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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?

#131

Post by tptacek »

crdoconnor wrote: post #86
kasey_junk wrote: post #76

Earlier quoted context omitted.

> None of which we get from HFT. No but we do get it from market makers. HFT has led to a dramatic decrease in the price of market making. Unless your claim is that market making is not something that should be allowed? > And risk management? Please. They're only managing their own risks. My point about risk management was about the aggregate benefits of the markets, not about HFT providing someone risk management. I…

>No but we do get it from market makers. HFT has led to a dramatic decrease in the price of market making. Unless your claim is that market making is not something that should be allowed? No, my claim is that market making was made significantly cheaper by electronic trading in the 90s-00s but HFT had very little effect on that. HFTs do a lot of market making, make almost no profit from it and mainly use it as cover…

You are ignoring the context of the article in order to push an ideological point.

Levine is explaining how you can get a 95+% cancellation rate simply by running the most brain-dead simple possible market maker strategy: because you're required to post orders at multiple exchanges, and because every price change involves order cancellations (potentially lots of order cancellations, even on a single exchange, because of pairs trading and price ladders), and because adjusting prices on exchanges in near-real-time is the basic job of a market maker, virtually anyone running an electronic market maker is going to have a huge cancellation rate.

Levine brings this up to illustrate the silliness of proposals to regulate HFT by targeting entities with huge cancellation rates.

Comes now 'cdroconnor. You're playing a semantic game. You're defining "HFT" as "bad HFT", and everything else as simple "electronic trading". FINE. Nobody disagrees with you, except on the very boring point of what labels to attach to things.

But your argument here doesn't make any sense for the thread, because the good simple electronic trading you're condoning is also targeted by the cancellation regulation Clinton proposed. Which is the whole point of the article.

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

#132

Post by harmegido »

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".

That makes no sense. Here let me rephrase it:

"Americans love commuting. If not, they wouldn't be spending millions of hours in their cars each year to get to work!

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

#133

Post by librvf »

harryh wrote: post #104
librvf wrote: post #96

Earlier quoted context omitted.

> Lots of things are illegible to the public. Explain to me all the processes involved in building the smart phone in your pocket. You can't. I can't. Probably no single person in the world can. Who cares? That's not true, not like HFT anyway. First, you can quickly and succinctly describe the traits and benefits of a smartphone. You can be high-level at first, you don't have to explain how every detail works. There'…

I can quickly and succinctly describe the traits and benefits of HFT: Replacing slow expensive humans with fast and cheap computers has dramatically reduced the cost of trading. You can see this because buy/sell spreads have shrunk by at least 10x.

That's not what High-Frequency Trading means. The terms for what what you describe are the more general "electronic trading" and "automated trading". They enable HFT, but are not HFT.

High-Frequency Trading, while also an umbrella term, virtually always refers to a subset of algorithmic trading involving arbitrage over extremely short timeframes. HFT is not about being faster than "slow expensive humans" it's about being microseconds faster than other HFTs.

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

#134

Post by dclusin »

chollida1 wrote: post #7

I 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…

Quote stuffing works because you know before hand which orders to filter out and don't need to expend resources considering them while everyone else does. An advanced player can build this into an FPGA to achieve greater performance.

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

#135

Post by harryh »

librvf wrote: post #133
harryh wrote: post #104

Earlier quoted context omitted.

I can quickly and succinctly describe the traits and benefits of HFT: Replacing slow expensive humans with fast and cheap computers has dramatically reduced the cost of trading. You can see this because buy/sell spreads have shrunk by at least 10x.

That's not what High-Frequency Trading means. The terms for what what you describe are the more general "electronic trading" and "automated trading". They enable HFT, but are not HFT. High-Frequency Trading, while also an umbrella term, virtually always refers to a subset of algorithmic trading involving arbitrage over extremely short timeframes. HFT is not about being faster than "slow expensive humans" it's about b…

I believe that you are making a distinction without a difference. Operating over extremely short timeframes is what allows electronic traders to provide such efficient pricing.

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

#136

Post by vasilipupkin »

shasta wrote: post #130
vasilipupkin wrote: post #63

Earlier quoted context omitted.

It's the opposite. The resources being spent on microsecond speed race is a form of a tax imposed on HFT by society. If all big HFT firms spent on getting faster, they don't benefit in expectation, since all the competitors will be equally fast, but society benefits because that spending goes to wider economy outside HFT

Right, that's the obvious situation that I see. I'm wondering if anyone can argue otherwise? If not, why isn't there a bigger push for market infrastructure that doesn't advantage high frequency trades? I don't know that most high frequency microtrades are a real problem either way, since it seems mostly zero sum among the people playing that game. But whenever there is a macro change in a price that takes place over…

"If not, why isn't there a bigger push for market infrastructure that doesn't advantage high frequency trades?" because most of those who could do the pushing are ignorant and/or confused about the economics of competitive markets and how competition benefits society as a whole and not really those who are competing

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

#137

Post by ctlby »

yummyfajitas wrote: post #31
amelius wrote: post #20

Earlier quoted context omitted.

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.chrisstucch…

Eliminating the sub-penny rule would probably be counter-productive for most US equities. You would not see further spread compression (most stocks' natural spreads are already greater than one cent), and displayed size would likely shrink (this latter bit is exactly what happened when prices decimalized). A better alternative would be a tick-size schedule that's a function of price, as is generally done in Japan and Europe.

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

#138

Post by washedup »

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…

Exactly. I also wonder if the "canceled" orders are really just changing orders (either "cancel/replace" or "change" messages sent to the exchange) i.e. the desire to buy or sell is still there, just at a different price.

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

#139

Post by czinck »

djyaz1200 wrote: post #92
yummyfajitas wrote: post #85

Earlier quoted context omitted.

If you pay $100 extra once in your life for the gold iPhone, then Apple has probably cannibalized more of your retirement fund than HFT. Ballpark esitmate: drop $20k/year into retirement (1 lot of SPY/year) x 1 penny/share being robbed from you x 50 year working career, you've lost $50 to the evil HFTs.

True, more than the money it's the problem that all these super talented people are trying to relive Superman 3 instead of curing cancer.

Have you found the cure for cancer and now you're wasting time while waiting for the FDA to approve it?

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

#140

Post by vegabook »

okegoge wrote: post #90
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 worth remembering that HFTs like yourself define front-running differently than others. Others often (rightfully) feel that HFTs who engage in latency arbitrage where they take advantage that everyone else is using the NBBO (because they have to), and the NBBO is lagged, are front-running assholes who extract value without creating anything. And we refer to that thieving, predatory, value-stealing activity as 'f…

I hope you understand that the thievery has been happening for centuries, millennia. There is no other way to gauge real supply and demand than to put buy and sell orders into the market yourself. HFT is doing at ultra-high speed what human market makers do all day long, and have been doing forever.

Now, possibly rightly, market makers in general, through the ages, have had a bad rap. They are indeed trying to get more information than the average joe, with very clever, and risky, techniques (see below) and skimming him after having done so. Nevertheless, you must remember, that without these people/machines taking these risks, you would not have a continuous market in which to trade. You'd have a much more stepwise price action and much more risk. They're providing s service.

Perhaps most controversially, being a good market maker means having some capital, so that you can wear a loss which is entirely possible during your price discovery. Thus, market makers who make money, inevitably already have money. This doesn't help their cause.

But the idea that HFT per se is the problem is wrong. If you don't like HFT, you don't like finance, period. That may be a legitimate view, or not, but the two are inextricable. They are not different one from the other - HFT is simply Amazon doing what Barnes and Noble does, more efficiently (without the monopoly aspects - HFT is fiercely competitive).

Without HFT, bid offers would be wider. Fact.

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