Flash Boys

I read Michael Lewis’s Flash Boys in a single sitting at the Cambridge Public Library.  For context, I rarely finish books and it usually takes months.  I read it because I needed to understand the pros and cons of routing trades to IEX and couldn’t find enough detail online.  Flash Boys turned out to surpass my expectations, but left me wondering why IEX doesn’t publish a more concise explanation of how the market works and why trades should be routed to them.  Claiming they have a coil of fiber to introduce a delay that slows down HFT is hardly an explanation.

I should mention that I was positively surprised to see Lewis mention both Nanex and Themis Trading, because they really are the best resources for understanding market microstructure and how HFT works.  I’ve been following these problems with the markets for 4 years now, and never imagined it would get so much public attention.

Lewis identifies a few ways in which HFT takes money from investors.

  1. High speed links between exchanges beat customer orders from one exchange to another.
  2. Varying rebate structures cause brokers to route customer orders to where the broker gets paid the most and the customer is therefore least likely to be filled.
  3. Orders in dark pools can be executed at stale prices because they aren’t displayed as part of NBBO.
  4. Sub-pennying.  Lewis actually fails to explain how sub-pennying hurts traders.  There’s a single reference to sub-pennying in the book, but it says nothing about how it works.  See http://www.nanex.net/aqck2/3519.html and http://www.defendtrading.com/cfm.v21.n1.2.pdf

I wish the book had a technical summary of all the phenomena seen, so I’ll try to write one here.

First, some background for non-traders.

There are two basic types of trades: market orders and limit orders.  Market orders are for traders who have strong convictions about the direction a stock is moving.  They are designed to get executed immediately at the best available prices in the market.  They’re also called “market taking” because they take whatever prices are given.  Limit orders are for traders who want to guarantee a particular price or are willing to wait for someone else to trade in the opposite direction.  They’re known as “market making” because they make up the prices you see posted in the market.  A market order is like selling your car to a dealer.  You get instant money, but not as much.   A limit order is like listing the car for sale and waiting for a willing buyer.

Secondly, the order in which trades are executed matters a lot.  Imagine you and a dozen other people are trying to sell something of uncertain and changing value.  If you’re all offering the same price, you don’t want to be the last person to sell.  If that happens, it’s because a buyer came and bought everything, which implies that the thing you sold is probably now worth more.  On the other hand, if you’re the first to sell and everyone else is still offering to sell at the same price, that’s great.  You still have the option of undoing the sale by turning around and buying from another seller at the same price.  Furthermore, imagine a buyer comes and offers one of the sellers a dollar less to buy the thing and the seller agrees.  If you can jump in after the agreement, push the seller aside by offering to save the buyer an additional penny, the buyer probably wouldn’t mind, you’d still be able to undo your trade at a 1 cent loss, and the seller you displaced would feel unfairly treated.

Now, on to the 4 HFT phenomena.

  1. Phenomenon 1 (fastest links between exchanges) only affects market taking orders, not market making orders.  Katsuyama complains that when he sees shares offered on multiple exchanges and sends an order to buy all of them, only some of them get filled.  For years, traders have known that the way to get around this is to release the orders such that they all arrive at nearly the same time.  But maybe Katsuyama discovered it first and it just took a long time for Lewis to write the book.  By the way, you also have to flag orders as ISO (intermarket sweep order) so that the receiving exchange doesn’t wait to confirm that there isn’t a better price at another exchange.  By that time, the available price would have disappeared.  IEX helps a lot here by providing such sweep order functionality to traders who don’t have direct connections to all the exchanges.  I’m surprised nobody mentioned the idea of using synchronized clocks on machines located outside each exchange that release a large order within light meters (tens of nanoseconds) of each other.  I’m sure there are firms doing it.  Maybe Katsuyama didn’t tell Lewis.  But it should be an obvious solution to anyone who thinks about the problem a lot.  Another thought on this phenomenon is that it’s nothing new.  It’s called cross market arbitrage and they used to use telephones.  It’s an unavoidable fact that whoever has the best communication method will keep markets in line with each other.  The unanswered question is, “Why aren’t all customers bringing their trades to the same venue?”  If new exchanges start and pay brokers extra to bring orders there, why don’t all brokers end up directing orders to the single exchange providing the highest kickback ”rebate”?
  2. A lot of exchanges provide rebates for market making orders and charge market taking orders.  This incents brokers to direct limit orders to exchanges with the highest positive rebates.  Obviously, those orders will be the last to be filled, since it costs more to take them.  I’m not sure how IEX helps here.  If I post a limit order on IEX that matches the NBBO, it’s not going to get filled before the one on BATS.  Small market orders prefer BATS because they offer a negative rebate (get paid to take markets).  Big market orders often hit BATS first too, as described in the book.  To help limit orders get filled quickly, IEX needs to change the fee structure and pay for market orders while charging limit orders the way BATS does.  And as things are right now, I have no incentive to route small market orders to IEX.  I’m best off sending them to the exchange with the highest negative rebate.  The only counterargument is that the prices on certain exchanges could be stale and no longer available, but here we’re talking about prices that stay stable for multiple seconds at a time and your customer order is the first event causing the price to move.
  3. The dark pool incident in which Rich Gates sells stock on an exchange at a price below the price he’s bidding in the dark pool is interesting.  It wouldn’t happen on a lit exchange because the sell order would automatically be re-routed to your standing best bid.  Maybe the lesson is to not leave limit orders unattended in dark pools?  It’s like being willing to sell a car, but not posting it to craigslist or AutoTrader.  You only tell your local dealer that you’re willing to sell the car and wait until he has a customer willing to pay more, at which point he buys it off you.  Why would you do that?  IEX is a dark pool, but it prevents such occurrences using the coil of fiber that delays dealer trades.  What happens is that while the dealer’s attempt to take your stale limit order is looping around in the fiber, IEX learns about the new prices being offered in the market and then blocks your limit order from executing with the dealer because the order could get a better price now on an “away” exchange.  That’s pretty cool.  But it’s not well explained in the book.  I bet most readers don’t think through exactly how introducing a delay helps at all in protecting against HFT because the fast traders will always be faster than the slow traders.  Lewis should have been very clear that the delay effectively solves the problem of the SIP being too slow and ensures that the exchange knows the NBBO before the trades are executed instead of learning of it too late.  In summary, IEX seems to be a properly functioning dark pool, but I can’t think of any compelling reason to post limit orders in a dark pool instead of publicly at an exchange.  Dark pools seem to be for traders unable to mask their order size by breaking up the order.
  4. Sub-pennying occurs when a market order is about to take a limit order, but then an HFT jumps in front of the limit order by 1/100th of a cent as “price improvement” for the market order.  The market taker saves a penny while the original market maker remains unfilled and protects the HFT from the price immediately worsening.  The end effect is similar to what happens in dark pools (an HFT disrupts two traders from trading with each other).  But sub-pennying happens on public exchanges.  I don’t know a way around it.  It really sucks when you’re at the front of a queue of limit orders and an HFT takes your fill for a meaningless amount of money.  It’s not clear how IEX helps here.  I assume trades executed on IEX only occur at whole cents, so there is no sub-pennying.  But market takers don’t really care so much about sub-pennying because they’re still getting nearly the same price.  And not having your limit orders sub-pennied only helps if people are routing market orders to the exchange where your order is posted.  Therefore, I think IEX should offer negative rebates and pay market takers to bring business to the exchange.

The midpoint peg order offered at IEX seems like an appealing concept.  Bad trade executions are ones where the counterparty immediately knows he got a good deal.  When you take part of a posted market and don’t push the price to the next level, the market makers are happy, which is bad for you.  When you are the last limit order to get filled at a certain price, you have an immediate loss.  The right way to trade is to take the market when you have high conviction about which way the market is going or have limit orders near the top of the book.  If neither of those are possible, having your trades execute halfway between the bid and offer is nice because you know your counterparty is trading out of a need to trade and not to immediately make a profit.  The trouble is that midpoint peg orders can be discovered by probing the market and then traders can manipulate the bids or offers to change the midpoint before executing against your trade.  For instance, say I’m bidding for 10,000 shares and the stock is 24.82 at 24.84.  Someone can send a midpoint buy and a midpoint sell to see which way there’s trading interest to determine that I’m a buyer.  Then, buy all the offers at 24.84, pushing the market to 24.84 at 24.85.  Immediately send a midpoint sell to get rid of the shares just purchased for a half cent profit on each.

There’s actually nothing wrong with the old-fashioned market model of price-time priority and a single exchange.  Your limit orders are treated fairly.  IEX could be that market, except that it’s a dark pool right now.  It also has to deal with a lot of the good customer market order flow being internalized or going off to exchanges that pay negative rebates.

Finally, here are some excelllent posts by Dennis Dick that clearly explain the most egregious flaw in how the stock market currently works.  Until there’s a legislative fix, do the right thing and switch to a broker who allows you to directly route your orders to public exchanges.  We’ll all save money and free up the country’s top technical talent for solving real problems.

(1) http://premarketinfo.com/2012/02/23/dark-secrets-where-does-your-retail-order-go/

(2) http://premarketinfo.com/2012/07/23/exploring-the-hidden-costs-of-retail-price-improvement/

Scamming with the Phrase “Peer-to-Peer”

These days, we see the term “peer-to-peer” describing all sorts of new businesses.  There’s P2P lending, where people bypass banks and lend money to each other.  P2P carsharing, P2P livery service, P2P lodging. Real estate agents should advertise as facilitating P2P house trading.  When people buy or sell houses, they’re almost always transacting with other customers, not businesses or professionals, so it seems totally P2P to me.

I ask, “What qualifies as peer-to-peer?” because I see CurrencyFair and TransferWise using the term to imply that you can exchange money directly with another customer instead of going through a bank.  The thing is, that’s not at all how it works at CurrencyFair despite their early marketing materials depicting customers transacting with other customers.  CurrencyFair have come clean and admitted how it really works in the fine print on their site, but they continue to use the term “peer-to-peer”.  I’m pretty sure TransferWise also doesn’t match customer orders only with customer orders and I’m about to begin investigating to check if they’re profiting off of imbalances in customer order flow, but my speculation as to what they might be doing is for another post.

Consider a used car dealership.  Used car dealers could argue that they’re a peer-to-peer business.  As if they’re just providing a service of matching buyers with sellers.  But I’d say that they’re not P2P because the buyer doesn’t know what price the seller received.  Neither the buyer nor seller can tell the true cost of the transaction.  The dealer’s profit comes from holding inventory and offering different prices to buyers and sellers.  With real estate, on the other hand, buyers are truly matched with sellers while the brokers take a 6% commission with all the compensation out in the open for all to see.

CurrencyFair operates a platform on which parties (not just customers, as we will see) can exchange currencies and pay 0.15% in commission.  However, because it’s unlikely that customer orders come in equal and opposite quantities at the same time, CurrencyFair operates its own currency dealing business that will always offer to trade at 0.5% worse than the going rate for currency.  So most customers actually trade with “the house” and pay on the order of 0.5%.  I asked CurrencyFair if I can become a participant dealer and improve pricing by offering money at 0.4% worse than the going rate at all times, but they wouldn’t let me.  They won’t even let me place an occasional order to buy a currency that I want to buy, at the mid-market rate with any customer that comes along.  Because exchange rates move so fast, it’s nearly impossible that two customers will trade with each other unless they’re allowed to enter orders that track mid-market.  If I place an order at mid-market, the market will move and CurrencyFair’s dealer will trade with my now stale bad price before a customer gets to benefit from it.  That’s about as peer-to-peer as a car dealership where a seller just might happen to run into a buyer in the parking lot and negotiate a direct deal.

Is there legal precedent for such a business?  Stock exchanges used to be owned by their members.  The New York Stock Exchange was a venue for brokers and dealers to trade with each other and would charge a commission for each trade.  But because customer orders to buy and sell stock (brought to the exchange by brokers) don’t come in equal and opposite quantities at the same time, the dealers (who owned the exchange) would trade with the orders at slightly unfavorable prices.  That’s a lot like how CurrencyFair takes a 0.15% commission for each transaction and at the same time the people who own CurrencyFair always get to trade at prices in their favor.  The difference is that the way the NYSE worked was fairly widely known.  Customers didn’t like overpaying for transactions, but knew that feeding the dealers was just part of doing business.  It didn’t feel as much like a deceptive scam.

I can summarize it like this:

  •  Car dealers don’t tell you black book prices.  Yeah, you’ve never even heard of it, right?!
  • CurrencyFair doesn’t tell you the fair price for your transaction, which would let you see how much you’re losing.
  • TransferWise shows you a fair price, but probably not the fair price at the time they decide that your transfer will definitely be executed.

Thoughts on the Knightmare

The Knightmare is what we call an event during which Knight Capital, at the time a large publicly traded electronic trading group, lost $460 million in about 45 minutes.  If the error had gone undetected longer, Knight would have gone bankrupt and broken the market by not paying for its trades.  That such a thing could happen illustrates a problem with how our markets work.

When you or I place an order to buy stock, our brokerage firm first checks how much money is in our account and how many other outstanding trade orders we have that could reduce our available funds.  The brokerage firm only sends the order to an exchange after confirming that we have sufficient funds.

We cannot trade directly on the New York Stock Exchange because there would be nobody to guarantee that we can actually pay for the trade.  The stock exchange has members, known as dealers or brokers, who pay expensive membership fees to be able to trade directly.  Brokers are the ones who bring customer orders (such as yours or mine) to be filled.  Dealers are there to take the other side of our order because there may not be another customer who wants the exact opposite trade at the same moment.  Both brokers and dealers have to prove that they have adequate money and risk management controls in place to make their trades without the exchange checking their ability to trade all the time.  Part of this process involves going through a “clearing firm”, usually a very large financial institution, who holds their money and securities.  The clearing firm checks their financial status at the end of every day.  The clearing firm also guarantees that all the trades will be paid for.  To avoid the possibility of a small dealer with a few million dollars buying billions of dollars of stock, the clearing firm will monitor the dealer’s finances throughout the day.  Still, the process is a little backwards, with the trade being executed first, then the ability to pay for it being checked.

Knight Capital had computers sending automated orders to the exchanges with no systems verifying how much money it would cost to fill all of them and comparing it to the available funds of the firm.  It seems a little absurd that they are in charge of regulating themselves.  It seems a little like asking a child to decide how many cookies to eat.  Part of the reason trading works this way is that given the volume of orders submitted to exchanges daily, it is technologically impossible to run each one through a validation process.  But maybe requiring exchanges to clear all orders (verify adequate funds) would do two things.  First, it would slow down the high frequency electronic trading that’s creating an overload of data and risks of events such as the Knightmare.  Second, it would lower the barrier for customers to bypass brokers and trade directly on the exchange.

Tradesports / Intrade and various online currency trading sites already handle both exchange and clearing functions at the same time.  To do so, they developed some amazing computer technology such as the LMAX Disruptor http://martinfowler.com/articles/lmax.html  I’d like to see that approach applied to stock trading.  But it’s hopelessly complex from a legal standpoint.  Ideally, regulators would require all exchanges to clear all their orders.  But that’s unlikely because it’s a huge change and many in the financial industry would lobby against it.  A company could attempt to offer a “fair” exchange with equal access for all retail and professional traders, but it would have to somehow allow itself to be detached from the national market and exempt from Reg. NMS (the national market system).

I think a requirement for all orders to pass through a clearing stage is still a better solution to “high frequency trading” problems than a financial transaction tax.  If the tax can overcome lobbying and aversion to change, a requirement that directly lowers risk and benefits retail traders should be more palatable to regulators and financial market participants.

Norman Augustine: Simple Systems and Other Myths

I just found a printed handout from this Norman Augustine lecture and there’s no trace of it on the internet.  So, I’ve typed it in for you.  – Charvak

Excerpts from the Dec. 5 inaugural Brunel Lecture Series in Complex Systems

The fact is there’s no such thing as a simple system.  And, complex systems are made particularly challenging because the interactions in those systems are so easily overlooked or misunderstood.

Today, I’d like to share with you some lessons from my own experience in systems engineering.

1. The first lesson that I would like to cite is the importance of taking a broad view of what constitutes a system.  Remember Andrew–a particularly devastating hurricane that hit Florida a few years ago?  When the hurricane hit, the telephone companies were having difficulty getting the telephone system back in operation for the first couple of days.  The reason was not lack of wire or trucks or switching centers.  The recovery was stopped by the lac of child care centers.  Most telephone employees come from two-wage earner families and when the hurricane knocked out all the child care centers, one parent had to stay home with the children.  Only about half the work force showed the day they so badly needed all the work force and more.  The telephone company quickly called in their retirees who set up day care centers so the regular work force could work.  The problem, of course, was that they had too narrowly defined the system.

2. The next major lesson is bound the problem.  This may sound contradictory to the first lesson.  It is, but no one ever said that systems engineering was easy!  To true transportation engineers, the air transport system is really only a part of the transportation infrastructure.  They would be thinking of highways and ships and perhaps even how to move information.  The challenge for systems engineers is to determine what could be the boundaries of the system for practical purposes.  If you included too little in the system, it makes the system untenable; if you include too much, it makes it unanalyzable.

3. The next lesson is to watch for unintended consequences, sometimes these can be extremely subtle connections or interactions.  The first day I worked when I was out of college, a wise, old engineer said, “No change is a small change.”  If I’d paid attention, I could have saved my employer billions of dollars with mistakes I’ve made by not realizing there’s no such thing as a small change.  Let me illustrate by referring to the Standard ARM, an anti-radar missile used during the Vietnam War.  It had been tested extensively and performed beautifully.  In Vietnam, it was flown against radars in North Vietnam and, at 16 seconds time of flight, they would all blow up.  Back at the test range, they worked fine.  Investigations found nothing.  The only difference between the missiles that went to the fleet and the test ones was that one had an actual explosive in the nose, whereas the other had an inert warhead.  On the one that went to the fleet, someone put a sticker on the side of the missile that said, “Live round.”  Investigators discovered that the glue that held the sticker on would debond at the temperature the missile reached at about 16 seconds in flight.  In wind tunnel models, the stickers would blow up through a strange airflow right through the guard beams and detonate the warhead.

4. The next one, question everything, is a lesson that Warren Buffett told me before I was to teach my first class.  He said the most important lesson that I could teach my students was to always have someone around who could tell the Emperor he has no clothes.  It’s very good advice to always have someone around, preferably yourself, but others too, who can challenge what you’re doing.  Prior experience and inborn biases can cause a person to have very fuzzy vision.  And if prior experience can cause fuzzy vision, arrogance can cause absolute blindness.

What’s the danger here?  When the Hubble Space Telescope was first launched, the media called it the Near-Sighted Mr. Magoo.  The subcontractor who built the optics for this telescope, one of the finest optical manufacturers in the world, built the flight article and then tested it.  When they tested it, they got a pattern that indicated a huge error.  They said to themselves there’s no way we could have made an error like that.  Something’s wrong with the test.  So the telescope went in orbit and it turned out they had made a huge error.  Fortunately, NASA was able to put a set of corrective eyeglasses on the telescope and eventually we got sensational pictures.

5. Another lesson is the things you worry about usually aren’t the things that do you in.  That’s because you pay attention to them and you can usually solve them.  Rather you tend to have your lunch eaten by things that were overlooked or that you thought were under control but were not.  This past year, I served on a commission to review the Osprey, a tilt-rotor aircraft.  Our question was whether the concept of having an aircraft that’s both helicopter and fixed-wing in performance might be fundamentally flawed.  Aircraft of this type had a tragic record: five crashes, 22 Marines killed the prior year alone.  Everybody was very focused on this complex rotor system.  We dug into the five crashes.  If my memory serves me correctly, there were three unrelated mechanical problems, one maintenance error, and one pilot error.  None had much to do with the very complex new concept.

6. Then, watch for details that will get you if you don’t watch out.  There are some painful examples of not getting the details right.  Remember the Mariner spacecraft that we built for Jet Propulsion Laboratory, one of the finest technical organizations in the world?  To our great embarrassment, NASA and we were working in different units–English and metric–and we lost that spacecraft.

7. The next lesson is treasure your anomalies.  While the details can hurt, they can also help.  In that Mariner mission, there were a number of earlier corrections on the way to Mars that all had the same directional bias, which is peculiar.  Had we questioned that, we might possibly have discovered that we were working in different units, but nobody challenged it.  They just put in a correction.

8. Then, a lot of redundant systems aren’t redundant.  An L1011 with three engines was flying from Miami to Nassau.  It had an oil loss warning indicator on one engine, so the pilot turned around to fly back to Miami.  On the way back, the second engine gave a no-oil indication, then the third engine.  The pilot said there’s no way that you can have three separate engines with totally separate oil systems all lose their oil on the same flight.  Well, it turns out there is a way.  Just before they had left Miami, the maintenance people had put a new chip detector in each engine.  The chip detectors had all come from the same supplier, who had left off an O-ring in the assembly process.  Happily, the engines didn’t fail.

9. Finally, complex systems often involve human components.  When I was assistant secretary of the Army for research and development, we were producing the Pershing Missile.  The engineers realized that somebody could accidentally get two huge cables reversed and that would be very bad.  So, they designed one cable bundle with a 16-pin connector and the other with an 18-pin connector.  The only problem was the strongest soldier in the United States Army forced a 16-pin connector into an 18-pin connection.  A fire followed.

Today, I shared with you nine lessons from my own experience in systems engineering.  You might say, why not ten?  The reason is because I’m sure that everyone–particularly the old hands in the audience–have one of their own to add.


Insight Oil Report 1

I changed the oil in the Insight for the second time, after 6 months and 11 days at 15,175 miles.  I ran a MicroGreen filter and the recommended Mobil 1 0W/20 high fuel efficiency oil.  So the total costs are $15 for the filter, $20 for 4 quarts of oil, $20 for labor, and $35 for the analysis.  A $90 oil change is expensive, but this diagnostic report gives me valuable information and tells me I can go for 20,000 miles next time.  Obviously, Bob says 16,000 because it’s not his car on the line.

insight oil report 1

Creative Communication

I recently arrived in Switzerland and faced the problem of notifying my friend when to pick me up from the train station.  Had I known Switzerland still has payphones, I would have dropped 50 cents in one and sent an SMS.Swiss payphone  But imagine landing in a country without payphones, without internet, and with no working SIM card.  How could you inform a friend what time you may arrive?  A little signal sent on a 2-way FM radio could work.  I came up with an even cooler idea.  Payment networks are the most prevalent means of communication.  You could set up a program that keeps checking your bank account for a transaction.  Then, make a cash withdrawal or purchase just before boarding the train.  The program could detect the transaction and send an email to indicate which train you’re on.

Back in the nineties, we could send prearranged messages free of charge by using payphones to ring other phones.  Or we could make collect calls and encode the phone number to call back using dictionaries of names.  Of course, then you could end up placing a collect call as someone unlikely such as “Tanya Rosenberg van Kent”


Antimatter Refrigerant

This site makes the following claims:

“The Secrets in the Glaciercore… Non-Toxic patented refrigerant, is actually colder than Ice! Ice gives up coldness when it melts at 36°, and at the same time thinning down your drink. Who wants a watered down Beer or Soda Pop, NOT ME! The Glaciercore cools to 34°, with no watering down…”

And even better, this page says:

“Made with over 1 pound of super freezing patented solution (made from all FDA food approved components) the Glaciercore actually gets colder than your freezer when it’s thickening the smoothie, by crystallizing the natural ingredients in the beverage.”

The part about ice freezing at 36° could be true at certain altitudes. But the claim that this refrigerant gets “colder than your freezer” really caught my attention. And to claim that it does so by crystallizing the beverage made me wonder whether crystallization might absorb heat, actually somehow cooling the refrigerant. It turns out that Glacierware haven’t invented a magical antimatter refrigerant.

First of all, something that’s patented is no longer secret. Also, their patent has expired, so it’s not patent protected. It merely was patented a long time ago. US Patent 3791159 was filed in 1971 and reveals that they just have a propylene glycol or urea solution as a version of ice that freezes and melts at a lower temperature.
The Commonwealth of Massachusetts’ Corporations Listing gave information on how to contact the company owners, as did their domain name registration. I tried writing Timothy an email explaining the false claims on his site, but he didn’t respond. So now I’m posting this because I think it’s amusing.

Here’s the interesting part from my note to Timothy:

The patent explains that the secret to the Glaciercore is a solution that freezes below the freezing point of water, but above the temperature of a freezer. Can you explain how the Glaciercore “gets colder than your freezer”, or correct the website to say that the “Glaciercore stays colder than ice as it thickens your smoothie by crystallizing the natural ingredients in the beverage” Note that I removed the comma to indicate that it “thickens the smoothie by crystallizing the beverage” as opposed to it “gets colder by crystallizing the beverage”


I was playing a game of Settlers of Catan (or Die Siedler von Catan) with some friends and made an observation about my playing style. I definitely tried to win, but I would avoid placing settlements on opposite corners of hexes or otherwise doing anything to harm the total productivity of the board. I also overinvested in strategies that led to greater long term production at the expense of scoring points in the short run. Another player pointed out that the only objective of the game is to achieve 10 points before any other player. It doesn’t matter if you’re producing more resources or would have been the first to 20 points because the game ends as soon as someone gets 10 points. It doesn’t matter if the board is overpopulated or not once the game ends. You’re more likely to win if you can make the board less inhabitable for your opponents, so wasteful plays can help.

In real life, I am a conservationist because I know that the world lives on once I die. I feel connected to society and want to act in ways that are collectively best for everyone. I believe in policies that work in perpetuity, not 4 years, not my lifetime, or any other end of the world. That’s what sustainability is about.

One way I practice this is at the grocery store I purchase packages that may be slightly disfigured or the milk from the front with the earliest expiration date. If everyone always reached to the back to get the freshest milk, stores would routinely have to discard the older milk that doesn’t sell. If nobody buys the disfigured packages, they get thrown out. There’s nothing good about systematically wasting food.

Which milk do you buy?

Distortion in Digital Audio

Here’s a good article on digital audio.

The article explains a lot of things people who like music should know. First, we’ve all seen the “THD” or “total harmonic distortion” specs on all audio equipment. It turns out that harmonic distortion isn’t really an issue and it might even make music sound better. Violins have so many harmonics already, a little harmonic distortion is no big deal. Also, it’s a poor metric because digital devices are more prone to other types of distortion. It’s no surprise that they achieve <0.01% THD or something small like that, without much expense. It reminds me of $50 digital cameras with 14 MP that take awful pictures. Anyway, don’t buy audio gear based on the THD numbers. Now I wonder if maybe the expensive tube amps with poor THD numbers actually do sound better because they avoid the truly bad types of distortion that digital systems can create.

The article also does a great job of explaining quantization distortion and how dither turns it into quantization noise. Also, read about dither or at least look at the pictures so you’re clear on exactly how dither works and how amazing an idea it is:http://en.wikipedia.org/wiki/Dither

The article goes on to discuss 1-bit DSD, which I spoke highly of from a technical standpoint in this previous post. However, I agree with the authors that 24-bit or higher PCM is the best choice for audio processing and 1-bit DSD only makes sense as a final distribution medium. Any mathematical operations on 1-bit DSD are very complex and I don’t really know how the distortion and noise introduced will sound, but PCM is easy to understand.

I recently bought a couple pairs of high-end headphones. As the audio forums suggested, the headphones didn’t sound very good plugged into my computer’s soundcard. My ears felt fatigued after listening, despite low volumes. People on the forums say the poor quality is because sound cards or most digital players don’t have the power to drive large headphones. But they sounded bad even with the volume turned way down. Now, I think it’s more of an issue of quantization noise at low volumes. A D/A converter should receive the raw original bitstream, not scaled down, and then the volume adjustment should be an analog operation. I got a fairly inexpensive HeadRoom BitHead portable headphone amplifier / USB soundcard which makes the headphones sound great!

Also, the more I’ve learned and listened, the more I think that mp3 audio may in fact be of sufficient quality or even indistinguishable from CD, SACD or DVD-Audio. The inadequate sounding mp3′s I’ve heard are probably that way because the original recording or mastering was poor, not a fault of the compression. It is possible to get a crisp, clear, precise sound from an mp3. A bad D/A conversion system probably does more audible harm than the mp3 compression.