Distance Does Matter On The Internet, Sometimes

from the speed-of-light-not-fast-enough dept

Along with many other physical constraints, the internet can make distance or location irrelevant. Things like telecommuting mean that companies don't necessarily have to go where their employees are, though change in this regard has been somewhat slow. It's true in the financial industry, as New York is slowly losing its role as the only place for a financial company to locate. The CEO of online broker Ameritrade once colorfully noted that his company could be located in Zimbabwe, and it wouldn't matter (it happens to be located in Omaha). But there are some financial companies, whose businesses are also completely electronic, that are finding a need to be close to the financial centers. Traders and funds, whose strategy it is take advantage of small arbitrage opportunities only available for an instant, have found that the milliseconds difference in trade execution time can make a big difference in terms of the effectiveness of their strategy. In fact, one building in New York that houses the main computer system for electronic trading is home to 40 companies that trade using this strategy. So while the internet can eliminate many physical constraints, the physical constraints on the internet itself can have a big impact for some lines of business.


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  1.  
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    david b, Dec 15th, 2006 @ 3:23pm

    uhm...

    can someone explain to me why these companies are trading so much? i always thought it was smarter to buy good stock and stick with it. it's better for the economy, better for you, better for the stability of the market. can someone tell me what i'm missing here? or at least post a link to where i can read more.

     

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  2.  
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    Theoden, Dec 15th, 2006 @ 3:55pm

    Re: uhm...

    For long term investing, the buy and hold idea makes sense. But there is a lot of money to be made by buying and selling stocks several times a day, if the timing is right.

    If you buy a stock as it starts to go up and sell it just before the price peaks, then you can make money. If you short (sell) a stock you can do the same thing in the other direction.

    The problem, as mentioned, is that the timing to grab the stock at the price you want - and reverse the position when you want - is very limited and a few seconds can be the difference between making a lot of money or losing even more.

    Most of these kinds of trades are done automatically, rather than by someone sitting at a keyboard, in order to take advantage of the speed that the computer can "decide" when to buy and sell. It is not for the average trader!

     

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  3.  
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    Ajax 4Hire, Dec 15th, 2006 @ 4:22pm

    Microtrading can net you loads of cash..

    Traders can take advantage of Market Orders by offering a 5c less on purchase and 5c more on sell. All it takes is quick access to the incoming Market Orders.

    Manage this over a few 100k trades and you end the day with $5000 cash and nothing but cash to manage for the next day. It can be nerve-racking but very profitable.

     

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  4.  
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    david b, Dec 15th, 2006 @ 4:57pm

    Re: Re: uhm...

    thanks for replying.

    i understand how you make money with this strategy, but what are the long term effects on the market for this? it makes sense to me that this would be bad for companies, i.e. we have cash, now we don't, we have cash again...
    plus the focus shifts to the short term, so long term business plans don't look so hot.

    am i right here?

     

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  5.  
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    Stu, Dec 15th, 2006 @ 5:51pm

    Hi David,

    For the most part there is not much effect on the corporations whose stock is being traded this way.

    The buying and selling isn't between the corporation and the traders, but rather between different (faceless) holders of the stock.

    However, if the corporation is buying or selling its own stock, it may be harmed (or helped) on specific trades.

    Long term investors aren't effected either. Their outcomes depend on long term factors.

    The kind of trading we're talking about is pure speculation - gambling. Not for the newbie, the weak, or for risking the rent money.

    The long term health of corporations and countries are severely impacted by the emphasis on meeting short term goals. This is common in too many publicly held corporations - less so in privately owned ones.

     

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  6.  
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    david b, Dec 15th, 2006 @ 6:26pm

    Stu,

    thanks for clearing that up.

     

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  7.  
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    Gary, Dec 16th, 2006 @ 6:05am

    Had nobody considered what an enormous risk it is to put so many of these systems in the same place? A well-located piledriver can cut a cable and wreck rezl damage to the entire trading system.

    The sort-term advantages of co-location are nothing compared to that.

     

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  8.  
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    Jeff, Dec 16th, 2006 @ 9:10am

    Re: Gary's piledriver comment

    Two thoughts. Assuming the piledriver use and subsequent cut cable are OUTSIDE the building; street crew work, etc. assumed.

    1) During the "outage", companies smart enough to have paid to be inside the building *SHOULD* be smart enough to have a direct connection to the server -- since that's why they're in the building. So they're already ON the building-internal network... they're not having to transmit from their company out to their ISP, and then back into the hosting company in their building. Any company who paid a premium to be in the building and is doing that is not getting any more bang for their buck than someone who leased a spot down the street. But the people INSIDE the building are getting the same advantage during the outage that they got during normal time.

    2) During the "outage", assuming that this is such an important trading system, the rest of the world ideally *SHOULD* be operating on a secondary backup system, which for disaster purposes *SHOULD* be geolocated FAR AWAY from the physical point of the disaster. Meaning people who did not pay the super-high premium to be *IN* the building, but compromised and made a business decision to be located *CLOSER* to the building now are at a disadvantage... their competitors *IN* the building are still cranking along as normal on the primary network... but those merely *CLOSE* to the bulding now are operating off of a datacenter *FAR* away... meaning they're now no better than the company in Omaha... unless of course the backup datacenter is *IN* Omaha, in which case the Omaha company now also has an unexpected free boost.

     

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  9.  
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    Jeff, Dec 16th, 2006 @ 9:37am

    re: Joe's example of IN the building

    I should note... I alluded to this in my reply to Gary, but it has broader implications to your story, Joe.

    You said:

    "In fact, one building in New York that houses the main computer system for electronic trading is home to 40 companies that trade using this strategy."

    I said:

    "companies smart enough to have paid to be inside the building *SHOULD* be smart enough to have a direct connection to the server -- since that's why they're in the building. So they're already ON the building-internal network... they're not having to transmit from their company out to their ISP, and then back into the hosting company in their building. Any company who paid a premium to be in the building and is doing that is not getting any more bang for their buck than someone who leased a spot down the street."

    So. The broader implication of this is...

    THESE PEOPLE INSIDE THE BUILDING SHOULD NOT BE ON *THE INTERNET* BUT ON AN INTERNAL NETWORK!!!!!

    By even using this in your article without this qualification, the title to your article is more than misleading.

    Even people *CLOSE* to the building you'd hope would be able to pay for a T1 or T3 and get a direct connection -- which sure could be broken by Gary's piledriver example, but the direct connection would be preferable than using the ISP, which at optimal would put me only one hop more than a direct connection -- assuming I could get the same ISP as the datacenter, and that I'm hitting the same switch as they are. But if I'm already paying a premium to be *CLOSE* to the building, I should be able to pay for the direct connect in as well.

    Note when I say "on the network" or "direct", I'm not even assuming that the datacenter is less secure or that the datacenter is granting 3rd parties access to their "core" network inside their firewall -- I'd guess companies "directly" connecting (through a wired, non-Internet network connection) are hitting a machine outside of a firewall that still can protect the "core" network, but gives these "direct" connecting companies fast fast access.

    EVEN STILL, THIS IS NOT A "DISTANCE DOES MATTER ON THE INTERNET" TYPE THING, BUT A SIMPLE FACT THAT LOCAL CONNECTIONS ARE FASTER THAN INTERNET CONNECTIONS.

     

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  10.  
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    Nitrodist, Dec 18th, 2006 @ 1:12am

    Re: Re: Re: uhm...

    When you sell/buy a stock, it's almost never from a company. Except in the initial public offering (IPO), all of your trading is done with the "secondary" market. The first market being the actual companies that you buy it from. Once the stock is sold, the ownership of the company is all that matters. All the money that the company makes is in the IPO and not in the day to day stock trading.

     

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