Raging Bulls: How Wall Street Got Addicted to Light-Speed Trading
Wall Street used to bet on companies that build things. Now it just bets on technologies that make faster and faster trades.
Editor’s note: One of the most interesting things about the catastrophe at Knight Capital Group—the trading firm that lost $440 million this week—is the speed of the collapse. News reports describe the bulk of the bad trades happening in less than an hour, a computer-driven descent that has the financial community once again asking if their pursuit of profit has lead to software agents that are fast, dumb, and out of control. We’re posting this story in advance of its publication in Wired’s September issue because it examines how Wall St. got to the point where flash failures come with increasing frequency, and how much farther traders seem willing to go in pursuit of ever-greater speed.
The 2012 New York Battle of the Quants, a two-day conference of algorithmic asset traders, took place in New York City at the end of March, just a few days after a group of researchers admitted they had made a mistake in an experiment that purported to overturn modern physics. The scientists had claimed to observe subatomic particles called neutrinos traveling faster than the speed of light. But they were wrong; about six months later, they retracted their findings. And while “special relativity upheld” is the world’s most predictable headline, the news that neutrinos actually obey the laws of physics as currently understood marked the end of a brief and tantalizing dream for quants—the physicists, engineers, and mathematicians-turned-financiers who generate as much as 55 percent of all US stock trading. In the pursuit of market-beating returns, sending a signal at faster than light speed could provide the ultimate edge: a way to make trades in the past, the financial equivalent of betting on a horse race after it has been run.
“Between the time the first paper came out in September and last week, a guy in my shop had written two papers explaining how it could be true,” a graying former physicist said ruefully, sipping coffee near an oversize Keith Haring canvas that dominated the room at Christie’s auction house where the conference was held. “Of course, you’d need a particle accelerator to make it work.”