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

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

#21

Post by yummyfajitas » Fri, Oct 09, 2015, 1:43 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.

Startup costs are a few thousand a month. The firm I worked at has never had more than 3 people and was started by one nerd working out of his flat. You can spend a lot more if you want to do proper latency arb rather than price improvements, but bootstrapping your way to that point is hardly impossible.

I run algo strategies myself - not HFT - and my monthly trading costs are less than my monthly beer costs. Capital invested is perhaps 1-2 years savings for any software engineer (e.g., my best recent trade was dropping $40k on SPY when it was at $190, it's now at $201.66).

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

#22

Post by yummyfajitas » Fri, Oct 09, 2015, 1:45 PM UTC

mkinitcpio wrote: post #17

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 order…

The author put "front-running" in scare quotes for a reason. See footnote 6, where he explains he's using the term in the Michael Lewis/IEX sense.

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

#23

Post by elecengin » Fri, Oct 09, 2015, 1:47 PM UTC

yummyfajitas wrote: post #22

mkinitcpio wrote: post #17

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 order…

The author put "front-running" in scare quotes for a reason. See footnote 6, where he explains he's using the term in the Michael Lewis/IEX sense.

Agreed. Matt Levine is one of the few commentators that fully understands market microstructure. The Bloomberg View linked in a different comment (by John Arnold) is horrible with terminology, though.

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

#24

Post by Variance » Fri, Oct 09, 2015, 1:49 PM UTC

It's great to see Matt Levine on HN - for those interested in finance, his Money Stuff [0] daily column is absolutely excellent. His writing has a really fantastic funny and informal style.

He does a great job presenting a fair and deep view of a lot of finance issues, like HFT or Unicorn valuations.

[0] http://www.bloombergview.com/topics/money-stuff

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

#25

Post by neomantra » Fri, Oct 09, 2015, 1:50 PM UTC

zeeshanm wrote: post #16

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.

I would be interested in your source for that comment, as I think it is untrue (at least for US exchanges, I don't know rules in other countries).

I am not saying payment-for-order-flow doesn't exist, but the buyers are firms like Citadel and other "internalizers", not exchanges.

If by "paying" you are referring to the maker/taker rebate model, that is paid to any market participant, not just retail brokers.

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

#26

Post by harryh » Fri, Oct 09, 2015, 1:51 PM UTC

zeeshanm wrote: post #16

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.

Which is why retail level commissions have dropped to zero (or close to it).

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

#27

Post by devit » Fri, Oct 09, 2015, 1:52 PM UTC

"Updating" orders seems a far more accurate terminology than "cancelling" in the market maker case.

Although of course making such a distinction by law is problematic, because updating an order to be "out-of-the-money" (have an absurdly low or high price) is almost equivalent to canceling, and objectively determining if an order is "out-of-the-money" is problematic.

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

#28

Post by philipov » Fri, Oct 09, 2015, 1:52 PM UTC

elecengin wrote: post #23

yummyfajitas wrote: post #22

Earlier quoted context omitted.

The author put "front-running" in scare quotes for a reason. See footnote 6, where he explains he's using the term in the Michael Lewis/IEX sense.

Agreed. Matt Levine is one of the few commentators that fully understands market microstructure. The Bloomberg View linked in a different comment (by John Arnold) is horrible with terminology, though.

Doesn't the fact that he understands, and intentionally uses pejorative language make him dishonest?

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

#29

Post by harryh » Fri, Oct 09, 2015, 1:52 PM UTC

amelius wrote: post #20

juziozd wrote: post #18

Earlier quoted context omitted.

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" :)

Because the issue isn't how long it takes for a company to do something. The issue is how fast you can react once information about what they are doing becomes public.

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

#30

Post by mkinitcpio » Fri, Oct 09, 2015, 1:53 PM UTC

yummyfajitas wrote: post #22

mkinitcpio wrote: post #17

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 order…

The author put "front-running" in scare quotes for a reason. See footnote 6, where he explains he's using the term in the Michael Lewis/IEX sense.

Ah, I read that but didn't parse it as the author trying to make the distinction between (misnamed) "front-running" and actual front-running.

Probably still worth pointing out, since one of the activities is illegal and harmful (uses non-public information) and the other is just reacting quickly to the public market information.