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There are several pseudosciences and misquotes in Nanex's response that I can talk about another time (I'm busy). I'm surprised and pleased that Virtu did a good job rebutting him before me - that was a good find - thanks.
I know of two strong indications that this is incorrect and Peterffy's success didn't depend on special agreements with Interactive Brokers.
1. In 1977, Thomas Peterffy bought a seat on the American Stock Exchange (AMEX) and became a member, trading as an individual market maker in equity options. In 1982, Timber Hill Inc. was formed and in 1983, Timber Hill expanded to 12 employees. It wasn't until 1993, over a decade later, that Interactive Brokers Inc. got established as a US broker-dealer.
2. In 2010, Peterffy spoke out against internalization before the World Federation of Exchanges, noting that no major online broker sent more than 5% of its orders to an organized exchange (according to the Rule 606 reports mandated by the U.S. Securities and Exchange Commission) with the sole exception of Interactive Brokers.
That would violate the speed of light as Nanex showed in their analysis which also considered third party timestamps for confirmation. I didn't find Nanex's response to be pseudoscience.
Somehow half of my post got lost while I was typing it.
I don't really see your argument here. There's not a lot you can say about a person's wealth today based on two dates several decades ago. I wasn't even alive in 1982: this doesn't imply anything about how I made the majority of my money today. IBKR's K-10 filing (https://www.sec.gov/Archives/edgar/data/1381197/000104746913002439/a2213156z10-k.htm) yields more concrete evidence:
Timber Hill is slow by comparison to say, GETCO or IMC. The majority of their trading advantage comes from customer flow. If this isn't telling enough, consider their trading gains: in 2012, they made $511.5M from prop trading and payment for order flow (I concede this is a slight overestimation as they lump "market data fees" and "account inactivity fees" together with this) in contrast to $412.6M from commissions. In 2011, they made a startling $708.2M from prop trading and payment for order flow as compared to $456.2M in commissions.
IBKR made a whopping 43% and 49% of its net revenue from prop trading in 2012 and 2011 respectively. Over the same period, Goldman Sachs made 17% of its in net revenue from prop trading compared to other activities that improve our society, e.g. client services, lending and investment management. IBKR promotes negative externalities to the market, e.g. gambling, while Goldman doesn't (well, this is up for another debate).
Statistically speaking, IBKR is a worse vampire squid than Goldman will ever be.
Are you on Steadfast's network (assuming, since you used a Steadfast IP to test against)?
Impressive deviation. This is from one of my 350 E Cermak servers to another, on Steadfast's network. Keep in mind this is also two public facing web servers, db and app servers, with 400 users online (nexusfi.com (formerly BMT) servers).
"If we don't loosen up some money, this sucker is going down." -GW Bush, 2008
“Lack of proof that something is true does not prove that it is not true - when you want to believe.” -Humpty Dumpty, 2014
“The greatest shortcoming of the human race is our inability to understand the exponential function.” Prof. Albert Bartlett
Because it would be faster than light. How does not adjusting for geodesics let you arrive at 1.6 milliseconds? That's implausible from the checks I did.
Your other numbers are in agreement with Nanex's and show that there's something wrong when the theoretical minimum is established at 2.2 milliseconds but trades reacting to the news release occurred just 1.637 milliseconds apart in the two locations, according to Virtu's accurate and synchronized timestamps. That's what Nanex argued and you basically confirmed.
1. You've given me no evidence of what checks you've made.
Step 1: The radius of the earth is about 6400km. New York is about -77.5 degrees and Chicago is about -88 degrees. You know these if you've had to apply for a job at a hedge fund or a prop firm as a quant because you have to prepare for Fermi estimate brainteasers. I know the first one because I was a physicist.
Step 2: The most difficult part of the calculation is manipulating the trigonometric functions so you either try to pin the longitude or the latitude to an integer multiple of 1/4*pi. Since I know geographically that the distance between the 2 cities is mostly east-west versus north-south, and that the 2 cities should be nearly on the same latitude, it's easier to avoid trouble by taking both latitudes to be 1/4*pi. This simplifies most part of the calculation - because
Step 2: Transform to Cartesian coordinates, where phi1 = phi2 = sqrt(1/2), psi1 = -1.5, psi2 = -1.4.
(x1,y1,z1) = (r cos(phi1) cos(psi1), r cos(phi1) sin(psi1), r sin(phi1))
(x2, y2, z2) = (r cos(phi2) cos(psi2), r cos(phi2) sin(psi2), r sin(phi2))
Step 4: Take the Euclidean distance (notice all of the approximations are to 2 significant figures, this makes calculation fast but also implies that any higher precision can be discarded):
sqrt( (x1-x2)^2 + (y1-y2)^2 + (z1-z2)^2 ) = 660km
So the approximate direct distance (ignoring surface curvature) from Washington DC to Chicago is about 660km. To obtain an upper bound, assume the packet is transmitted over fiber. Light travels in fiber at approximately 2/3*c. The distance between Chicago and Washington DC is about twice that of the distance between Chicago and New York, so the difference in time to receive the packet would be approximately (330e3/3e8) / (2/3) / (1/2) = (110/1e5)*3 = 1.6 milliseconds.
Step 5: Adjust for geodesics... This is difficult to do by hand. Usually, you would just assume that the arc length would be approximately equal to the chord length given the small angular separation. Then we're done. This is actually a stronger assumption to those that I made in my estimates above (biggest source of error is the sensitivity to psi1 and psi2).
2. There is no reason why the first trade immediately after 2:00:00 PM has to be a trade responding to the news announcement at 2:00:00 PM. Cross-venue trading occurs between these 2 venues all throughout the day. Any participant can write a buy program to lift the asks at two venues at a preset time in the future almost simultaneously (<<1 ms). It is poor academic practice to pick just 2 instruments precisely to find the pairwise difference in time of first trade after 2:00:00 PM. If you want to do this, you don't have to pick any special economic event. You can easily run a script and find hundreds of pairs whose times between their first trades after any announcement at an arbitrary time (e.g. 10 AM EST) are smaller than 1 millisecond and claim it is a market exploit.
3. Read carefully. Nanex makes a shifting argument here. This was their first post.
The SPY timestamp should have nothing to do with the measurement of the reaction time in the GC futures contract. This measurement now has a completely different frame of reference from the one earlier implied. If you think this is valid, then why don't you trade with me the difference {EUR 21 - US$20} for the difference {US$21 - US$20}?
4. I notice that you didn't respond to my post about Interactive Brokers and that you gave no evidence of your 'checks'. If you're only interested in arguing for the sake of it, there's no point in me posting about anything if it doesn't help you. Whatever floats your boat. No one is stopping you from using Nanex and Interactive Brokers as your service providers.