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

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

#51

Post by Retric » Fri, Oct 09, 2015, 2:41 PM UTC

kasey_junk wrote: post #49

gbhn wrote: post #42

Something this article ignores, and which is ignored by most articles on HFT, is that the process is ilegible to the public. "No no we're doing you a favor!" is not reassuring when the activity consumes a bunch of resources on zero sum activity. Ultimately investing runs on trust. HFT is consuming public trust in the financial system at a prodigious rate. Is it a trillion dollars a year? A billion? Hard to be sure. B…

> when the activity consumes a bunch of resources on zero sum activity The thing to remember about the markets is that each individual trade is always zero sum, but the value of the markets comes from the aggregate total. The behaviors that we want in our markets, price discovery, liquidity, easy risk management are all outcomes that are enabled by speculative market participants like market makers engaging in lots o…

Trading is not a zero sum activity, trades happen because each side want what the other person has more than what they have which is a net positive. aka I want lunch more than money.

HFT trading is zero sum because the traders don't actually want or keep stock.

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

#52

Post by crdoconnor » Fri, Oct 09, 2015, 2:46 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…

It's a legal distinction. Economically the effect is the same.

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

#53

Post by astine » Fri, Oct 09, 2015, 2:47 PM UTC

"Here you have an industry that has undercut the business of the big banks, irritated hedge fund managers and been great for small investors. Why would cracking down on that business be populist? Why would it alienate wealthy donors?"

For the same reason that people don't generally cheer when a gang war happens. Just because the gangsters are mainly shooting other gangsters doesn't mean the violence isn't costly to society. The same with Wall Street. Just because people don't trust big banks and suspect them of rooking the common man doesn't mean that they want to legitimize said rooking, or that it isn't costly to society when banks rip each other off.

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

#54

Post by harryh » Fri, Oct 09, 2015, 2:47 PM UTC

Retric wrote: post #51

kasey_junk wrote: post #49

Earlier quoted context omitted.

> when the activity consumes a bunch of resources on zero sum activity The thing to remember about the markets is that each individual trade is always zero sum, but the value of the markets comes from the aggregate total. The behaviors that we want in our markets, price discovery, liquidity, easy risk management are all outcomes that are enabled by speculative market participants like market makers engaging in lots o…

Trading is not a zero sum activity, trades happen because each side want what the other person has more than what they have which is a net positive. aka I want lunch more than money. HFT trading is zero sum because the traders don't actually want or keep stock.

Grocery store owners don't want vegetables either. They just want to hold them a little while before they sell them to you.

Are they zero sum?

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

#55

Post by kasey_junk » Fri, Oct 09, 2015, 2:48 PM UTC

Retric wrote: post #51

kasey_junk wrote: post #49

Earlier quoted context omitted.

> when the activity consumes a bunch of resources on zero sum activity The thing to remember about the markets is that each individual trade is always zero sum, but the value of the markets comes from the aggregate total. The behaviors that we want in our markets, price discovery, liquidity, easy risk management are all outcomes that are enabled by speculative market participants like market makers engaging in lots o…

Trading is not a zero sum activity, trades happen because each side want what the other person has more than what they have which is a net positive. aka I want lunch more than money. HFT trading is zero sum because the traders don't actually want or keep stock.

No one wants actual stock. They want to gain money on price differences in stock, or get the dividends that owning stock gives rights to, or I suppose they want to be able to have the voting rights stocks grant.

The difference is all about timing. I may want something else more than you do but am willing to sell now. If at the time you close out your trade (that is sell the shares from me) the price may have risen or fallen. If it rose you won and I lost by not holding longer.

This time mitigation is precisely what market makers have always done and what HFT market makers have driven the profits (and thus the costs to outside participants) out of.

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

#56

Post by Rimpinths » Fri, Oct 09, 2015, 2:48 PM UTC

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've seen this type of behavior described as "order anticipation", which I think is a much better term. "Front running" means that you are using confidential information that an order will be submitted. "Order anticipation" means that are you using public information and you are anticipating that an order will be submitted.

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

#57

Post by pjc50 » Fri, Oct 09, 2015, 2:48 PM UTC

harryh wrote: post #50

dopamean wrote: post #47

Earlier quoted context omitted.

I think the illegibility of it is important if it is affecting other people's finances.

Nearly every good or service that you purchase is backed by a nearly illegible process of global trade. That doesn't affect your finances?

Doesn't it? The illegibility of offshore money affecting overall tax take and therefore government spending, services, and jobs? The illegibility of jobs disappearing to ... somewhere? Not knowing if you've bought products that have been manufactured by slave labour or just awful working conditions?

It's not clear.

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

#58

Post by harryh » Fri, Oct 09, 2015, 2:49 PM UTC

astine wrote: post #53

"Here you have an industry that has undercut the business of the big banks, irritated hedge fund managers and been great for small investors. Why would cracking down on that business be populist? Why would it alienate wealthy donors?" For the same reason that people don't generally cheer when a gang war happens. Just because the gangsters are mainly shooting other gangsters doesn't mean the violence isn't costly to s…

Viciously competing to provide services at the lowest possible cost to the customer is not the same thing as ripping each other off.

There is no violence here. Only competition.

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

#59

Post by kasey_junk » Fri, Oct 09, 2015, 2:51 PM UTC

astine wrote: post #53

"Here you have an industry that has undercut the business of the big banks, irritated hedge fund managers and been great for small investors. Why would cracking down on that business be populist? Why would it alienate wealthy donors?" For the same reason that people don't generally cheer when a gang war happens. Just because the gangsters are mainly shooting other gangsters doesn't mean the violence isn't costly to s…

I think you are missing his point. HFT is not typically banks ripping each other off. Its a new outside entity that has made the service the banks and traditional market makers provided to their customers much cheaper at the expense of hedge funds and bank profits.

In most industries we applaud this disruption.

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

#60

Post by minimax » Fri, Oct 09, 2015, 2:53 PM UTC

kevin_thibedeau wrote: post #40

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".

The NY/Chicago arb trade is futures vs equities. In other words it's two separate products with highly correlated prices. On one side are the futures contracts and on the other side are the underlying stocks (and ETFs). As long as the two separate products exist, you'll always have fast arbitrageurs. This is true whether the matching engines are 1000 miles apart or in the same rack.