Michael Lewis is a prolific writer on all the dodgy dealings in the financial markets. He has authored Liar's Poker and The Big Short, which I have read and thoroughly recommend.
There is a lot to be learned by sports traders from good writers in the financial world and Michael is certainly one of those writers. His latest offering is Flash Boys, which details the nefarious goings on in High-Frequency Trading (HFT), those who benefit from it and those who fight against it.
The book tells us about how financial trading is now less about knowledge of fundamentals such as the data held in company reports but more about market structure. Knowledge of how the many electronic exchanges are linked and who is buying and selling which stocks before they are traded allows high-frequency traders to gain an advantage. It's as though you could tap into Patrick Veitch's (see Predicting the Starting Price is NOT Possible (for us mortals)) mind to ascertain which horse he is going to perform a coup on and at what odds he has determined are fair. And, before he can get on the phone to his agents to place bets across the country, you can get online to the exchanges and back the horse all the way down to fair odds.
Naturally, that would make Patrick very angry and his ability to trade profitably would be over. And yet, that is what happens in the financial markets everyday. From individuals wanting to play the market for a few hundred shares to the big funds wanting to trades hundreds of thousands of shares, the HFT firms get wind of this activity in advance and manipulate the market to make people pay more to buy and expect less when selling.
How is all this achieved? Again, it is the 'rocket scientists' at work. Since floor trading was superseded by electronic exchanges the market has fragmented. There are many more exchanges and big banks have their own private exchanges too called Dark Pools (see Dark Pools: The rise of A.I. trading machines and the looming threat to Wall Street). There is a time lag between each of these exchanges (depending on how far you are from each of them) as the fibre optic cable linking you to any one exchange might take a circuitous route.
To make a big trade means that you have to split an order up and spread it across many exchanges to find enough buyers or sellers. Of course, the exchange closest to your servers is going to get your first order but then that alerts the high-frequency traders so they cancel their offers on other exchanges and re-offer at a higher or lower price accordingly. The HFT firms do this to extort (in some people minds) a middleman fee from every trade. Instead of one entity buying from another, the HFT firms interject themselves and buy what is wanted from the seller and sell it to the buyer at an inflated price.
From analysts calculating fair value for a stock we now have computer programmers building bots using speed and cunning to extract fractions of a penny, many thousands of times a second. As they say, "Look after the pennies and the pounds will look after themselves." This book is a good read on taking advantage of market micro-structure. Something for the bot building sports trader to learn from.
Amazon - Flash Boys
