2021 IEEE 71st Electronic Components and Technology Conference
EPS Seminarhttps://www.ectc.net/

What is a Hight-Speed Trade?
Why does a Stock Exchange Speed-Up?
Takanobu Mizuta

SPARX Asset Management Co., Ltd.
Mail: mizutata[at]gmail.com
HP: https://mizutatakanobu.com

Note that the opinions contained herein are solely those of the authors and do notnecessarily reflect those of SPARX Asset Management Co., Ltd.

You can download this presentation material fromhttps://mizutatakanobu.com/2021ETCT.pdf

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Takanobu Mizuta
Now, I belong to SPARX Asset Management Co., Ltd. as Fund Manager and Senior Researcher.
I am also a part-time lecturer of the Graduate School of Public Policy, The University of Tokyo.
In SPARX Asset Management, I am responsible for quotative investigate of Japanese stock market
and the portfolios, and maintaining system/DB for the investigation,
and academic-study regulation/rules using multi-agent simulations.

2014 Ph.D.: School of Engineering, The University of Tokyo (Kiyoshi Izumi Laboratory)
2004 Joined SPARX Asset Management (current affiliation)
2002 Master: School of Science, The university of Tokyo (Space Plasma Physics)
2000 Bachelor: Japan Meteorological College
2016/4-, Vice Chair: Special Interest Group on Financial Informatics
the Japan Society for Artificial Intelligence (JSAI SIG-FIN),
2019-, Technical Committee Member: IEEE Computational Intelligence Society,
Computational Finance and Economics (IEEE CFETC)

You can download this presentation material fromhttps://mizutatakanobu.com/2021ETCT.pdf

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If you are interested in a multi-agent simulation in finance (not Today’s Talk)
My Review Paper
Mizuta 2020, “An agent-based model for designing a financial market that works well”,
IEEE Symposium Series on Computational Intelligence, Computational Intelligence for Financial
Engineering and Economics (CIFEr), December 1 to 4, 2020, Canberra, Australia(virtual)
https://arxiv.org/abs/1906.06000
https://doi.org/10.1109/SSCI47803.2020.9308376
Presentation on YouTube https://youtu.be/rmlb72ykmlE3

Today’s Talk: What is a Hight-Speed Trade?
Why does a Stock Exchange Speed-Up?
- As you know, I am not a technology engineer.
So, I do not know about technology, especially hardware, so much.
- I am not a High-Speed Trader nor Stock Exchange people.
This is not only weak point, but strong point that my talk is not position talk.
(They tend to emphasis their benefits too mach.
On the other hand, my talk will be fair.)- The goal of my talk showing the abstract what is High-Speed Trade andthe reason why Stock Exchanges try to speed up their matching system.
Today’s Talk’s Contents(1) Stock Markets and Liquidity Providers(2) Trading Strategies of High-Speed Trades(3) High-Speed Trades Companies(4) Speed up of Stock Exchanges

4(1) Stock Markets and Liquidity Providers(2) Trading Strategies of High-Speed Trades(3) High-Speed Trades Companies(4) Speed up of Stock Exchanges

5Stock Market works well with a variety of Trading Participants
Directly
ExecuteAsset Owner
Pension Fund, Severin Wealth Fund

Partially
EntrustMe!

Partially
EntrustAsset
Management
Company

Order
Order

Individual
Investor

Broker(Security
Company)

Today’s
Talk II

High-Speed Today’s
TradesTalk I
Company

HFT（High Frequency Trades）

Stock
Exchange
ExecuteThey depend oneach other

High-Speed Trades Company earns margin by reselling stocks like as a used bookstore
Asset Owner and Investor hold a company like as a book reader
Buying books needs used bookstores, but book readers want to buy cheaper as possible
Investors welcome High Speed Trades Company, but want them not to earn so much

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Investors and Liquidity Providers
Primary (new issued) Stock Market
Broker(Security Company)
Stock

Investor

Money for
New BusinessCompany

Dividend(share of profit)• For new business, at first money for investment is needed, then after that,company get a profit.
• So, investors seeking share of profit with company pay very important role
to build innovative company.
• For example, people were going to an unknown world to get treasures back in the Age of Exploration.
Whether the ship return or not is very uncertain, but, if so, big money will be come. So, starting the7
exploration is depend on investors and aiming big money taking large risk .

Secondary (Listed) Market

Buy and Resell in short term

Liquidity Provider(High-Speed Traders)
BuyStarting

Investor
Dividend

Take
Liquidity

ProvideLiquidity

Sell

Stock

Take
Liquidity

Price
Discovery

Not interested what
the company do

Quitting

Investor

Exchange

Company

There comes a time when any investor will quit investment and sell stock.
(No one lives forever, there comes a time anyone want to use the money.)So, easy to sell (liquidity) is important for the investors.
If not easy, this leads hesitation to buy stock and providing new money
to an innovative company in primary market.
Liquidity providers indirectly help innovative company to get new money.

8What do you feel "High-Speed trades" ?
✓ Some people may recall the book “Flash Boys” by Michael Lewis, orthe movie based on the book, “the Hummingbird Project”✓ They are overdramatic, but the atmosphere of High-Speed trades
industry is like this, especially hardware battle. They are good
“fantasy” to know what is High-Speed trades.
✓ However, there are many wrong descriptions intending to create
image that High-Speed trades are evils.
✓ Please remember that in real financial markets there are no
heroes, no heroines, no devils and no villains. There are justinvestors keeping rules and not keeping rules.
✓ The book (not the movie) described one person as a hero to build
the stock exchange excluding High-Speed trades (IEX), however,actual IEX has not provided liquidity so much even now.
✓ Actual high-Speed traders can not earn so much like as in themovie at least now. (The stories are around 2009?)✓ However, the atmosphere, hardware battle, is like this.
Flash Boys

https://wwnorton.com/books/Flash-Boys/

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The film opens as stockbroker Vincent Zaleski pitches Bryan Taylor on investing in a fiberoptic
cable from Kansas electronic exchange to the New York Stock Exchange in order to front runorders in a new high-frequency trading (HFT) operation. // Any deviation in the shape of thetunnel will create delays in the trade. Anton is hard at work trying to shave 1 millisecond off
the time it takes to front-run orders to NYC. Currently, his software will do it in 17
milliseconds, which is not fast enough to be competitive. It needs to be at least 16 milliseconds
to be a viable enterprise for Taylor's firm. // Eva (villain? rival of the hero in the movie) finds
an NYU student who has written a paper about microwave pulses to effect HFT. She hires him,and starts the process of building a series of towers to make trades with microwaves.
villain?

Overdramatic and “fantasy”, but, actual HFTs also battle using very very large
and expensive hardware each other(Wikipedia) https://en.wikipedia.org/wiki/The_Hummingbird_Project10(Trailer) https://youtu.be/3-IlhKbakFA

The series of towers is real

Sorry for my talking about the important part of the movie, villain’s towers won to hellos’
straight fiberoptic cable that is slower some millisecond.
In the real, the towers have been remained and the straight cable have not.
November 17, 2017 VAND Capital Blog, Future of High Frequency Tradinghttps://medium.com/anton-iribozov/future-of-high-frequency-trading-bbb37e220509

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Many specialists (not novelist) indicated wrong points of Michael Lewis’s stories

While ‘Flash Boys’ (and ‘the hummingbird project’) may capture the complex execution
framework of the US equities market, Michael Lewis does not portray the full story.
The market may not be perfect, but it’s not rigged.
https://tabbforum.com/opinions/no-michael-lewis-the-us-equities-market-is-not-rigged/12

(Reference) the book “Flash Crash”✓ On the other hand, the book “Flash Crash” isrecommendable to be well written as a non-fiction, very
objective, no labeling heroes or villains to investors.
✓ However, the main character is just criminal manipulating
the e-mini S&P 500 future market with placing spoofing
orders, and he is just individual investors and not HighSpeed trades.
✓ Moreover, his trades were not related with the flash crashin May 2010, however, when he was arrested the mass
media not understanding the flash crash just reported "heis a flash crash trader".
✓ The movie "Flash Crash" will also be released, but I am
concern that the movie will be dramatized more excessively
and lose objectively.

Flash Crash(book)https://www.amazon.com/dp/0385543654

Plan of Flash Crash(Movie)
https://www.hollywoodreporter.com/news/dev-patel-star-flash-crash-new-regency-see-saw-1280039

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(1) Stock Markets and Liquidity Providers(2) Trading Strategies of High-Speed Trades(3) High-Speed Trades Companies(4) Speed up of Stock Exchanges

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Two Main Strategy of High-Speed Trades
Market Making Strategy
A trader always places both buy and sell order with a little different price.
The trader earns by the difference when buy and sell investors come.
-> like as a used book-store

Arbitrage trades
Even though two assets have exactly same economic value, sometimes
they have different prices. Then, a trader buys cheaper one and immediately
sell more expensive one.
-> like as a resail broker
Both strategies have been there since long ago, and recently was automated.

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Market Making Strategy
Order Book of continuous double auction

places both buy and sell order

Place Waiting
Sell Order

Shares
Sell

Price

84

1.01

176

1.00

Shares
Buy

0.99

204

0.98

77

Place Waiting
Buy Order

Multiple buyers and sellers compete to buy and sell stocks in the market, and transactions can occur
at any time whenever an offer to buy and an offer to sell match.

For example, when someone sells at 0.99 the waiting buy order is immediately
executed and someone buys at 1.00 the waiting sell order is immediately. So,
the trader earns by the price difference. However, when the prices fall down,
the trader should sell super quickly, because after some milliseconds the trader
can only sell very lower price the trader bought.
So, the trader needs a high-speed trade.
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Arbitrage trades
Even though two assets have exactly same economic value (stock, future,
option, ETF, etc.), sometimes they have different prices. Then, a trader buys
cheaper one and immediately sell more expensive one.
Buy at 0.99

Sell at 1.00

High-Speed
Trader

Stock0.99 sell

Exchange A

Future1.00 buy
Exchange B

Only Fastest trader earns

Other Traders earn ZERO, even though the speed is a nanosecond slower
Trading Speed is only needed

In the movie “the Hummingbird Project”, the traders do arbitrage trades
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(Reference) Actual Arbitrage between ETF and stocks
High-Speed trader

buy cheapersell more expensive

ETF

profit fromprice difference

Stock
１

Stock
２

exchangeable

Stock
3

Stock
4

・・・

An ETF is exchangeable with all stocks held by the ETF.
When the price of the ETF and the total value of the stocks held by the
ETF differ, a trader can buy the cheaper asset, exchange, sell the more
expensive asset, and thus earn a profit from the price difference.

The trader arbitrage-trades with Market Making, very complex trades18

Which type of “speed” is needed?
“Low Latency”

Needed time from submitting order to receiving new information

Sending many data per a time that is speed of internet as we usually said,
does not effect（e.g. “Mbps”）
One trade data is a very few

Matching System(Stock Exchange)

Matching orders &Changing traded prices
New
Traded
Price

Order

Trader19

(Reference) Directional Strategy (betting price up-down) exists a few
Monetary Policy Announcement
text publicationtime
Web site of the Bank of Japan
Very frequently
Pinging whether the
text exists or not

Getting thetext
High-Speed Trader
If the text is longer
it buys USD

FX market (USD/JPY)
The text longer means changing monetary policy.
These trades were usual around 2015-2017
Keiichi Goshima, Yusuke Kumano, 2018 “Monetary Policy Announcement and Algorithmic News Trading in the Foreign Exchange
Market“ the Bank of Japan, Discussion Paper Series 2018-E-13
https://www.imes.boj.or.jp/research/abstracts/english/18-E-13.html

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(Reference) Latency Arbitrage
The book (not the movie) described “latency arbitrage”, but this is exactly not “Arbitrage”
because it needs a prediction.

The prediction is Uncertainty
Not easy strategy

order
NormalInvestor

Late

Exchange
1
Exchange2

Information of changing order book,and predicting the Late Order
High-Speed
TraderExchange
3

Order
Maybe advance the Late Order(Need Predicting the existence)https://medium.com/boxes-and-lines/modern-day-latency-arbitrage-predicting-price-changes-738edc25a28d

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(1) Stock Markets and Liquidity Providers(2) Trading Strategies of High-Speed Trades(3) High-Speed Trades Companies(4) Speed up of Stock Exchanges

22High-Speed Trades Companies “to” Tokyo Market
They should be registered to the Japanese regulator from 2018https://www.fsa.go.jp/menkyo/menkyoj/kousoku.
pdf

Only one company of all 56 is in Tokyo（January 7, 2021）

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(Reference) If you want to High-Speed Trades “to” Tokyo Market,
PLEASE read the document very carefully

https://www.fsa.go.jp/en/regulated/hst/index.htm

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The Japanese regulator (Japan Financial Services Agency) also lists up
market-making strategy and arbitrage trade as a main strategy ofhigh-speed trades.
https://www.fsa.go.jp/common/law/guide/hft/hft_eng_201804.pdf

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VIRTU, biggest one in the world VIRTU: Quarterly Financials 3Q2020 Presentation Material

https://s21.q4cdn.com/422114427/files/doc_financials/2020/q3/2020.Q3-Earnings-Supplement-vFINAL.pdf

VIRTU is listed company, so components of revenue is opened.
All High-Speed Trades are described as “Market Making”.
I think this includes “Arbitrage trades” for market making, but at least I
can say definitely that other strategies are not main.

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dharmacapital, only Japan based high-speed trader

16 January 2019 NHK news

https://www.dharmacapital.co.jp/

https://archive.is/L34Ih （archive.is）

The firm was introduced on TV news of NHK, which is Japan's publicbroadcaster. In the show, the head of the firm said that our main strategies
are market-making and arbitrage trades, and speed is most important andneed heavy cost for the speed, heavily hardware battle.
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NEWS for special “switch” only for trades

Aug 8, 2016 The Wall Street Journal
Trading Tech Accelerates Toward Speed of Light

Financial-technology startups are arming
traders with devices that shave precious
nanoseconds off stock-market bets.
Speeding up the trading world: Metamako
co-founders Scott Newham (left) and David
Snowdon inspect one of the ultrafast
network switches that they produce in afactory near Sydney and ship to traders andexchanges world-wide.
Metamako and xCelor said they complete the entire messaging job, including the more
complicated task of shooting orders back to the exchange, in around 85 nanoseconds.
The equivalent time for Cisco’s fastest switch is at least 240 nanoseconds,
according to the company’s website.
Cisco declined to comment.
https://www.wsj.com/articles/trading-tech-accelerates-toward-speed-of-light-1470559173

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Speed up “in” Computer

Lockwood et. al. 2012, A low-latency library in FPGA
hardware for High-Frequency Trading, IEEE 20th Annual
Symposium on High-Performance Interconnects

Replacing CPU for FPGA(Field Programmable Gate Array).
We can input the algorithm program to FPGA as an integrated circuit.
https://doi.org/10.1109/HOTI.2012.15

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Declining earnings
Revenues at HFT firms from U.S. equities
trading were an estimated $1.1 billion lastyear, down from $7.2 billion in 2009,
according to research firm Tabb Group.

22 March, 2017 The Wall Street Journal
High-Frequency Traders Fall on Hard Times

That is the backdrop behind last week’s news that Virtu Financial Inc. had
made a bid to buy rival KCG Holdings Inc., a proposed deal that would unite
two of the biggest U.S. electronic trading firms. Virtu’s stock has shed about afourth of its value since the company went public in 2015, while KCG’s key
market-making business has lost money for the last two quarters.
Other industry heavyweights are exiting altogether. Thomas Peterffy, chairman
and chief executive of Interactive Brokers Group Inc., said this month he would
end his firm’s options market-making activities, a business he helped pioneerin the 1980s. Misha Malyshev, who once led global HFT for hedge fund giant
Citadel LLC and left to start Teza Technologies, said in November that Tezawould exit its proprietary trading business.
https://www.wsj.com/articles/high-frequency-traders-fall-on-hard-times-1490092200

A few companies will survive like as the airflight industry
I do not know whether more high-speed provides more liquidity or not

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Heavy, heavy cost

30 August, 2016 Bloomberg
Traders Discuss Data Superhighway From Chicago to Japan

Rival high-frequency trading firms are in talks tojointly build a Chicago-to-Japan communications
link that would accelerate trading across the Pacific
Ocean, according to people familiar with thediscussions.
The project, dubbed “Go West,” would install a line of microwave towers fromthe Chicago area to the U.S. west coast, possibly ending near Seattle, and thenconnect to an undersea cable that stretches to Asia, according to the people, who
asked not to be identified because the talks, which started months ago, areconfidential. The cast of companies involved in the talks has included Citadel LLC,
Virtu Financial Inc. and Jump Trading LLC, though the final roster isn’t set and thetalks aren’t final, the people said. Those three firms declined to comment.
https://www.bloomberg.com/news/articles/2016-08-29/traders-said-to-discuss-data-superhighway-from-chicago-to-japan

I do not know the high-speed cables that rival can also use are benefitable

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(Reference) How do long-term investors feel about high-speed trades?

スパークス・アセット・マネジメントの水田孝信ファンドマネージャー兼上席研究員は「彼らがもうけすぎていると、他の投資家が高く買わされていることになるから、今ぐらいがちょう
どいいのでは」と指摘する//、「生かさず殺さず」ということだろう。

I am asked this question by a press person. I answered that
“Recently they do not earn not so much. It is good for us. Whatthey earn very much means we are charged heavy trading
costs. But we need liquidity they provide. So, we should not
make them live nor kill them.”

4 February 2019 Newspaper NIKKEI
https://www.nikkei.com/article/DGXMZO40796210R00C19A2000000/

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(1) Stock Markets and Liquidity Providers(2) Trading Strategies of High-Speed Trades(3) High-Speed Trades Companies(4) Speed up of Stock Exchanges

33What do you feel “Stock Exchange” ?
== long ago (-1999 in Tokyo) ==== Now ==Physically Gathering traders
like as “Market”“Servers” in racks
in the data-center

https://www.jpx.co.jp/corporate/events-pr/140years/index.html

https://www.jpx.co.jp/english/systems/connectivity/(The location of the data-center for Tokyo
Stock Exchange is top secret)34

(Reference) What is this in Tokyo Stock Exchange?
You may image this place as Tokyo
Stock Exchange. However, this is justa decoration for tourists. There is noserver of exchange and the datacenter locates at definitely different
place. People in this are not traders
but workers of the exchange(inspecting unfair trades?).

https://ja.m.wikipedia.org/wiki/file:The_Tokyo_Stock_Exchange_-_main_room_3.jpg

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(Reference) What is this in Tokyo Stock Exchange?
In the New York Stock Exchange, even now, there are physically traders
who market-make called “Specialist”, however, they trade not so much andoff course electric trades are very very more then by them.

(picture) https://toyokeizai.net/articles/-/145694 (9 November 2016, Donald Trump won the election)(detail of specialists)

https://www.sec.gov/fast-answers/answersspecialisthtm.html

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(Left) From 23 March 2020, the floor closed due to tow traders getting COVID-19(picture) https://jp.reuters.com/article/health-coronavirus-usa-markets-idJPKBN2172PB(NEWS) https://www.reuters.com/article/us-health-coronavirus-nyse-idUSKBN21B3I7(Right) From 26 May, gradually open
https://www.cnbc.com/2020/05/26/nyse-floor-reopens-after-coronavirus-shuts-historic-big-board-for-two-months.html

Some researches showed liquidity was not changed even though open or close.

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Competition between stock exchanges
There are many stock exchanges-> They should be chosen by traders
Stock
Buy at 0.99
Stock0.99 sell
Exchange C

Sell at 1.00

High-Speed
TraderWant to Sell
as soon as Possible
even one nanosecond

1.00 buy

FastMatching
SystemExchange A

Stock
1.00 buy

Slow
Matching
SystemExchange B

If other conditions are same, the trader should place the orderon the exchange using faster matching system.
do not want to lose the chance, and more frequently trades
Faster than other exchanges
Is very very important

Hardware Battelle38

Co-Location Service
Many exchanges provide Co-Location Service to High-Speed Traders to
get lowest latency. High-Speed Traders can use co-located server justnext matching server.

NormalTraders

From outsideof the data
center

The Data Center
Co-LocatedServerHigh-Speed
TraderAutomatically
Place Orders
within the data center
Matching Sever

Stock
Exchange39

Co-Location Service by Tokyo Stock Exchange

https://www.jpx.co.jp/english/systems/connectivity/40

(Reference) Movie Introducing Co-Location Service of Tokyo Stock Exchange

https://youtu.be/boTtC3GoT6Y

About cables (Around 2.36)
About Server redundancy, power and air conditioning（Around 2.30 to 4.00）41

Summary✓ I presented what is a Hight-Speed Trade, and why does a Stock Exchange
Speed-Up.
✓ High-Speed Trades help society by providing liquidity of stocks like as a usedbookstore.
✓ High-Speed Trades need “Low Latency”. Other types of speed, e. g. “bpm”,
are not needed.
✓ Market Making Strategy and Arbitrage trades are main strategies of HighSpeed Trades. Both strategies have been there since long ago, and recently
was automated.
✓ Their earnings are declining. A few companies will survive like as the airflightindustry because they need heavy cost for the speed, hardware battle.
✓ I do not know whether more high-speed provides more liquidity or not.
✓ Stock exchanges should be chosen by traders, faster than other exchanges isvery important, They are also in Hardware Battelle.
✓ The book “Flash Boys” by Michael Lewis, and the movie based on the book,“the Hummingbird Project” are good “fantasy” to know what is High-Speed
trades.
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