Why Do High-Frequency Traders Cancel So Many Orders? • Hacker News Board

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#11

Post by elecengin » Fri, Oct 09, 2015, 1:22 PM UTC

bko wrote: post #3

elecengin wrote: post #2

This 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/m…

Completely agree - in the single exchange markets you see a lot of monopolistic behavior with the operators.

In this current, though, we have three major operators with 2-3 exchanges each - many with single digit percentages of market share. I suspect that the savings in execution cost due to competition are vastly overwhelmed by the increased cost of infrastructure for most market participants (excluding the largest firms).

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#12

Post by elecengin » Fri, Oct 09, 2015, 1:26 PM UTC

CyberDildonics wrote: post #8

elecengin wrote: post #2

This 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 whe…

> 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.

This is a very strong statement with little support. I agree that some competition among exchange operators is important, but how do you justify exchanges like CHX, with approximately 1% market share?

I am not sure how to respond to your comment regarding front running without more detail. Many sources have already debunked the Michael-Lewis-style argument regarding front running. Where do you see front running? (Using the proper definition of trading ahead of a customer order based on knowledge of that order)

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#13

Post by digital-rubber » Fri, Oct 09, 2015, 1:27 PM UTC

Since they have a single goal of raking in as much money as possible, let me do a guess?

To get rich?!

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#14

Post by omellet » Fri, Oct 09, 2015, 1:27 PM UTC

amelius wrote: post #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.

It's not an especially high barrier if your strategy doesn't require you to build physical infrastructure (most strategies don't require this). You have programmers, hardware, colocation costs, direct exchange connection costs, trading fees, etc. The programmers are by far the most expensive component.

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#15

Post by elecengin » Fri, Oct 09, 2015, 1:30 PM UTC

amelius wrote: post #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.

Good question. HFT is a spectrum. At the lowest latency (approximately 5 microseconds), the barriers to entry are massive - multi-million dollar startup costs.

For "kind of fast" - 10-100 microseconds - there are a variety of brokerages that can get you started with costs of approximately $1000-10,000 a month. This is rapidly changing though - the exchanges have been continuously increasing the prices of their market data to the point where consuming the entire US equity market proprietary feeds costs around $50,000/mo in licensing.

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#16

Post by zeeshanm » Fri, Oct 09, 2015, 1:34 PM UTC

HiLo wrote: post #9

John 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 d…

That's why most of these HFT-sponsored exchanges (read: BATS, CHX, etc) pay retail brokers (e.g. eTrade, Scottrade, etc.) for their flow.

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#17

Post by mkinitcpio » Fri, Oct 09, 2015, 1:37 PM UTC

Disclaimer: I work in HFT

The article uses the term "front-running" incorrectly. Front-running is where a firm places their own trades ahead of trades they're placing for a client, to capitalize on the price movement that client order might generate. This is illegal.

What the market makers in the article are doing isn't front-running. It's just being smart with their orders.

And that's generally why HFTs cancel orders- they're reacting to market conditions that exist on the span of microseconds and will want to change their market positions very quickly- including canceling orders that they no longer think are suitable.

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#18

Post by juziozd » Fri, Oct 09, 2015, 1:38 PM UTC

amelius wrote: post #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.

These days you can rent a co-located computer with direct connection to the exchange. The cost is a few grands per month. Not very cheap but definitely within reach of a small business. There are many small HF firms based all over the country that just rent 1 or 2 computers close to exchanges. This is bad for big investment banks like Goldman because they no longer have a location advantage - you do not need an office in Manhattan to compete with big guys anymore.

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#19

Post by elecengin » Fri, Oct 09, 2015, 1:38 PM UTC

HiLo wrote: post #9

John 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 d…

I can't believe the article in the comment above made it on to Bloomberg View. It uses a completely incorrect definition of front-running - claiming it is a "loose" term. It isn't. Front running is illegal. It requires advanced knowledge of a customer order (as the definition linked from the article states!) That means seeing the order before it appears on a market data feed. "Gleaning" information about the order using publicly available information is not front-running. That is reacting to the market.

This abuse of the term completely confuses the entire debate.

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#20

Post by amelius » Fri, Oct 09, 2015, 1:42 PM UTC

juziozd wrote: post #18

amelius wrote: post #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.

These days you can rent a co-located computer with direct connection to the exchange. The cost is a few grands per month. Not very cheap but definitely within reach of a small business. There are many small HF firms based all over the country that just rent 1 or 2 computers close to exchanges. This is bad for big investment banks like Goldman because they no longer have a location advantage - you do not need an offic…

Then my followup question would be: why do we actually need trading to be faster than the regular internet allows? For the objects being traded (companies) have time-constants that are far greater than the millisecond-range. And I hope the answer is not "because everybody else does it" :)