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Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

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Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#101

Post by darawk »

yummyfajitas wrote: post #48
darawk wrote: post #14

Earlier quoted context omitted.

Renaissance is not that type of hft firm. Renaissance uses algorithms to predict price movements before they happen. The type of hft this system is designed to prevent is front-running. Which is me seeing your order on exchange A and buying ahead of you on exchange B before your order arrives. Those types of hft firms are surely eating into Renaissance's profits in a big way.

What you are describing is an acausal (i.e. physically impossible, since cause effect happens before cause) version of demand anticipation - changing prices in response to market demand. It's impossible because the HFT will only know your order has reached exchange A after exchange A has told him about it. Obviously A can't tell him about it until after your order has arrived. Front running is a strategy where your b…

Did you not read my example? We are talking here about multiple, physically separated exchanges.

Example:

Vanguard sends a buy order of 1000 shares of AAPL to exchange A. Some HFT firm sees that order on exchange A and knows that it will also be placed on exchange B, and was surely broadcast from Vanguard's trading floor at the exact same moment as the order to exchange A.

However, the HFT firm also knows that Vanguard is physically closer to exchange A then B, and the HFT firm has invested a lot of money to ensure that they have the physically shortest possible route from themselves to exchange B.

This allows them to broadcast their order to exchange B and have it arrive there before the order broadcast by Vanguard, even though they broadcast their order later.

It is somewhat difficult to wrap your head around, but it is a physical reality, and people are making millions of dollars from it as I write this.

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#102

Post by eru »

kasey_junk wrote: post #55
Animats wrote: post #51

Earlier quoted context omitted.

"In reality the other HFT are not buying/selling new orders. Instead what they are doing is cancelling or modifying their existing orders so that they don't get hit by incoming orders." Right. One of the strategies is: - Put in standing order to sell a small amount of security slightly below market and leave it active. - Wait until a buy order triggers it. - Buy same security faster than rest of buy order can be proc…

> Buy same security faster than rest of buy order can be processed. How? You can't because your competition is already resting orders there (from potentially weeks ago) and any order you put in there will be behind your competitors no matter how fast you are. What does happen is that you all are resting orders up and down the order book. When a big order takes out several levels of your orders, you race as fast as po…

Would eliminating the sub-penny rule remove the need to use this strategy? If there were basically an infinite number of points orders could be resting, you could just get in an epsilon above or below some other fund's order to get ahead in the queue?

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#103

Post by darawk »

harryh wrote: post #15
darawk wrote: post #14

Earlier quoted context omitted.

Renaissance is not that type of hft firm. Renaissance uses algorithms to predict price movements before they happen. The type of hft this system is designed to prevent is front-running. Which is me seeing your order on exchange A and buying ahead of you on exchange B before your order arrives. Those types of hft firms are surely eating into Renaissance's profits in a big way.

It's worth nothing that eating into Renaissance's profits in this way is good for everyone else because it means that accurate prices are reaching the market faster.

You could say the same thing about insider trading. So, the argument that accurate prices reach the market faster is not, in and of itself, an argument that something is good.

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#104

Post by eru »

Johnie wrote: post #81
dsl wrote: post #21

Earlier quoted context omitted.

They don't care about "target markets" or what anyone else thinks. This technology is to protect their own trades. The goal is to be able to execute buys across multiple exchanges (because the orders are so large) without other high frequency firms being able to see a trade on one exchange, then buy and resell stock to them at a higher price on another exchange.

Exactly. This is a defensive technology to defend against other HFT players. Think of it this way: - In the past (prior to HFT), when you put in an order, you know where the market is going to be. How you win is by building better financial models to identify which security to buy/sell. - With HFT, traders, without sophisticated tools, can no longer trust the market because once they submit, HFT algorithms can shift…

How did you know in the past where the market was going to be?

All that was ever available was information about past trades, and perhaps open orders in the market that could have already been removed at any time?

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#105

Post by eru »

MichaelGG wrote: post #85
jwatte wrote: post #45

An exchange could work just as well and provide just as much liquidity if it accepted sealed bids into a queue for one minute, then settled and showed the full queue, while accepting sealed bids for the next minute. HFT would no longer be a thing, and everyone would trade on more equal footing. ("One minute" is a guess. Could be right interval is 20 seconds or ten minutes or whatever... But needs to be slow enough to…

There are exchanges that operate with similar rules, like POSIT. http://www.itg.com/product/posit-3/ But the slowness is a lot more, executing a few times a day. And you can't change your order AFAIK (and there's large random timespans). There's also complications to avoid revealing how big the buy or sell side are. As far as your suggestion, that's what I was thinking for a while when I first read about them. I don'…

HFT is only a bad thing, because it's removes bright minds from working on other problems; not because it hurts other market participants (which it doesn't---apart from being competition to other market makers).

I've read some interesting proposal that removing the subpenny rule would make speed less of a concern, since it would be possible to undercut on price instead.

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

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#106

Post by eru »

jwatte wrote: post #70
kasey_junk wrote: post #49

Earlier quoted context omitted.

And how would that exchange handle tie breakers? Also what about cross exchange arb? You'll probably be interested in reading Eric Budish.

Everybody would see the arbitrage within the next trading cycle. So, rather than try to eliminate the arbitrage opportunity, put reaction times into a human time scale and let every actor share. Tie breaks can be fair split with cryptographically random split for the last share, for example. Yes, "all or nothing" would complicate, of it's still a necessity, but all those things are solvable, if we believe in fairness…

> So, rather than try to eliminate the arbitrage opportunity, put reaction times into a human time scale and let every actor share.

Why? We don't need a minimum wage for market makers.

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#107

Post by eru »

djoldman wrote: post #72
hourislate wrote: post #68

Earlier quoted context omitted.

HFT systems scalp. They make their millions .001 at a time on front running and volume. A way to discourage this is by adding a very small fee to each trade. This eats/takes away their profits. The problem is their are too many folks making money that are connected to the right people in Government.There will always be talk about doing something about it but nothing will ever happen. The only positive outcome from al…

If you wanted to kill HFT, it's actually pretty easy. Just make the minimum increment incredibly small. In other words, let people trade at $.0000000001 increments. No fees needed.

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

Perhaps even allow orders at arbitrary random numbers? (More precise numbers take more time to transmit anyway.)

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#108

Post by eru »

harryh wrote: post #20
WestCoastJustin wrote: post #19

Highly recommend reading Flash Boys [1] and it explains why time is so important and HFT firms. Great book for filling in the picture of what HFT is and I found it pretty entertaining too. [1] https://www.amazon.ca/Flash-Boys-Michael-Lewis/dp/0393244660

Highly recommend reading Flash Boys: Not So Fast [1] and it explains how Flash Boys gets it almost entirely wrong. [1] https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-...

Alternative review: https://www.goodreads.com/book/show/23570025-flash-boys

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#109

Post by eru »

Lagged2Death wrote: post #31

When HFT was new, amateur forums that discussed it (like this one) were full of apologists saying that it didn't matter, it somehow didn't really effect the market. Some even claimed it made the market better. The tone of the conversation, the framing assumptions, seem different now.

Interesting. Around what time was that?

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#110

Post by eru »

Johnie wrote: post #80
ChuckMcM wrote: post #40

Earlier quoted context omitted.

Unfortunately for the traders, two of the clocks were at altitude and so time passed more slowly for them, resulting in several femptoseconds of misalignment :-)

You joke, but Google actually uses GPS mounted on the roofs of their data centers for time synchronization.

GPS plus atomic clocks.

And, boy, do the off-the-shelf commercial offerings suck. The vendors are not really used to dealing with the stress that Google puts these things under.

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