WEBVTT - Show Me the 00100100 0:00:00.160 --> 0:00:07.240 Brought to you by Toyota. Let's go places. Welcome to 0:00:07.400 --> 0:00:14.960 Forward Thinking. Hey there, everyone, and welcome to Forward Thinking, 0:00:15.000 --> 0:00:17.959 the podcast that looks at the future and says they say, 0:00:18.040 --> 0:00:21.120 the best things in life are free. I'm Jonathan Strickland. 0:00:21.200 --> 0:00:26.360 I'm Lauren foc Obad. I now, Joe. I look at you, 0:00:26.400 --> 0:00:28.400 and I just think you're not You're not in the 0:00:28.480 --> 0:00:31.920 right place, Joe, you're not. You don't belong here. You 0:00:32.400 --> 0:00:37.280 belong in a swamp. That's that's choice number two, actually 0:00:37.400 --> 0:00:40.120 choice number one. Oddly, you're wearing the same thing in 0:00:40.200 --> 0:00:45.560 both scenarios, is that you're wearing a rumpled Oxford shirt 0:00:45.680 --> 0:00:48.720 that's been rolled up to the elbows. You've gotta tie 0:00:48.800 --> 0:00:52.120 that's a little, you know, dislodged, and your hair's all 0:00:52.200 --> 0:00:54.760 must up, and you're standing in the middle of a 0:00:54.760 --> 0:00:57.360 crowd of people all with sheets of paper in their hands, 0:00:57.520 --> 0:01:00.800 and you're making these crazy hand signals to some guy 0:01:00.840 --> 0:01:02.680 who stands in front of a bunch of numbers that 0:01:02.800 --> 0:01:05.640 keep on changing, and you just keep screaming out buy 0:01:05.720 --> 0:01:09.240 and sell in random increments. Yeah, you're imagining me as 0:01:09.280 --> 0:01:12.399 an extra from the movie Wall Street, which was about 0:01:12.480 --> 0:01:16.480 the place Wall Street which is about money. Yes, yeah, 0:01:16.560 --> 0:01:20.720 you've nailed it. Actually, that's my personality. I write about science, 0:01:20.760 --> 0:01:25.160 technology in the future, but my real passion is international finance. 0:01:25.280 --> 0:01:28.480 Yeah I can, especially the part that involves standing someplace 0:01:28.520 --> 0:01:31.080 and shouting. Oddly enough, you would be doing the same 0:01:31.120 --> 0:01:35.520 thing in the swamp, just to whatever creatures happened to 0:01:35.520 --> 0:01:40.160 be stopping by. Okay, So yeah, this isn't um the 0:01:40.200 --> 0:01:45.760 easiest topic for everyone to find something interesting about international finance, stocks, 0:01:45.880 --> 0:01:49.840 commodities markets. But it turns out that there are crazy 0:01:49.960 --> 0:01:54.920 machines involved in stocks markets. Yes, and as you read 0:01:54.920 --> 0:01:58.080 about these crazy machines, you start to envision a future, 0:01:58.280 --> 0:02:01.680 a future that's similar to say, the Terminator film series. 0:02:01.960 --> 0:02:05.680 So we wanted to talk today about that future and 0:02:05.760 --> 0:02:08.679 about some of these machines and what they do. So 0:02:08.800 --> 0:02:11.080 before we get into the future, let's talk about the past. 0:02:11.600 --> 0:02:16.520 You guys know what happened on May six? Can you 0:02:16.520 --> 0:02:19.040 tell us? John? I can. I was waiting for response, 0:02:19.160 --> 0:02:21.959 which your your stunned silence tells me that I need 0:02:21.960 --> 0:02:25.440 to explain. That was the day. It was when the 0:02:25.440 --> 0:02:29.040 superhero the Flash smashed into the side of a mountain. Oh, 0:02:29.120 --> 0:02:32.080 the Flash crash. Okay, well, you got the name right, 0:02:32.360 --> 0:02:36.040 but but the particulars are a little different from what 0:02:36.120 --> 0:02:40.440 you are envisioning. It didn't involve Barry Allen smashing into 0:02:40.440 --> 0:02:43.400 the side of a cliff. No, the flash crash was 0:02:43.440 --> 0:02:47.839 really about a bad day on the for the TAL 0:02:47.960 --> 0:02:51.480 the dal Jones Industrial average. It dropped about nine percent, 0:02:51.800 --> 0:02:55.200 which was around a thousand points total that day, and 0:02:55.240 --> 0:02:58.720 recovered most of those losses within the span of less 0:02:58.720 --> 0:03:01.720 than an hour. Actually, but six hundred points of that 0:03:01.880 --> 0:03:05.720 one thousand point loss came in the space of five minutes, 0:03:05.960 --> 0:03:09.040 and it required about twenty minutes for the market to recover. 0:03:09.600 --> 0:03:12.040 And there are a lot of different reasons why the 0:03:12.080 --> 0:03:14.760 stock market dropped that day. One of the reasons was 0:03:14.800 --> 0:03:19.280 that Greece was undergoing that terrible debt crisis that was 0:03:19.320 --> 0:03:22.160 gripping a lot of Europe. Actually, Greece was just sort 0:03:22.200 --> 0:03:25.040 of the hotbed for it. And then there are other 0:03:25.040 --> 0:03:27.760 issues as well. But some of it has to do 0:03:28.160 --> 0:03:31.520 with these crazy machines all acting on what they what 0:03:31.600 --> 0:03:35.560 they perceived to be market trends in mass and it 0:03:35.680 --> 0:03:39.320 began to kind of create an escalating effect. I guess 0:03:39.360 --> 0:03:41.680 it's not so much the machines that are crazy, but 0:03:41.720 --> 0:03:45.640 it's what the machines do. These your computers executing what 0:03:45.680 --> 0:03:50.320 we call high frequency trading. Yeah, which you might wonder, well, 0:03:50.360 --> 0:03:52.560 what does that mean? High frequency trading is pretty much 0:03:52.560 --> 0:03:55.320 what sounds like. You're trading lots and lots and lots 0:03:55.320 --> 0:03:59.080 of shares throughout a day, like your shares are are. 0:03:59.120 --> 0:04:04.320 You're buying and selling uh, sometimes multiple times within a second. Yeah, 0:04:04.440 --> 0:04:06.960 and actually usually not that many shares that you usually 0:04:07.080 --> 0:04:09.440 keep the number of shares to a couple of hundred, 0:04:09.520 --> 0:04:11.760 but you're but you're flipping them tens of thousands of 0:04:11.800 --> 0:04:14.119 times a day in order to rack up these fractions 0:04:14.120 --> 0:04:17.280 of its scent each time. Right, because stock prices are 0:04:17.320 --> 0:04:20.839 actually averaged out quite a few decimal places these days, 0:04:21.080 --> 0:04:24.040 so you could be talking about point zero zero zero 0:04:24.279 --> 0:04:27.200 five cents in a trade. But if you have enough 0:04:27.200 --> 0:04:30.120 of those over the course of a day that that 0:04:30.520 --> 0:04:32.800 starts to amount to some real money. Okay, so high 0:04:32.800 --> 0:04:36.279 frequency trading was partially responsible for the flash crash, but 0:04:36.320 --> 0:04:39.120 surely that's the only time something like that has happened. Oh, 0:04:39.440 --> 0:04:42.720 actually there is another blip. In by blip, I mean 0:04:42.760 --> 0:04:47.160 like a hundred thirty six billion dollar market value blip. Um. 0:04:47.520 --> 0:04:50.600 By the way, I accept blips. If anyone has a 0:04:50.680 --> 0:04:53.240 hundred thirty six billion dollar blip they'd like to give me, 0:04:53.640 --> 0:04:57.400 also blimps. I am a Dirgible fan, so just throwing 0:04:57.440 --> 0:05:00.160 that out there, I actually will accept cheap Dirgibles here. 0:05:00.240 --> 0:05:02.320 That's true. That's true. I like to think of them 0:05:02.320 --> 0:05:05.559 as reasonably priced. But go on, okay, So in this instant, 0:05:06.760 --> 0:05:10.720 the APIs the Associated Press's Twitter account was hacked and 0:05:10.720 --> 0:05:12.560 it sent out news that bombs had gone off in 0:05:12.560 --> 0:05:14.760 the White House and that Obama had been injured. Um. 0:05:14.760 --> 0:05:18.640 Of course that never happened, but programs that were monitoring 0:05:18.680 --> 0:05:22.279 the news sold off holdings within seconds and the market plummeted. 0:05:23.480 --> 0:05:27.800 These are these are two two separate but connected uh 0:05:27.920 --> 0:05:31.279 trends here, right, We've got computers that are following algorithms 0:05:31.279 --> 0:05:34.200 that are looking for market trends, like if they see 0:05:34.240 --> 0:05:36.359 something happening in the market, they pounce on it, whether 0:05:36.400 --> 0:05:39.320 that's buying or selling whatever stocks they happen to have. 0:05:39.760 --> 0:05:43.159 And then the other trend is machines that are taking 0:05:43.200 --> 0:05:46.080 in information from the real world and acting upon it. 0:05:46.680 --> 0:05:50.960 So both of these things are happening in increasingly large 0:05:51.080 --> 0:05:54.520 numbers and frequencies in the United States in particular, in 0:05:54.560 --> 0:05:56.520 other countries as well. We're not the only ones who 0:05:56.560 --> 0:05:59.640 do it, but investors of this kind sometimes call themselves quants, 0:05:59.720 --> 0:06:02.880 alluding to some kind of metaphorical quantum unit of money, 0:06:02.960 --> 0:06:04.880 which of course does not exist, but it's kind of 0:06:04.920 --> 0:06:07.839 cute um and and and the strategy here is too, 0:06:07.920 --> 0:06:10.280 is to yeah, flip all of these shares back and 0:06:10.279 --> 0:06:14.240 forth based on minute changes in the stock market thousands 0:06:14.240 --> 0:06:16.120 of times a day, and then remove all your funds 0:06:16.160 --> 0:06:18.839 from the market by the close of business. Right, so yeah, 0:06:19.120 --> 0:06:23.159 you you get in and out every single day. It's 0:06:23.240 --> 0:06:25.600 kind of it's kind of mind boggling, and it's and 0:06:25.640 --> 0:06:28.839 it's operating at a speed that human people literally cannot 0:06:29.520 --> 0:06:31.880 compete at. Right. Yeah. No, that by the time you 0:06:31.920 --> 0:06:36.080 would see a offering on a stock, it would already 0:06:36.120 --> 0:06:39.440 be too late in this world, you know, too late 0:06:39.560 --> 0:06:42.760 a thousand times over. We're talking about machines that can 0:06:43.440 --> 0:06:47.880 that can make a decision in a fraction fraction of 0:06:47.920 --> 0:06:50.159 a second, millionth of a second. And it might be 0:06:50.279 --> 0:06:53.320 responding to like we talked about something in the news, 0:06:53.440 --> 0:06:56.440 or some kind of external predictor or me responding to 0:06:56.640 --> 0:06:59.839 the just the market prices themselves, right right? Yeah, Now, 0:07:00.560 --> 0:07:03.400 according to one story I read in two thousand twelve, 0:07:03.520 --> 0:07:07.560 high speed computer algorithms, or al goes as some call them, 0:07:07.600 --> 0:07:11.600 I don't. I can live for about of all trading 0:07:11.600 --> 0:07:15.320 in US stocks, which sounds like a lot until you 0:07:15.400 --> 0:07:18.320 hear other numbers. I've heard that estimated at as high 0:07:18.360 --> 0:07:24.480 as eight percent, and as much as for UK stocks 0:07:24.480 --> 0:07:27.440 for other European stock markets. Right, and so here we're 0:07:27.440 --> 0:07:32.200 talking about not just uh high frequency here, it's obviously 0:07:32.280 --> 0:07:34.480 all about speed as well. So it's not just how 0:07:34.520 --> 0:07:36.800 many times are your trading stocks throughout the day, but 0:07:36.880 --> 0:07:40.960 how quickly can you pounce upon a trend opportunity in 0:07:41.040 --> 0:07:45.000 order to make that fraction of assent. So let's before 0:07:45.040 --> 0:07:48.040 we get into actually how that happens and what and 0:07:48.200 --> 0:07:51.600 what lengths people and companies have gone to in order 0:07:51.640 --> 0:07:55.880 to get that that advantage of speed. Maybe it's time 0:07:55.920 --> 0:07:58.720 to take a little step back, right, Let's let's turn 0:07:58.760 --> 0:08:01.920 the clock back and take a look at how stock 0:08:01.960 --> 0:08:06.280 markets even came into being and how they work in general, 0:08:06.680 --> 0:08:08.560 so that we can understand what's going on at these 0:08:08.600 --> 0:08:12.560 incredible speeds. So if you were to go back to 0:08:12.920 --> 0:08:16.200 uh say, the Middle Ages, and um, you know, you know, 0:08:16.560 --> 0:08:19.440 dust yourself off a little bit and look around. The 0:08:19.520 --> 0:08:24.080 earliest examples of what would eventually become stock exchanges really 0:08:24.120 --> 0:08:27.840 grew out of the the money lending and later the 0:08:27.920 --> 0:08:31.680 banking movements that we're just getting started. Really, money lending 0:08:31.680 --> 0:08:33.600 had been around for a while, but banking was pretty 0:08:33.679 --> 0:08:37.920 darn new, um, and so at that point one of 0:08:37.920 --> 0:08:42.079 the things that started to become commonplace was trading of debts. So, Lauren, 0:08:42.160 --> 0:08:44.360 let's say that you had borrowed a small sum of 0:08:44.400 --> 0:08:47.160 money and you fully intend to pay it back, and 0:08:47.320 --> 0:08:50.000 you are probably going to be able to, and I 0:08:50.080 --> 0:08:53.200 happen to hold the the debt the promise you're going 0:08:53.240 --> 0:08:56.960 to be paying me. Joe, let's say that you have 0:08:57.160 --> 0:09:00.280 borrowed a ludicrous sum of money and you have very 0:09:00.320 --> 0:09:03.080 little intent to pay it back, but no one knows that. Well, 0:09:03.160 --> 0:09:05.959 I needed to invest in my alchemy lab. Okay, so 0:09:06.360 --> 0:09:09.320 you have gone into I turn all this lead into gold. 0:09:09.480 --> 0:09:12.120 You'll get your money back and then some So Joe 0:09:12.160 --> 0:09:16.720 has invested heavily in Al's chemicals, and uh so, Joe's 0:09:16.800 --> 0:09:20.640 money is potentially never going to be seen again. Now 0:09:20.800 --> 0:09:23.920 I have a chance, a pretty good chance of getting 0:09:24.080 --> 0:09:28.360 the loan paid off by Lauren. But someone else holding 0:09:28.480 --> 0:09:31.520 Joe's loan may say, hey, I'll trade you this this 0:09:31.640 --> 0:09:34.320 loan for that loan. Whereas you know, yours has almost 0:09:34.360 --> 0:09:36.960 a guarantee of being paid off. Mine doesn't have a 0:09:37.040 --> 0:09:40.120 very strong guarantee, but the payoff would be much larger. 0:09:40.600 --> 0:09:43.200 And so you would have people start to trade those 0:09:43.320 --> 0:09:46.679 kinds of those debts, and this has got to be 0:09:46.720 --> 0:09:49.480 a pretty big thing. However, there was no there was 0:09:49.520 --> 0:09:53.240 no formal place to meet to do this. You wonder, 0:09:53.440 --> 0:09:55.679 you wonder if the higher risk, bigger debts are more 0:09:55.720 --> 0:10:00.480 attractive to people who are better at extracting payment, yeah right, 0:10:01.000 --> 0:10:05.760 or less good at math yeah well, uh yeah, Like 0:10:06.360 --> 0:10:08.880 the Borgias were probably pretty darn good at it at 0:10:08.880 --> 0:10:11.240 the by the at their height. But then you had, 0:10:11.880 --> 0:10:16.199 around the the early fift hundreds the Belgian Stock Exchange, 0:10:16.640 --> 0:10:19.880 which traded in bonds and promissory notes. No promisory notes, 0:10:19.920 --> 0:10:22.440 that's essentially saying I promised to pay you X amount 0:10:22.440 --> 0:10:25.600 of money. Yeah, it's it's a legal document, but it 0:10:25.640 --> 0:10:29.400 is essentially an iou uh. And then in shipping you 0:10:29.559 --> 0:10:33.080 started to see the people who owned ships would sell 0:10:33.160 --> 0:10:36.640 shares in a voyage, the idea being that by raising 0:10:36.640 --> 0:10:39.160 this money they could outfit the voyage and then if 0:10:39.160 --> 0:10:41.880 the voyage were successful, they would pay out profits from 0:10:41.920 --> 0:10:44.920 that voyage to their backers. Just very similar to the 0:10:45.000 --> 0:10:46.640 kind of stuff we would see and say a movie 0:10:46.679 --> 0:10:49.840 like The Producers, where you get this idea of selling 0:10:49.840 --> 0:10:51.920 shares in a in a show. In that case, they 0:10:51.920 --> 0:10:54.400 were trying to uh sell shares and show that was 0:10:54.400 --> 0:10:56.480 guaranteed to fail, so they wouldn't have to pay anyone back. 0:10:57.400 --> 0:10:59.360 But this was this is the basis of what would 0:10:59.360 --> 0:11:03.400 eventually be come kind of again a stock market. And 0:11:03.400 --> 0:11:05.960 in fact, in London you get your first stock market 0:11:06.040 --> 0:11:09.920 in seventeen seventy three and nineteen years later that's when 0:11:09.920 --> 0:11:13.920 the New York Stock Exchange was formed. And so that 0:11:13.960 --> 0:11:17.000 takes us to how these these systems work. So you've 0:11:17.000 --> 0:11:20.400 got buyers and sellers right, and you have a market there. 0:11:21.320 --> 0:11:24.640 Often the market is actually the entity that's holding stocks 0:11:24.679 --> 0:11:28.320 and is selling to you. Uh, you have a price 0:11:28.400 --> 0:11:32.720 which is guided by the market itself and basically guided 0:11:32.720 --> 0:11:35.280 by the amount of money someone was last willing to 0:11:35.440 --> 0:11:39.040 buy or sell a stock at. So if you want 0:11:39.120 --> 0:11:41.640 to buy stock. Joe. Let's say that you're raid by 0:11:41.679 --> 0:11:44.520 into Al's chemicals today, you know, because that that business 0:11:44.520 --> 0:11:46.480 really turned around after the Middle Ages. I want to 0:11:46.520 --> 0:11:49.760 invest in lead. Okay, So Joe wants to invest in lead. 0:11:49.800 --> 0:11:53.240 He he thinks lead is going places. So Joe, you 0:11:53.240 --> 0:11:55.120 you say that you're willing to pay how much are 0:11:55.120 --> 0:11:59.160 you willing to pay for a share of lead? A dollar? 0:11:59.280 --> 0:12:01.880 So Joe willing to pay one dollar for a share 0:12:01.880 --> 0:12:04.080 of lead? And how many shares are you wanting to 0:12:04.120 --> 0:12:07.319 purchase in total? So Joe is willing to pay one 0:12:07.360 --> 0:12:10.559 dollar per share of lead for up to one hundred 0:12:10.600 --> 0:12:12.880 shares of lead. Now let's say that you have a 0:12:13.160 --> 0:12:15.320 that that would, by the way, be called a bid. 0:12:15.679 --> 0:12:18.640 That that's your bid for a share for a hundred shares. 0:12:20.720 --> 0:12:24.079 Now the seller might say, you know, I'm willing to 0:12:24.120 --> 0:12:30.080 sell uh fifty shares of lead, but my asking price, 0:12:30.200 --> 0:12:34.000 my ask is a hundred a hundred dollars. So there's 0:12:34.000 --> 0:12:36.839 a big gap there. Right, you're asking you we're willing 0:12:36.840 --> 0:12:39.360 for a dollar, they're asking for a hundred. This would 0:12:39.400 --> 0:12:42.160 be a bad what they call spread. But let's say 0:12:42.200 --> 0:12:44.679 as much you were you were being very realistic, or 0:12:44.720 --> 0:12:46.480 maybe maybe the price is much lower. We'll say that 0:12:46.600 --> 0:12:49.320 asking for a dollar oh five per share, Then you 0:12:49.360 --> 0:12:51.320 have a spread of five cents per share. It's not 0:12:51.400 --> 0:12:54.560 that big a deal. If it's the market that's selling this. 0:12:54.679 --> 0:12:57.440 The market ends up in kind of pocketing that five 0:12:57.480 --> 0:12:59.839 cent difference every time these trades are happening, and that's 0:12:59.840 --> 0:13:03.600 how the market makes money. And again, the stock price 0:13:03.760 --> 0:13:07.079 is reflected by that last transaction. So if your transaction 0:13:07.160 --> 0:13:09.240 was the last one, and you actually bought say a 0:13:09.320 --> 0:13:12.160 hundred hundred years of lead for a dollar or five apiece, 0:13:12.320 --> 0:13:15.319 dollar or five would be what the stock price would be. 0:13:15.920 --> 0:13:19.560 So that's the basis of this. So if you were 0:13:19.559 --> 0:13:22.520 able to act very very quickly, and and you saw 0:13:22.559 --> 0:13:26.319 that a stock price had changed to a specific amount, 0:13:26.720 --> 0:13:28.760 and you were able to leap on it right at 0:13:28.840 --> 0:13:32.120 that moment before anything any other changes in the market happened, 0:13:32.120 --> 0:13:34.400 before anyone else made a purchase, and then sold it 0:13:34.440 --> 0:13:36.559 for a different amount, which would change the stock price. 0:13:37.200 --> 0:13:41.040 You could stand to benefit from that, either by selling 0:13:41.120 --> 0:13:43.720 something slightly higher than what it was or buying it 0:13:43.760 --> 0:13:46.600 when it was slightly lower. You know, there's a lot 0:13:46.640 --> 0:13:49.240 of different maneuvers you could do within the stock market, 0:13:49.320 --> 0:13:51.800 but you know, you're limited by how fast you can 0:13:51.800 --> 0:13:54.800 do them, which is where things like computers come in. 0:13:55.040 --> 0:13:57.880 Oh well, I mean because in in ye olden days, 0:13:57.960 --> 0:14:00.680 and by ye olden days, I mean for a great 0:14:00.720 --> 0:14:03.240 part of the twentieth century. In fact, this involved a 0:14:03.280 --> 0:14:06.080 lot of literal running around. I mean high high technology 0:14:06.080 --> 0:14:08.679 at the time was hiring the fastest and loudest kid 0:14:08.720 --> 0:14:12.000 that you could to go work on the exchange floor. Um. 0:14:12.040 --> 0:14:15.560 And or sometimes pigeons. Legends say that pigeons were used 0:14:15.640 --> 0:14:17.880 to trade in real time on the outcome at Waterloo. 0:14:18.240 --> 0:14:23.080 The Rothchild family supposedly used pigeons to uh, to learn 0:14:23.160 --> 0:14:25.680 the outcome of the Battle of Waterloo before anyone else 0:14:25.840 --> 0:14:30.080 that they could then act upon the market accordingly. So 0:14:30.440 --> 0:14:33.280 I guess they had a strategy like, okay, if the 0:14:33.320 --> 0:14:37.520 French win, go with this. So it was kind of 0:14:37.520 --> 0:14:40.240 an interesting Uh. That's that's an interesting legend. Whether or 0:14:40.280 --> 0:14:42.280 not it's true, you know, it could be apocryphal, we 0:14:42.320 --> 0:14:44.760 don't know sure, but um, but all of this did 0:14:44.800 --> 0:14:47.640 definitely change when computers started to become a thing. Um. 0:14:47.680 --> 0:14:52.200 In October, a computer system replaced that original trading floor 0:14:52.240 --> 0:14:54.560 of the of the New York Stock Exchange, and uh 0:14:54.720 --> 0:14:57.040 it tripled the number of exchanges that could be made 0:14:57.080 --> 0:14:59.680 within months or that were literally made within months. Yeah, 0:14:59.760 --> 0:15:02.880 so you suddenly see a lot more volume as a result, 0:15:02.960 --> 0:15:06.360 you see uh more you know, a higher frequency but 0:15:06.400 --> 0:15:09.800 not high frequency trading. It that would come later, but 0:15:10.120 --> 0:15:12.560 it's certainly that that's set the stage and now we've 0:15:12.560 --> 0:15:16.720 gotten to a point where we really want to eliminate 0:15:16.800 --> 0:15:20.280 latency as much as possible. Latency is that period between 0:15:21.280 --> 0:15:25.840 recognizing a potential trend and acting upon it, and latency 0:15:25.880 --> 0:15:28.120 depends on a couple of different things in this world. 0:15:28.320 --> 0:15:30.800 It depends on how good your computer algorithm is a 0:15:30.920 --> 0:15:34.120 recognizing trends and then and then executing a command. And 0:15:34.200 --> 0:15:39.640 it depends upon the actual communication connection, physical hardware that 0:15:39.680 --> 0:15:44.000 you're using, right, even the infrastructure, right the cables that 0:15:44.080 --> 0:15:47.600 connect you to the New York Stock Exchange. In fact, 0:15:47.640 --> 0:15:49.960 at this point, you have companies that are willing to 0:15:50.000 --> 0:15:53.440 pay top dollar to have to have machines all stored 0:15:53.560 --> 0:15:55.880 in Essentially, they're all putting them in the same building 0:15:55.920 --> 0:15:58.320 that's near the New York Stock Exchange in order to 0:15:58.360 --> 0:16:01.120 have as as close to connect to the stock exchange 0:16:01.160 --> 0:16:03.760 is possible, and to keep things fair, the engineers in 0:16:03.800 --> 0:16:06.840 that building equalize the cable that runs to each of 0:16:06.880 --> 0:16:09.880 these servers, like like adding a few feet of cable 0:16:09.880 --> 0:16:12.800 when necessary, so that these messages that are moving essentially 0:16:12.920 --> 0:16:15.680 y'all at the speed of light are going to equal out. Yeah, 0:16:15.720 --> 0:16:18.040 that's kind of incredible that a few feet can make 0:16:18.080 --> 0:16:22.080 a difference. So the actual physical speed of data transfer 0:16:22.240 --> 0:16:27.080 depends upon the medium you're using to transmit that information, right, 0:16:27.080 --> 0:16:29.080 because the speed of light is a constant, and it's 0:16:29.120 --> 0:16:32.880 a hypothetical ideal that we're never really going to reach. Right, 0:16:33.080 --> 0:16:35.200 that's the speed of light and a vacuum. And so 0:16:35.320 --> 0:16:40.600 what we're dealing with is like various extremely fast transmissions, 0:16:40.600 --> 0:16:47.360 say like the stream of a microwave transmission through the air, 0:16:48.440 --> 0:16:51.680 a fiber optic cable across the street, you know. Right, 0:16:51.720 --> 0:16:54.400 As it turns out, light does travel at different speeds 0:16:54.400 --> 0:16:56.880 through different media, right, I mean, it all depends upon 0:16:56.880 --> 0:16:59.480 the medium or electromagnetic waves, because we're gonna be talking 0:16:59.520 --> 0:17:02.040 not into really about light. That's true. That's true. So 0:17:02.200 --> 0:17:05.560 if you are talking about optic cable, so fiber optic 0:17:05.600 --> 0:17:09.040 cables you can transmit lots of information through fiber optic 0:17:09.080 --> 0:17:11.720 cables by doing lots of tricky things like having multiple 0:17:11.760 --> 0:17:15.800 cores and even a different geometric layout of how the 0:17:15.880 --> 0:17:19.159 light itself travels through that cable. So you may have 0:17:19.240 --> 0:17:23.080 heard about the fastest supercomputers in the world using fiber 0:17:23.119 --> 0:17:26.200 optic to move massive amounts of data in very little time. 0:17:27.160 --> 0:17:30.320 But this is this is that difference between speed and 0:17:30.440 --> 0:17:33.400 throughput that we've talked about before in this podcast. It's 0:17:33.400 --> 0:17:35.920 not that the data is moving faster, it's it's able 0:17:35.960 --> 0:17:39.240 to move more data at the same time, so it's 0:17:39.280 --> 0:17:42.119 it's not necessarily traveling at the speed of light. So 0:17:42.240 --> 0:17:46.520 speed of light through optical cable is around two hundred 0:17:46.560 --> 0:17:51.760 thousand kilometers per second. But you know if that sounds 0:17:51.760 --> 0:17:54.040 pretty fast two kilometers per second. I mean, I'm not 0:17:54.080 --> 0:17:57.400 saying that's slow. But if you were to say, set 0:17:57.480 --> 0:18:00.480 up a microwave tower and a receiver and send a 0:18:00.520 --> 0:18:04.800 message that way, then travels at around three hundred thousand 0:18:04.880 --> 0:18:10.000 kilometers per second, so markedly faster. Right, You're going much 0:18:10.040 --> 0:18:11.880 faster than you would be if you were going through 0:18:11.880 --> 0:18:15.880 optic cable. So there are companies that are setting up 0:18:15.920 --> 0:18:20.919 these microwave relay towers to transmit information between say the 0:18:20.920 --> 0:18:25.600 New York Stock Exchange and a trading houses in Chicago 0:18:25.680 --> 0:18:28.880 that deal with futures, right, because the activity in one 0:18:28.960 --> 0:18:31.159 can affect the other. And if you know about it 0:18:31.200 --> 0:18:33.879 ahead of time, ahead of your competition, you stand to 0:18:33.960 --> 0:18:36.280 make a lot of money. Yeah, I mean even by 0:18:36.280 --> 0:18:39.600 by fractions of a second faster than your competition. And 0:18:39.640 --> 0:18:41.960 there are problems with microwaves that you don't run into 0:18:41.960 --> 0:18:44.320 with optical cable, Like it's a direct line of sight 0:18:44.480 --> 0:18:46.600 kind of issue, right, and if there's a storm, it 0:18:46.640 --> 0:18:49.280 can interfere with transmission. Right. So I mean the same 0:18:49.320 --> 0:18:51.240 reasons that we don't use satellites for this kind of 0:18:51.280 --> 0:18:53.400 thing because latency. I mean, you can move a lot 0:18:53.560 --> 0:18:56.720 more data. But yeah, but for that information to travel 0:18:56.760 --> 0:18:58.840 all the way up into space and then relay with 0:18:58.840 --> 0:19:01.080 the satellite and then be be back down to some 0:19:01.440 --> 0:19:05.119 receiving station on Earth, that that information has to travel 0:19:05.200 --> 0:19:08.080 a huge distance obviously all the way up into lower 0:19:08.119 --> 0:19:10.000 th orbit and then back down and then or not 0:19:10.080 --> 0:19:13.359 even lower thorbit, that could be much higher than lower orbit. 0:19:13.880 --> 0:19:16.440 Uh so then you have a real latency problem. Sure, 0:19:16.800 --> 0:19:19.480 and people are working with microwaves on that entire line 0:19:19.480 --> 0:19:21.760 of sight issue, right, No, sure, A couple of different 0:19:21.800 --> 0:19:25.680 companies have been working on building microwave towers, like I said, 0:19:25.720 --> 0:19:28.199 between New York and Chicago. They're also looking at the 0:19:28.200 --> 0:19:32.440 possibility of using microwaves to transmit information across the Atlantic, 0:19:32.440 --> 0:19:35.080 which would be a lot trickier because you know, building 0:19:35.119 --> 0:19:37.240 towers out in the middle of the ocean not easy. However, 0:19:37.280 --> 0:19:40.840 there's at least one guy who suggests we use drones. 0:19:41.400 --> 0:19:47.840 Microwave drones, Yeah, drones that can actually the stock so 0:19:48.040 --> 0:19:50.439 you think, you know, you'd have to have a drone 0:19:50.520 --> 0:19:54.560 that would be very energy efficient to be able to 0:19:54.600 --> 0:19:59.080 maintain flight over the Atlantic Ocean without needing to recharge 0:19:59.080 --> 0:20:01.120 every few minutes. It would have to have some kind 0:20:01.160 --> 0:20:03.960 of crazy power source, perhaps one of the ones we've 0:20:03.960 --> 0:20:07.000 talked about in one of our previous episodes. But if 0:20:07.040 --> 0:20:09.040 you were able to do it, then in theory, you 0:20:09.040 --> 0:20:13.760 could have a drone microwave relay station to transmit information 0:20:14.200 --> 0:20:17.600 across the Atlantic Ocean, which would travel faster than it 0:20:17.640 --> 0:20:21.320 would with a fiber optic cable. So, assuming that there 0:20:21.320 --> 0:20:23.960 weren't these atmospheric problems in the way obviously that we 0:20:24.000 --> 0:20:27.119 mentioned earlier, right, sure, And I mean, as as crazy 0:20:27.160 --> 0:20:29.360 as this all sounds, it might in fact be more 0:20:29.400 --> 0:20:33.360 reasonable than the three hundred million dollar cable laying project 0:20:33.400 --> 0:20:36.840 that's underway to shave uh sixty five milliseconds to just 0:20:37.000 --> 0:20:39.880 under sixty from London too. So here's the thing. If 0:20:39.880 --> 0:20:42.680 there's money to be made, someone's doing it. That's really 0:20:42.680 --> 0:20:44.800 the message we're getting at here is that you know, 0:20:44.880 --> 0:20:48.479 you're you're hearing like these incredible like you're just taking 0:20:48.520 --> 0:20:51.359 maybe a little bit more than five milliseconds off of 0:20:51.359 --> 0:20:55.840 a transmission line that seems so tiny to us, but 0:20:56.040 --> 0:21:01.400 the fact is that can trans translate into me, got dollars? Yeah, yeah, 0:21:01.480 --> 0:21:05.240 for for these for these crazy high frequency trader people. Okay, 0:21:05.280 --> 0:21:08.440 So I have a question. So obviously lots of people 0:21:08.440 --> 0:21:12.080 are going to be trying to get there. They're buying 0:21:12.840 --> 0:21:16.480 signal out there faster to get out ahead of the competition. 0:21:16.800 --> 0:21:18.960 But I can foresee that one way to get out 0:21:19.000 --> 0:21:21.600 ahead of the competition is not to get there faster, 0:21:22.119 --> 0:21:25.840 but to make smarter decisions, or to trick your opponent 0:21:25.920 --> 0:21:30.639 into making dumber decisions. Right, So I have to guess 0:21:30.680 --> 0:21:33.840 if people are spending millions of dollars shaving half of 0:21:33.840 --> 0:21:37.639 a second off of a transmission time. They're probably also 0:21:37.680 --> 0:21:40.880 spending money on software that's designed to do this, am 0:21:40.880 --> 0:21:43.560 I right? Yeah, yeah, So you've got software, like we said, 0:21:43.560 --> 0:21:46.719 the algorithms that are designed to specifically look for trends 0:21:46.720 --> 0:21:49.400 in the market. That's one type, right, They're looking for 0:21:49.440 --> 0:21:52.480 any kind of indication that a certain type of market 0:21:52.520 --> 0:21:55.199 condition is about to happen and so therefore act in 0:21:55.240 --> 0:21:58.200 advance of that, right, which I mean you've got these 0:21:58.240 --> 0:22:02.080 algorithms watching Twitter blogs and stuff like that. Right, then 0:22:02.119 --> 0:22:04.280 you've got those exactly the ones that are looking at 0:22:04.320 --> 0:22:07.520 the news itself and not just market conditions, but also 0:22:07.600 --> 0:22:10.520 external conditions that could then affect the market. Remember that 0:22:10.520 --> 0:22:13.840 the market is going to lag behind any news, but 0:22:14.040 --> 0:22:16.399