How the Speed of a Trade Got Down to Nearly the Speed of Light

Donald MacKenzie (0:02)

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Joe Weisenthal (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:23)

And I'm Tracy Alloway.

Joe Weisenthal (0:25)

Tracy, one of the things that I think we like to do on this podcast is sort of de-abstract the things that we take for granted in the world.

There are various processes. We always say this when there's like a blow up or something like that, where it's like, oh, if we're having to pay attention to X or Y, there must be something going on. But we don't always have to wait for blow ups. But we live in this world where you click buttons and things happen, and you have some intuition of what happens after the button is clicked. But you don't really have a great intuition of what happens between the button clicking and the thing happening.

Tracy Alloway (1:00)

Absolutely. I actually don't know how the process of inputting an equities trade actually works, where it shows up. So that's a big question. I suspect a lot of people, even people who are in markets probably don't know the entire sequence of events, partly because it's gotten more complicated over the years with like reg NMS. Do you remember that?

Joe Weisenthal (1:21)

Yeah.

Tracy Alloway (1:21)

Stuff like that. The other thing I've been realizing about trading, obviously, the big trend here is high-frequency trading, right? And it's just getting faster and faster and faster. When we first started writing about HFT, I guess in the mid-2000s after the financial crisis, I remember thinking that it was all about the actual algorithm and finding a really smart pattern in financial markets to exploit. But the more I learn about it and the more I read about it, I realize it's not really that, it's about exploiting the market structure.

Joe Weisenthal (1:59)

Yeah, totally. And there's so many, we had that, I forget who we were talking to recently, oh, is the guy from Hudson River Trading, and there were the famous Wire Wars, where it's like, no, I want to be one inch closer to the main server, etc. It's like, God, this is a good use of brain power, to like, we're going to solve the market because we want to be...

Tracy Alloway (2:17)

One more nanosecond faster.

Joe Weisenthal (2:19)

Yeah, one nanosecond faster, etc. But the other thing, sort of related to this, one of my longstanding questions is, a jobs report will drop at 8.3 on a Friday, and the market immediately moves. And I'm like, how did that happen? Because it didn't happen because someone was staring, they had their fingers above the buy or the sell button, but also something had to be programmed such that that data could instantly be ingested, and then some sort of directional trade was made based on that. But I don't know how that happens. I don't know how that works.

Tracy Alloway (2:50)

There's also, of course, the overall question of what all this electronic trading actually means for the market itself. And people talk about things with the multi-strap funds, getting these feedback loops, and maybe increasing volatility in the market and things like that. So we should discuss.

Joe Weisenthal (3:06)

And I would just add one more thing. You said, what does it mean for the market itself? What does it mean for society itself that so much effort is being placed on getting a meter closer to the server room or whatever? And why is this a good use of time? And is this improved capital allocation? I'm really excited to say, we do, in fact, have, I think, truly the perfect guest to talk about this. Someone who has a sort of an extraordinary body of life's work in a range of areas that is very distinct from almost any other academic or researcher that I can think of. We're going to be speaking with Donald Mackenzie. He's a professor of sociology at the University of Edinburgh in Scotland. I first came across his work. He wrote a fantastic book called An Engine, Not a Camera, which is sort of about finance and the original birth of quantitative finance and the use of advanced models and how these models didn't just reflect what was going on in the real world, but how the adoption of these models then created this feedback loop, the engine effect such that it actually started to drive markets themselves. More recently, he wrote a book called Trading at the Speed of Light, all about high-frequency trading. He's also written recently a book about digital advertising. So truly a polymath in the world of thinking about this relationship between industry and the sort of technological substrates that drive them. Professor Mackenzie, thank you so much for coming on Odd Lots.