Insights into High Frequency Trading from the Virtu IPO [pdf] • Hacker News Board

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

#51

Post by vostok » Thu, May 04, 2017, 10:15 PM UTC

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…

I think you're confused about how HFTs create value. They create value because they're the first ones to make a market in something.

They send out limit orders in every product. An investor then sends a marketable order to the exchange that fills one of the HFT's resting orders. If the HFT wasn't there then the investor's order would just fill a bank's order that would probably be wider and wouldn't respond to changing situations as quickly.

The innovation is that HFTs are able to make better markets with fewer people. This means that less money ends up in the pockets of intermediaries and more money stays in real investors' pockets.

Are HFTs always doing the right thing? No of course not, but HFTs are pretty clearly some of the most ethical firms out there.

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

#52

Post by ealloc » Thu, May 04, 2017, 10:15 PM UTC

Summary:

-- Their trades are profitable f = 51% of the time, and they do N = 3 million trades per day.

-- Their net profitability per day is thus (well approximated by) a normal random variable with a mean of f and a standard deviation of sqrt(f(1-f)/N), or 3e-4

-- The probability of this value being less than 50% is well approximated by norm.cdf(0.5, 0.51, sqrt(f(1-f)/3e6)) which gives 2.4e-263

In other words they only expect one loss per 10^263 days, which is much larger than the age of the universe. They are actually doing much worse than expected because they lost on one day.

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

#53

Post by wyager » Thu, May 04, 2017, 10:17 PM UTC

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…

> but its useless as far as i can tell,

That's because you, as well as 99% of people accusing financial firms of being useless, don't know what you're talking about.

One of the reasons planned economies usually fail quite spectacularly is that individuals are very bad at predicting global market behavior. It's too complicated. Local stochastic optimization (free market economies) works quite well, even if it's maybe not globally optimal; doing better than free markets via central planning requires an unfeasible level of omniscience about all market actors and interactions.

This refrain of "traders do nothing useful" is a great example of that; most people are too myopic and/or economically illiterate to see otherwise.

Here's what traders do; they communicate price information (extremely important) and charge a small commission for doing so. In the absence of regulation on "Wall Street" (or whatever your regional synechdoche), there would be more competition among people communicating price information and profit margins would probably be a lot smaller. If you can do a better job communicating price information (possibly by predicting future prices), you can make more money.

Another auxiliary job that traders do is provide liquidity, which is very important but (in my opinion) less important than the first.

My apologies for being a bit blunt, but I think people deserve a bit of admonition for attacking that which they clearly don't understand enough to even criticize coherently.

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

#54

Post by [deleted] » Thu, May 04, 2017, 10:19 PM UTC

hsitz wrote: post #35

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…

> 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…

[deleted]

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

#55

Post by SimbaOnSteroids » Thu, May 04, 2017, 10:21 PM UTC

vostok wrote: post #21

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…

I have a pet theory that anti-HFT sentiment is stoked by banks and other entities that aren't able to compete.

Unless you're a bank or have similar means you can't compete.

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

#56

Post by pg314 » Thu, May 04, 2017, 10:21 PM UTC

ealloc wrote: post #52

Summary: -- Their trades are profitable f = 51% of the time, and they do N = 3 million trades per day. -- Their net profitability per day is thus (well approximated by) a normal random variable with a mean of f and a standard deviation of sqrt(f(1-f)/N), or 3e-4 -- The probability of this value being less than 50% is well approximated by norm.cdf(0.5, 0.51, sqrt(f(1-f)/3e6)) which gives 2.4e-263 In other words they o…

So something is obviously wrong with their model.

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

#57

Post by jasonmunro » Thu, May 04, 2017, 10:21 PM UTC

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.

Firms with enough money to spend _can_ get a more accurate view of the market. The issue is proprietary data feeds. A trading platform is required to disseminate information to the consolidated tape at the same rate they do for a private feed, but that only holds for the "walls" of the trading platforms network. The consolidated tape is a LOT slower than a 100MB multicast feed being slurped up by a co-located server sitting 20 feet from the trading system.

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

#58

Post by brownegg » Thu, May 04, 2017, 10:22 PM UTC

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…

Correlations will tend towards 1 when using a large-enough time frame. On a microstructure scale, correlations go haywire in liquidity distress.

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

#59

Post by MichaelGG » Thu, May 04, 2017, 10:22 PM UTC

ForHackernews wrote: post #46

sidlls wrote: post #13

Earlier quoted context omitted.

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.

I think you'll find, when you try to get down into it, there's no easy way to enforce a speed limit. It's a naturally arising behaviour. You could try making a market that crosses orders every X seconds, but then you move the speed to the edge of those periods.

If you wanna slow down HFT, then kill the stupid restriction that stocks be priced in pennies. With 8 digits of resolution, HFTs would then be forced to compete on price.

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

#60

Post by wayn3 » Thu, May 04, 2017, 10:23 PM UTC

the_cat_kittles wrote: post #42

wayn3 wrote: post #38

Earlier quoted context omitted.

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.

if you look at the market as a whole, there is a thing called the "efficient market hypothesis". It assumes that markets are perfect and you can not make money trading securities, because all information is already priced in.

This is obviously not true, because HFT makes money, but you could say that HFT contributes to getting markets closer to being efficient.

Having efficient markets is worthwhile for society because an efficient, liquid market provides a more accurate picture of the "actual" value of things.

If you buy this argument, then HFT would be contributing to finding truth, which is inherently valuable in the eyes of many people.

At the end of the day, HFT is one of those things that people just get jelly about because someone makes money on something they dont understand and gets insanely rich "doing nothing".

What people get mad about is completely arbitrary. Everyone hates google because ads, but without google, their world would barely operate. Everyone hates facebook because fake news but nobody has the balls to actually not use facebook. A social network.

Everyone hates uber because "scandals" and poor drivers not being paid but still uses it because comfortable.

I'm not really in the stock market but when I want to sell stock, I'd rather there be some market maker who is obligated to buy it. Maybe he makes more money off of me than I ever will selling stock to him, but that one time when nobody else wants the falling stock and I potentially use a large chunk of my savings, I really need them.

Consumers sit on some amazingly high horses sometimes.