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Insights into High Frequency Trading from the Virtu IPO [pdf]

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Re: Insights into High Frequency Trading from the Virtu IPO [pdf]

#31

Post by ravibala1 »

SEJeff wrote: post #16
smallnamespace wrote: post #8

Note that the key assumption for why losses are unlikely is that they make many independent trades that are each likely to be profitable. But in real markets, outside events can suddenly make many trades all fail at the same time. This is the same reason AAA tranches of CDOs got those high ratings -- you only lose money if many obligations fail at once, but that is extremely unlikely if you think they have low correl…

Not exactly, a firm like Virtu makes money due to volume and volatility. If the market goes up, they make money, if it goes down, they make money. They don't make money when they break things, or when the volume (and volatility) is low. Source: Worked at Madison Tyler / Virtu for over 4 years, but left before their IPO.

Not sure I understand why we can assume that its all trades are entirely "independent" here.

Agree with you that HFT performance is not correlated with market direction. But given the volume of trades it would imply that many of the trades are occurring on a smaller pool of equity instruments. I'd think that given liquidity constraints and competition that there's a sweet spot in terms of number of stocks that a given strategy is actually efficient on.

So not entirely sure why we consider every trade to be iid - rapid shocks (flash crash), equity specific news etc would affect a number of trades at once changing the 51% probability?

Also does anyone know if the profitability numbers include payments to be a market-maker?

Re: Insights into High Frequency Trading from the Virtu IPO [pdf]

#32

Post by throwaway76543 »

the_cat_kittles wrote: post #15

to me this is a perfect example of how incredibly indifferent capitalism can be to creating value. no one is bad here, per se, but its useless as far as i can tell, and someone gets very very rich. nothing wrong with capitalism of course, but i feel the need to keep harping of the fact that it doesn't necessarily imply anything about value or desert. edit: every time i make a comment along these lines, its interestin…

Valuing something is itself valuable.

Re: Insights into High Frequency Trading from the Virtu IPO [pdf]

#33

Post by infecto »

I generally like HFT. I do not like front running or information advantages that have happened in the past.

Spreads these days are the lowest in history. What many people fail to realize is that before electronic market makers (I almost want to eliminate the name HFT), people sat in between these trades. It was slow, inefficient and they took a larger spread on the trade.

Re: Insights into High Frequency Trading from the Virtu IPO [pdf]

#34

Post by defgeneric »

jandrese wrote: post #11
sfeng wrote: post #5

Earlier quoted context omitted.

People who are pro-HFT see it as a way of increasing the 'liquidity' of the market. In their eyes it makes it easier to move volume of stock, and moves the bid price of the stock closer to the ask price of the stock.

That argument still makes no sense to me. How does skimming off of the top of trades make the market more liquid? It's not like they're offering any new product for sale. If a market is moving slowly all they do is artificially inflate the number of transactions without increasing liquidity. HFT is just abusing an information advantage to skim off of the market. Because they have a slightly more accurate view of the…

There's just a huge number of securities you can trade now. Most equities have monthly options (so e.g. about ~50 calls & puts * 6 months) and the indices have weekly now. And those are just the basic derivatives, the OTC stuff gets even crazier.

Re: Insights into High Frequency Trading from the Virtu IPO [pdf]

#35

Post by hsitz »

aaronchall wrote: post #24
the_cat_kittles wrote: post #15

to me this is a perfect example of how incredibly indifferent capitalism can be to creating value. no one is bad here, per se, but its useless as far as i can tell, and someone gets very very rich. nothing wrong with capitalism of course, but i feel the need to keep harping of the fact that it doesn't necessarily imply anything about value or desert. edit: every time i make a comment along these lines, its interestin…

Trading firms create value by providing liquidity. If they can buy low and sell high, they will be buying when there are relatively fewer other buyers, and sell when there are relatively few other sellers. This activity creates value for other people who want to trade in those circumstances. If no value was created, there would be no value to capture. And the prima facie evidence that they are creating value is that…

> Trading firms create value by providing liquidity.

Obviously true when they're added to market with little to no liquidity.

But hard to see as true when you're adding them to market that is already extremely liquid. At least, it's a statement that needs some empirical justification in that case, to show that the value from marginal liquidity being added (which is tiny) offsets the waste of the incredible amount of human effort used to create it.

Re: Insights into High Frequency Trading from the Virtu IPO [pdf]

#36

Post by jandrese »

lobster_johnson wrote: post #27
airza wrote: post #17

Earlier quoted context omitted.

before HFT these transactions were run by human market makers from giant banks who skimmed hundreds of times more profit off of them (this is the reason that you hear about it in the news all of the time) Someone's job is going to be to sit between the people who just want to sell and those who want to buy- when we talk about liquidity it's just this. The fact that you're directing your anger towards some robots who…

Does HFT only hurt "other bots"? My understanding was that HFT could take advantage of faster feeds to front-run human traders.

It hurts anybody who sells a stock.

You sell a stock at a certain price, someone else looks up the price of the stock and sees that it is slightly higher than what you listed, because your information is still propagating through the network. That person offers to buy the stock at the higher price. The market matches your offers up. Then the HFT steps in and buys your stock and resells it to the buyer at the price he asked.

There is no value to the seller or buyer. Zero risk to the HFT firm. No improvement in market conditions--the HFT firm doesn't sit on positions, they can't increase liquidty. Just free money from abusing a latency advantage on their view of the market.

Re: Insights into High Frequency Trading from the Virtu IPO [pdf]

#37

Post by MichaelGG »

SEJeff wrote: post #25
Kenji wrote: post #3

I don't know why HFT exists at all. I would just pass a law that forces a bit of random latency/noice in the market data, in the order of seconds (in a similar way as GPS has artificial inaccuracy). Normal people are not gonna notice and all this HFT garbage is completely eliminated. Win win.

Do yourself a favor and lookup the history of the IEX exchange, and read flash boys. They do just this, but HFT traders still trade there and make money, just probably less of it.

Any reading of Flash Boys needs to be accompanied by Flash Boys: Not So Fast. Or just a really critical eye. Flash Boys is beyond bizarre in the silly things it implies (like some major manager's trading PC is hacked or something, but somehow that's fixed with IEX). Or how they lament some guy can't buy huge amounts of stock without moving the price. It's a nonsensical book.

Re: Insights into High Frequency Trading from the Virtu IPO [pdf]

#38

Post by wayn3 »

the_cat_kittles wrote: post #26
aaronchall wrote: post #24

Earlier quoted context omitted.

Trading firms create value by providing liquidity. If they can buy low and sell high, they will be buying when there are relatively fewer other buyers, and sell when there are relatively few other sellers. This activity creates value for other people who want to trade in those circumstances. If no value was created, there would be no value to capture. And the prima facie evidence that they are creating value is that…

nah. its on such a small time scale, i really dont think it does.

If a company provided X amount of liquidity to both sides of the market, even if the company itself only entered a position for a millisecond, it still provided necessary liquidity. It did so in a very efficient manner and turned a profit on that.

Saying that you dont provide liquidity just because you enter both sides of the trade is like saying that a cab going into and a cab going out of manhattan cancel each other out and provide 0 net value to their passengers.

Re: Insights into High Frequency Trading from the Virtu IPO [pdf]

#39

Post by MichaelGG »

marcosdumay wrote: post #23
jandrese wrote: post #11

Earlier quoted context omitted.

That argument still makes no sense to me. How does skimming off of the top of trades make the market more liquid? It's not like they're offering any new product for sale. If a market is moving slowly all they do is artificially inflate the number of transactions without increasing liquidity. HFT is just abusing an information advantage to skim off of the market. Because they have a slightly more accurate view of the…

I can't help but to think the problem is being intentionally framed in an unhelpful way. The problem is their ability to front-run people. They shouldn't be able to get a more accurate view of the market than anybody else, and they certainly shouldn't have the chance to roll-back their actions after they get a glance of the results. Frequency of trading is irrelevant.

If an HFT firm was "front running" as you put it, and you know about it, why doesn't the SEC? Front running is not legal. Or are you using the Flash Boys definition of front run which is "anyone that trades better than me" or "anytime I try to buy 50,000 shares but move the price"?

Re: Insights into High Frequency Trading from the Virtu IPO [pdf]

#40

Post by metaphorm »

infecto wrote: post #33

I generally like HFT. I do not like front running or information advantages that have happened in the past. Spreads these days are the lowest in history. What many people fail to realize is that before electronic market makers (I almost want to eliminate the name HFT), people sat in between these trades. It was slow, inefficient and they took a larger spread on the trade.

this seems contradictory to me. HFT is basically predicated on front-running information advantages. It wouldn't be profitable otherwise.

maybe you can explain in more detail?

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