JUNE 4, 2010.Fast Traders' New Edge
Investment Firms Grab Stock Data First, and Use It Seconds Before Others.
By SCOTT PATTERSON
Some fast-moving computer-driven investment firms are getting an edge by trading on market data before it gets to other investors, according to market players and researchers who have studied the trading.
The firms gain that advantage by buying data from stock exchanges and feeding it into supercomputers that calculate stock prices a fraction of a second before most other investors see the numbers. That lets these traders shave pennies per share from trades, which when multiplied by thousands of trades can earn the firms big profits.
Critics call the practice the modern day equivalent of looking at share prices listed in tomorrow's newspaper stock tables today.
"It is a rigged game," Sal Arnuk, co-founder of brokerage firm Themis Trading, said Wednesday at a Securities and Exchange Commission roundtable discussion in Washington, D.C., referring to the trading activity, which some call "latency arbitrage."
While legal, the practice pushes the envelope of what is fair, critics say, and raises questions about the advantages some fast-moving traders are gaining in the market.
The SEC roundtable convened executives from trading centers and firms across Wall Street as the agency continues to probe high-frequency trading and the growth of dark pools, trading venues where trades take place away from the main exchanges.
High-frequency trading has come under greater scrutiny since the May 6 "flash crash," when some high-frequency firms along with a number of other active traders withdrew from the market, arguably exacerbating the stocks' swift downdraft that day.
High-speed trading, now estimated to account for about two-thirds of U.S. stock market volume, takes many forms, some entirely proper. Defenders say it reduces trading costs for all investors by adding volume to the market. Latency arbitrage is a type of trading that relies on ultrahigh speeds; it's not clear which firms engage in it or how pervasive it is.
Some firms pay tens of thousands of dollars a year to individual exchanges for premium access to their price feeds, industry players and exchanges say.
The SEC, in a broad review of market structure earlier this year, said information from trading-center data feeds "can reach end-users faster than the consolidated data feeds."
The latency arbitrage trade aims to game the so-called national best bid and offer price on a stock, which sets the price most investors use to trade.
The ability to estimate price moves ahead of the national best bid and offer price, which is consolidated electronically from exchanges, can give traders an advantage of about 100 to 200 milliseconds over investors who use standard market tools, according to a November 2009 report on such trading activities by Jefferies & Co.
An advanced look at exchange data and order flow can provide firms "the ability to forecast future prices" and "make adjustments to their orders in the market or send new orders which are based on this information," the report found.
Some investors are searching for ways to protect themselves. Rich Gates, co-founder of TFS Capital LLC, started becoming concerned about latency arbitrage in early 2009 after a Wall Street bank pitched the trade to his firm.
In hundreds of tests, TFS has found that some of its trades were getting picked off by firms exploiting the time-delay wrinkle. That was costing the firm money.
To learn more, TFS, which manages about $1.1 billion in mutual funds and hedge funds, devised a method to essentially bait firms into engaging in the trade. In effect, TFS proved that some traders were wise to a movement in a stock's price before it happened.
On a March afternoon, a TFS trader sent an order to a broker to buy shares of Nordson Corp., a maker of fluid dispensing equipment. The trader sent an instant message to the broker: "please route to broker pool #2," a request to send the order to a specific dark pool.
The trader told the broker not to pay a price higher than the midpoint between what buyers and sellers were offering, which at the time was $70.49.
Several seconds after the dark pool order was placed, the market price didn't change. Then the TFS trader set a trap: he sent a separate order into the broader market to sell Nordson for a price that pushed the midpoint price down to $70.47.
Almost immediately, TFS was sold Nordson for $70.49—the old, higher midpoint—in broker pool No. 2, which didn't reflect the new sell order. TFS got stuck paying two cents more than it should have, suggesting that some seller knew the higher price was a good deal to nab quickly.
Such trades are "unusually suspicious," said Mr. Gates.
Most dark pool operators say they police investors for improper activities. Liquidnet, which runs a dark pool, had suspended 125 members through 2009 for suspicious trading since its launch in April 2001, the firm says.
Friday, June 4, 2010
Music, Brain and Language
May 31, 2010
Exploring Music’s Hold on the MindBy CLAUDIA DREIFUS
Three years ago, when Oxford University Press published “Music, Language, and the Brain,” Oliver Sacks described it as “a major synthesis that will be indispensable to neuroscientists.” The author of that volume, Aniruddh D. Patel, a 44-year-old senior fellow at the Neurosciences Institute in San Diego, was in New York City in May. We spoke over coffee for more than an hour and later by telephone. An edited and condensed version of the conversations follows.
Q. YOU DESCRIBE YOURSELF AS A NEUROSCIENTIST OF MUSIC. THIS HAS TO BE A NEW PROFESSION. HOW DID YOU COME TO IT?
A. I’ve been passionate about two things since childhood — science and music. At graduate school, Harvard, I hoped to combine the two.
But studying with E.O. Wilson, I quite naturally got caught up with ants. In 1990, I found myself in Australia doing fieldwork on ants for a Ph.D. thesis. And there, I had this epiphany: the only thing I really wanted to do was study the biology of how humans make and process music.
I wondered if the drive to make it was innate, a product of our evolution, as Darwin had speculated. Did we have a special neurobiological capacity for music, as we do for language and grammar? So from Australia, I wrote Wilson that there was no way I could continue with ants. Amazingly, he wrote: “You must follow your passion. Come back to Harvard, and we’ll give it a shot.”
Wilson and Evan Balaban, a birdsong biologist who taught me about the neurobiology of auditory communication, mentored me through my thesis, which was called “A Biological Study of the Relationship Between Language and Music.” When I defended it in 1996, this was unusual scholarship. The neurobiology of music wasn’t yet a recognized field.
Q. WHEN DID IT GO MAINSTREAM?
A. Not too long after that. By the late 1990s, all of neuroscience was being transformed by the widespread use of imaging technologies.
Because it became possible to learn how the brain was affected when people engaged in certain activities, it became acceptable to study things previously considered fringy. Today you have the neuroscience of economics, of music, of everything.
I published a paper in 1998 that really surprised people. It was the first imaging study showing what happens when the brain processes musical grammar as compared with what happens when it processes language. From what we learned, this was occurring in an overlapping way within the brain. And this was a clue that the neurobiology of music could give us a new path to access and perhaps even heal some language disabilities.
Q. HOW WOULD THAT WORK?
A. One example. There’s a neurologist in Boston, Gottfried Schlaug, who uses music therapy to return some language to stroke victims. He has them learn simple phrases by singing them. This has proved more effective than having them repeat spoken phrases, the traditional therapy. Schlaug’s work suggests that when the language part of the brain has been damaged, you can sometimes recruit the part that processes music to take over.
Music neuroscience is also helping us understand Alzheimer’s. There are Alzheimer’s patients who cannot remember their spouse. But they can remember every word of a song they learned as a kid. By studying this, we’re learning about how memory works.
Q. RECENTLY, YOU’VE BEEN WORKING WITH A SULFUR-CRESTED COCKATOO NAMED SNOWBALL. WHAT PROMPTED THE COLLABORATION?
A. Before I encountered Snowball, I wondered whether human music had been shaped for our brains by evolution — meaning, it helped us survive at some point. Well, in 2008, a colleague asked me to view a YouTube video of a cockatoo who appeared to be dancing to the beat of “Everybody” by the Backstreet Boys!
My jaw hit the floor. If you saw a video of a dog reading a newspaper out loud, you’d be pretty impressed, right? To people in the music community, a cockatoo dancing to a beat was like that. This was supposed to be, some said, a uniquely human behavior! If this was real, it meant that the bird might have circuits in its brain for processing beat similar to ours.
Q. WHAT DID YOU DO WITH THIS INSIGHT?
A. I phoned up the bird shelter in Indiana where Snowball lived and talked to the director who told me his story. A man had dropped him off with a CD and the comment, “Snowball likes to dance to this.” One day, Irena Schulz, the proprietor, played “Everybody” to amuse the abandoned creature. And Snowball began to move. Irena then made the YouTube video, which immediately went viral. Millions saw it.
“Let’s design an experiment to see if this is real,” I proposed to Irena, who had a science background herself. We took the Backstreet Boys song, sped it up and slowed it down at 11 different tempos, then videoed what Snowball did to each. For 9 out of the 11 variations, the bird moved to the beat, which meant that he’d processed the music in his brain and his muscles had responded. So now we had the first documented case of a nonhuman animal who, without training, could sense a beat out of music and move to it.
Q. YOU SAY THAT SNOWBALL CHANGED YOUR THINKING. HOW?
A. Before Snowball, I wondered if moving to a musical beat was uniquely human. Snowball doesn’t need to dance to survive, and yet, he did. Perhaps, this was true of humans, too?
Since working with Snowball, I’ve come to think we could learn more music neuroscience by studying the behaviors of not just parrots, but perhaps dolphins, seals, songbirds — also vocal learners.
We eventually published the Snowball research in Current Biology. A group at Harvard published a paper right alongside ours in which they surveyed thousands of YouTube videos to see if there were other animals spontaneously moving to a beat. They found about 12 or 13 parrots. No dogs. No cats. No horses.
What do humans have in common with parrots? Both species are vocal learners, with the ability to imitate sounds. We share that rare skill with parrots. In that one respect, our brains are more like those of parrots than chimpanzees. Since vocal learning creates links between the hearing and movement centers of the brain, I hypothesized that this is what you need to be able to move to beat of music.
Q. IS IT DIFFICULT TO FIND MONEY FOR THIS TYPE OF RESEARCH?
A. It easier than it used to be. One of the founders of this field, Dr. Robert Zatorre, before 2000, he never used the word music in a grant application. He knew it would get turned down automatically because people thought this was not scientific. Instead, he used terms like “complex nonlinguistic auditory processing.”
But in recent years, it’s become O.K. to say: I study music and the brain.
Exploring Music’s Hold on the MindBy CLAUDIA DREIFUS
Three years ago, when Oxford University Press published “Music, Language, and the Brain,” Oliver Sacks described it as “a major synthesis that will be indispensable to neuroscientists.” The author of that volume, Aniruddh D. Patel, a 44-year-old senior fellow at the Neurosciences Institute in San Diego, was in New York City in May. We spoke over coffee for more than an hour and later by telephone. An edited and condensed version of the conversations follows.
Q. YOU DESCRIBE YOURSELF AS A NEUROSCIENTIST OF MUSIC. THIS HAS TO BE A NEW PROFESSION. HOW DID YOU COME TO IT?
A. I’ve been passionate about two things since childhood — science and music. At graduate school, Harvard, I hoped to combine the two.
But studying with E.O. Wilson, I quite naturally got caught up with ants. In 1990, I found myself in Australia doing fieldwork on ants for a Ph.D. thesis. And there, I had this epiphany: the only thing I really wanted to do was study the biology of how humans make and process music.
I wondered if the drive to make it was innate, a product of our evolution, as Darwin had speculated. Did we have a special neurobiological capacity for music, as we do for language and grammar? So from Australia, I wrote Wilson that there was no way I could continue with ants. Amazingly, he wrote: “You must follow your passion. Come back to Harvard, and we’ll give it a shot.”
Wilson and Evan Balaban, a birdsong biologist who taught me about the neurobiology of auditory communication, mentored me through my thesis, which was called “A Biological Study of the Relationship Between Language and Music.” When I defended it in 1996, this was unusual scholarship. The neurobiology of music wasn’t yet a recognized field.
Q. WHEN DID IT GO MAINSTREAM?
A. Not too long after that. By the late 1990s, all of neuroscience was being transformed by the widespread use of imaging technologies.
Because it became possible to learn how the brain was affected when people engaged in certain activities, it became acceptable to study things previously considered fringy. Today you have the neuroscience of economics, of music, of everything.
I published a paper in 1998 that really surprised people. It was the first imaging study showing what happens when the brain processes musical grammar as compared with what happens when it processes language. From what we learned, this was occurring in an overlapping way within the brain. And this was a clue that the neurobiology of music could give us a new path to access and perhaps even heal some language disabilities.
Q. HOW WOULD THAT WORK?
A. One example. There’s a neurologist in Boston, Gottfried Schlaug, who uses music therapy to return some language to stroke victims. He has them learn simple phrases by singing them. This has proved more effective than having them repeat spoken phrases, the traditional therapy. Schlaug’s work suggests that when the language part of the brain has been damaged, you can sometimes recruit the part that processes music to take over.
Music neuroscience is also helping us understand Alzheimer’s. There are Alzheimer’s patients who cannot remember their spouse. But they can remember every word of a song they learned as a kid. By studying this, we’re learning about how memory works.
Q. RECENTLY, YOU’VE BEEN WORKING WITH A SULFUR-CRESTED COCKATOO NAMED SNOWBALL. WHAT PROMPTED THE COLLABORATION?
A. Before I encountered Snowball, I wondered whether human music had been shaped for our brains by evolution — meaning, it helped us survive at some point. Well, in 2008, a colleague asked me to view a YouTube video of a cockatoo who appeared to be dancing to the beat of “Everybody” by the Backstreet Boys!
My jaw hit the floor. If you saw a video of a dog reading a newspaper out loud, you’d be pretty impressed, right? To people in the music community, a cockatoo dancing to a beat was like that. This was supposed to be, some said, a uniquely human behavior! If this was real, it meant that the bird might have circuits in its brain for processing beat similar to ours.
Q. WHAT DID YOU DO WITH THIS INSIGHT?
A. I phoned up the bird shelter in Indiana where Snowball lived and talked to the director who told me his story. A man had dropped him off with a CD and the comment, “Snowball likes to dance to this.” One day, Irena Schulz, the proprietor, played “Everybody” to amuse the abandoned creature. And Snowball began to move. Irena then made the YouTube video, which immediately went viral. Millions saw it.
“Let’s design an experiment to see if this is real,” I proposed to Irena, who had a science background herself. We took the Backstreet Boys song, sped it up and slowed it down at 11 different tempos, then videoed what Snowball did to each. For 9 out of the 11 variations, the bird moved to the beat, which meant that he’d processed the music in his brain and his muscles had responded. So now we had the first documented case of a nonhuman animal who, without training, could sense a beat out of music and move to it.
Q. YOU SAY THAT SNOWBALL CHANGED YOUR THINKING. HOW?
A. Before Snowball, I wondered if moving to a musical beat was uniquely human. Snowball doesn’t need to dance to survive, and yet, he did. Perhaps, this was true of humans, too?
Since working with Snowball, I’ve come to think we could learn more music neuroscience by studying the behaviors of not just parrots, but perhaps dolphins, seals, songbirds — also vocal learners.
We eventually published the Snowball research in Current Biology. A group at Harvard published a paper right alongside ours in which they surveyed thousands of YouTube videos to see if there were other animals spontaneously moving to a beat. They found about 12 or 13 parrots. No dogs. No cats. No horses.
What do humans have in common with parrots? Both species are vocal learners, with the ability to imitate sounds. We share that rare skill with parrots. In that one respect, our brains are more like those of parrots than chimpanzees. Since vocal learning creates links between the hearing and movement centers of the brain, I hypothesized that this is what you need to be able to move to beat of music.
Q. IS IT DIFFICULT TO FIND MONEY FOR THIS TYPE OF RESEARCH?
A. It easier than it used to be. One of the founders of this field, Dr. Robert Zatorre, before 2000, he never used the word music in a grant application. He knew it would get turned down automatically because people thought this was not scientific. Instead, he used terms like “complex nonlinguistic auditory processing.”
But in recent years, it’s become O.K. to say: I study music and the brain.
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