Why Do High-Frequency Traders Cancel So Many Orders?
bloombergview.com
Why Do High-Frequency Traders Cancel So Many Orders?
1–10 of 247 posts
Re: Why Do High-Frequency Traders Cancel So Many Orders?
#2This article brings up something that HF traders have been bemoaning for a long time: the fragmented US market structure. In US equities, you need to monitor almost a dozen exchanges to be competitive. The popular book "Flash Boys" gave the impression that HF traders loved this market structure and used it to extract more money out of the market. In the majority of cases, this is wrong.
In fact, the fragmented market results in huge costs (4 datacenters worth of infrastructure, low latency connectivity, etc) In reality, most market makers would vastly prefer to simplify this away. This is one of the reasons many traders have moved to alternative markets that have fewer trading venues (for example, many futures and options trade primarily on a single venue)
Re: Why Do High-Frequency Traders Cancel So Many Orders?
#3This article brings up something that HF traders have been bemoaning for a long time: the fragmented US market structure. In US equities, you need to monitor almost a dozen exchanges to be competitive. The popular book "Flash Boys" gave the impression that HF traders loved this market structure and used it to extract more money out of the market. In the majority of cases, this is wrong. In fact, the fragmented market…
Bare in mind that the system used to be centralized and, as mentioned in the article, was much costlier [0]. The fragmentation has downsides and no one likes redundancies, but it is a direct response to the older, less competitive system. The fact that a decentralized system is better is exhibited in the lower price and the participation in the smaller exchanges.
[0] http://www.bloombergview.com/articles/2014-03-31/michael-lew...
Re: Why Do High-Frequency Traders Cancel So Many Orders?
#4Legalized quote stuffing.
Re: Why Do High-Frequency Traders Cancel So Many Orders?
#5Because they're gaming the market. How it works: place a large order, wait for others to make a bid, then cancel the order and sell your own at a mark-up.
Re: Why Do High-Frequency Traders Cancel So Many Orders?
#6[deleted]
Re: Why Do High-Frequency Traders Cancel So Many Orders?
#7I think to understand most HFT market makers you have to understand how the markets pay.
Most work on a maker taker model. Which means the trader who initiates the trade pays a small fee and the trader who is the passive side, the one who had their order in the market already, gets paid a small fee. as a side note there are inverted markets but lets leave those aside for now.
This means to get paid you want to be at the top of the book, which means you are the first order to get filled when someone crosses the spread to get their order filled. the way priority is determined is first by price and second by time. So you have a very vested interest in being the first to cancel and move your order to the newest price level.
Exchanges have tried introducing some order types to alleviate this constant send/cancel routine such as the order type "Hide not Slide" but people tend to get upset at these order types.
Once you understand this, you start to realize that almost all HFT firms aren't quote stuffing, they are just jockeying for position at the top of the order book.
I've never really understood quote stuffing, the same firm that quote stuffs still has to deal with those quotes coming back, its not like the market data has a flag saying ignore this quote change as its caused by your own quote stuffing.
The way most markets are setup is that quotes come from gateways and multiple symbols all share a single gateway, usually assigned alphabetically, so A-F tickers all share the same gateway. This means that if someone is actually slowing down market data for say AAPL then they are also slowing down quotes for AMZN as well but again, the same firm that is quote stuffing also has to deal with their own mess so I can't see the benefit.
Another comment complains that HFT firms don't like the fragmented market. That is true to a point, but keep in mind most HFT strategies only work due to the fragmented markets and RegNMS. So while they may not like 11 venues, they certainly want atleast 3 or 4, and many of hte top HFT firms run their own dark pools, adding to the problem:)
As far as Hillary Clinton introducing legislation to curb HFT trading, she was the senator for New York. I'm dubious of her coming down hard on Wall Street.
Re: Why Do High-Frequency Traders Cancel So Many Orders?
#8This article brings up something that HF traders have been bemoaning for a long time: the fragmented US market structure. In US equities, you need to monitor almost a dozen exchanges to be competitive. The popular book "Flash Boys" gave the impression that HF traders loved this market structure and used it to extract more money out of the market. In the majority of cases, this is wrong. In fact, the fragmented market…
Fragmented exchanges are better for everyone except for high frequency traders. Then they actually have to do low latency arbitration to make money instead of full on front running like they do now.
Arbitration between physical locations is something that can't be helped. The other things ways that high frequency traders make money can be helped by better systems, but there are no incentives to make those systems when exchanges make so much of their money from high frequency traders themselves.
Re: Why Do High-Frequency Traders Cancel So Many Orders?
#9John Arnold (former Enron energy trader) also posted something on Bloomberg View, and the main gist of the article was:
Front-running is profitable against traditional orders entered by humans. But with spoofers in the mix, the picture looks quite different: When the front-running HFT algorithm jumps ahead of a spoof order, the front-runner gets fooled and loses money. The HFT’s front-running algorithm can't easily distinguish between legitimate orders and spoofs. Suddenly the front-runner faces real market risk and makes the rational choice to do less front-running. In short, spoofing poses the risk of making front-running unprofitable. Because spoofing is only profitable if front-running exists, allowing both would ensure that neither is widespread.
http://www.bloombergview.com/articles/2015-01-23/high-freque...
Re: Why Do High-Frequency Traders Cancel So Many Orders?
#10> the story of high-frequency trading is basically one of small smart firms undercutting big banks by being smarter and more automated and more efficient
Is that true? Isn't there a high barrier of entry? I was under the impression that large trading firms were building high-speed connections, which is obviously not something a small firm could ever do.