Simons vs. High Frequency Traders

Fitting that the day I finish the popular book Flash Boys (yes I know I’m behind on this) this news come by my desktop...

James Simons and Renaissance Technologies has recently filed a patent for outrunning speed crazed traders through executing synchronized trades in multiple exchanges. The invention by Simons consist of the typical algos and servers, but on top of that atomic clocks that are calculated with vibrations of atoms to sync orders within a few billionths of a second.

The $32 billion firm is willing to endure costs in multiple millions to have a huge weapon in gaining an upper advantage against HFT. HFTs have dominated the markets in the last couple of years and have drawn multiple criticism for gaming the system at the expense of everyone else.

Hedge funds are now doing their own routing and have continued to employ high frequency trading technologies. The statistical arbitrage that Renaissance has used has helped its Flagship Medallion Fund generate average annual returns of about 72% (before fees). This is more than seven times the average annual return of the S&P 500.

As more and more people start to learn the mysterious and complex subject of HFT, more continue to form an opinion on it. Trading by these HFT firms accounted for about one half of the volume in the U.S. stocks. To shed some positive light on HFT firms, they to serve well as market makers and do make markets much more efficient.

Nonetheless, Renaissance is taking matters into its own hands. Here’s the technical breakdown of the ‘weapon’:

Renaissance sends an order to a central server, which breaks it up into multiple smaller orders. Those are then routed to venues that offer the best prices and most liquidity, much the same as brokers do now.
But before that happens, the smaller orders are sent to servers located as close to the exchanges as possible, along with instructions on the precise times they should be executed. The co-located servers sync their transactions so HFT firms won’t have enough time to identify an order on one exchange and then race to another to trade against it.
A crucial part of the system is the optical, atomic or GPS clocks that will be used synchronize those orders. Renaissance says in its application that GPS clocks are accurate to within nanoseconds and any time differences between them are “too small to be perceived” by HFT firms.

What does the future hold for Renaissance Technologies and will it beat out the HFTs? Only time will tell.

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