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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]

#41

Post by maxerickson »

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.

Literal front running is illegal.

The thing to accuse them of is book stuffing.

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

#42

Post by the_cat_kittles »

wayn3 wrote: post #38
the_cat_kittles wrote: post #26

Earlier quoted context omitted.

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 othe…

sorry, i guess there was an ambiguity. i didnt mean to say it didnt "provide liquidity". i meant that what it provided was pretty worthless, in the non-monetary sense.

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

#43

Post by maxerickson »

jandrese wrote: post #36
lobster_johnson wrote: post #27

Earlier quoted context omitted.

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…

Something is providing the liquidity that has brought spreads down over the last couple of decades.

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

#44

Post by infecto »

metaphorm wrote: post #40
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?

Apologies. What I am referring is some of the issues of the past. It has been a number of years but IIRC it was a NASDAQ data feed that cost a good chunk extra but gave you a time advantage. Thats what I am referring to, or the fact that at that same time certain exchanges were catering order types for their big clients and leaving those unpublished (also illegal).

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

#45

Post by jasonmunro »

lobster_johnson wrote: post #19
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.

Because the stock exchanges are private companies that profit from every trade. It's in their interest to keep making everyone trade as much as possible. I doubt anything is going to happen unless all exchanges agree to institute the same policy, or a law is passed to that effect. I don't know why you're being downvoted. It's a legitimate concern.

While it's true that stock exchange operators are private companies, they are also SROs that undergo significant scrutiny from various government organizations (FINRA, SEC, etc).

Most (all?) exchanges use "maker/taker" pricing, so while it is possible the trading platform might not make money on _every_ trade depending on the exact pricing rules, they do make money in the aggregate, and in general more trades equal more profits. Many of the opponents to HFT believe that the maker/taker pricing model is a big problem in the markets, and doing away with it would significantly curb HFT profits. Personally, I'm ambivalent about HFT. All stock trading seems to me far removed from the actual value of the underlying companies anyway :).

Disclaimer: I was an engineer at BATS Global Markets for 5 years, but have been out of finance for the last 4, so my info may be out of date.

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

#46

Post by ForHackernews »

sidlls wrote: post #13
Glyptodon wrote: post #9

Earlier quoted context omitted.

I agree that it's likely not particularly useful for the market to care about things in millisecond resolution.

That's a very clever comment, but I think you should include something indicating why for those who don't know how HFT works.

If nothing else, it means that firms that can afford to collocate their servers in the cage next to the exchange's servers have an advantage over those that can't.

It seems like something like the roundtrip time for a packet from NYC to Tokyo would be a fair "speed limit" for exchanges, and ensure that all firms, globally, are on an even footing.

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

#47

Post by SEJeff »

MichaelGG wrote: post #37
SEJeff wrote: post #25

Earlier quoted context omitted.

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.

Also fun fact for you. Flash Boys: Not So Fast, was written by Peter Kovac. I used to work with Peter @ Madison Tyler (which merged with and became Virtu ~5-6 years ago). He's literally right on with his assessment.

I should have mentioned that, excellent point.

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

#48

Post by anigbrowl »

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…

I don't buy this argument, whose implicit corollary is that there can never be too much liquidity. I'm not an expert and don't have an opposing theory, nor do I want to do a bullshit refutation by just citing something I found in a few seconds on Google, but:

I feel there must be some ideal level of liquidity, which is after all subject to laws of supply and demand like everything else. Cannot an oversupply of liquidity result in fiscal inflation, as opposed to the monetarist kind? I'm reminded of the Asian financial crisis during the 1990s, when there was a ton of money flowinginto newly-developing markets int eh Asian region, but then a spasm of political uncertainty suddenly led to a catastrophic withdrawal.

Echoing one of the other posters here, I don't feel that anyone at this firm or the firm itself is acting in bad faith, but assuming this mathematical demonstration is correct and it's virtually impossible for Virtu to lose money other than by abandoning its winning strategy, does this not invite an arms race and a stampede of eager traders hoping to also get rich by picking up pennies from in front of steamrollers?

I don't want to say you're wrong, but to question the applicable scope of your premise. Virtu itself may not be big enough to cause market instability, but 100 firms doing the same thing might.

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

#49

Post by maxerickson »

jandrese wrote: post #30
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…

HFT aren't the firms putting the markets on computers. HFTs sit between the computers and the retail traders and use that information advantage to front run. There's no reason there needs to be a middleman here. Buyers can buy from sellers directly. In fact that's what they think they are doing, except that the HFT firms are basically adjusting the price on them underneath the sheets. The real losers are the sellers.…

Traditionally market makers do more than match orders from other parties:

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

This is because sellers don't always want to wait around for buyers and vice versa.

Sellers that are worried they have poor market visibility can just put in a limit order that they believe represents a fair price.

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

#50

Post by MichaelGG »

jandrese wrote: post #36
lobster_johnson wrote: post #27

Earlier quoted context omitted.

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…

Can you explain this in terms of actual orders placed? How do you "sell at a certain price"?
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