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Why Do High-Frequency Traders Cancel So Many Orders?

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

#31

Post by yummyfajitas »

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" :)

The answer is, in fact, "because everybody else does it".

https://www.chrisstucchio.com/blog/2012/hft_apology2.html

This can be partially fixed with a very technocratic market microstructure change (eliminating the subpenny rule). But politically that's very much a "huh?" point - imagine Bernie Sanders saying "I believe we should let traders quote in increments of 1/100 of a cent, not 1 cent".

https://www.chrisstucchio.com/blog/2012/hft_whats_broken.htm...

(This would fix things on the placing orders side, but not on the cancelling orders side.)

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

#33

Post by MathsOX »

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…

When Matt Levine includes anything in quotes, assume it's snark. He's written lots about "front-running" being, innaproporatiedy, a catch-all term, much like HFT itself.

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

#34

Post by evanpw »

philipov wrote: post #28
elecengin wrote: post #23

Earlier quoted context omitted.

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?

"Scare quotes ... may be used to imply that a particular expression is not necessarily how the author would have worded a concept."

https://en.wikipedia.org/wiki/Scare_quotes

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

#35

Post by yummyfajitas »

mkinitcpio wrote: post #30
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.

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.

I subscribe to his column and I've read his criticism of Michael Lewis/IEX, so his snark is obvious to me. But I can see how this article in isolation might not convey that.

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

#36

Post by _spoonman »

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…

Do you know of any of these companies? I would like to reach out.

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

#37

Post by elecengin »

neomantra wrote: post #25
zeeshanm wrote: post #16

Earlier quoted context omitted.

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.

https://www.nyse.com/publicdocs/nyse/markets/liquidity-progr...

http://cdn.batstrading.com/resources/release_notes/2012/BATS...

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

#38

Post by jevgeni »

Variance wrote: post #24

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

Matt is brilliant. A little bit more mature and reserved than during his time at Dealbreaker, but still awesome.

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

#39

Post by ConfuciusSay »

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 SEC has been very recently and selectively cracking down on excessive order cancelling though, so it's not clear that it's not illegal and is "just being smart with their orders".

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

#40

Post by kevin_thibedeau »

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…

The HFT guys love the fragmentation. If not they wouldn't be building out private microwave links between Chicago and NY to "beat the market".
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