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

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

#61

Post by return0 » Thu, May 04, 2017, 10:23 PM UTC

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…

> prima facie evidence that they are creating value is that they are capturing value from willing market participants.

is this referring to market value or economic value?

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

#62

Post by anigbrowl » Thu, May 04, 2017, 10:25 PM UTC

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…

But why is this liquidity necessary? Maybe if you can't find someone to take your trade that's an important price signal, which is being dampened by the liquidity. Forgive me for abusing the metaphor, but just as water is essential for life, consuming too much of it can kill you (by lowering the level of electrolytes and disrupting intracellular signaling). It's rare for people to die from drinking too much water at once, but that's not gonna be a lot of comfort if it happens to you, is it?

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

#63

Post by anigbrowl » Thu, May 04, 2017, 10:36 PM UTC

wayn3 wrote: post #60

the_cat_kittles wrote: post #42

Earlier quoted context omitted.

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 becau…

You are not in a position to talk about people on high horses after posting that. There is quite a lot of research from the behavioral economics field (tl;dr: most people are somewhat irrational) that undercuts the EMH.

Also, there's a lot of straw man argumentation in your post. Consumers can and do make sacrifices of utility in line with their values, even if such behavior is a standard deviation or two outside the norm. And while your argument for market making is sound, do you really need to make that trade within milliseconds, or would you be equally happy as long as it closed within a couple of minutes? You seem oblivious to the possibility that your stock might be falling due to a liquidity event caused by a race condition, for example, although in cases such as the 'flash crash' such trades are usually unwound afterwards, presumably at considerable expense.

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

#64

Post by wayn3 » Thu, May 04, 2017, 10:38 PM UTC

anigbrowl wrote: post #62

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…

But why is this liquidity necessary ? Maybe if you can't find someone to take your trade that's an important price signal, which is being dampened by the liquidity. Forgive me for abusing the metaphor, but just as water is essential for life, consuming too much of it can kill you (by lowering the level of electrolytes and disrupting intracellular signaling). It's rare for people to die from drinking too much water at…

liquidity is necessaryy because people need to be able to buy things. not having liquidity is like having empty grocery stores. doesnt sound like a big deal but oh so painful if it ever happens. people in this thread lump market makers and high frequency traders together which is not really correct, but market makers are hired by exchanges to make sure markets stay liquid. market makers guarantee that they will always be in the market for at least "x amount of security", typically 100 lots. that means that at any given point in time, you can at least 100 lots, which covers any kind of smalltime investor who doesn't have access to professional execution traders. this is important because you need to be able to get out of potentially deadly trades.

this is not just for stocks. the potential loss of a stock is the price of the stock. that is finite. some options, even ordinary options, can generate potentially infinite losses and stock exchanges want for everyone to be able to move their stuff.

as far as you are concerned about "signals", there is something called the order book. as a normal trader you dont see this, but the stock exchange lists every position in the market and you can pay to see that. there is literally no difference between no market makers in the market and market makers having their spread quoted on top of the available market, in terms of signals. market makers just make sure that you get a good, if not fair, price for the stuff you want to move.

illiquid markets are extremely painful, especially for those companies that exist in them, because their value can be extremely misrepresented. to make an example, assume you are tesla, but you are traded on an exchange that only publishes spot once a year, in january. in august, you need to raise money at fair value and youve grown 3x since january, but nobody can give you fair price because you are quoted at januaries value.

liquidity is a good thing for every market participant.

you need to drink 5 liters of water over a period of 30 minutes to kill you potentially. thats not going to happen by accident and you will be in ridiculous amounts of pain long before you hit the lethal dose.

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

#65

Post by anigbrowl » Thu, May 04, 2017, 10:39 PM UTC

wyager wrote: post #53

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…

This refrain of "traders do nothing useful"

That was not how I read the comment at all. Maybe slow down and reconsider it in the context of a specific discussion about this specific approach to HFT, rather than assuming the GP is dismissing the whole underlying principle of market making.

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

#66

Post by phdp » Thu, May 04, 2017, 10:39 PM UTC

pg314 wrote: post #56

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.

Most likely fat tails. A normal distribution is probably not a valid assumption

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

#67

Post by cortesoft » Thu, May 04, 2017, 10:40 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…

Yeah, the analysis in this article is not really answering the question of WHY they are profitable every day; in reality, it is just explaining the law of large numbers.

The whole thing rests on the premise that the company makes a profit on 51% of the trades, a loss on 24%, and break even on 25%. It is easy to show from those assumptions that you will never have a losing day if you make enough trades.

The REAL interesting question is "How do they make money on 51% of the trades they make, and are those results sustainable?"

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

#68

Post by anigbrowl » Thu, May 04, 2017, 10:40 PM UTC

21 wrote: post #7

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.

No they would not. Even if you introduce a 10 sec delay, there will still be someone which will be first after the 10 sec pass, and you can still create models which will be tuned to predict what the price will do 10 sec into the future. And what do you think about a law which forces all news agencies to wait 1 hour before reporting major news, so that everybody gets a chance to report it, and not only the huge agenc…

GP specifically said "a bit of random latency". Don't change the terms of his argument to make it easier for you to refute, that's dishonest.

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

#69

Post by cortesoft » Thu, May 04, 2017, 10:41 PM UTC

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.

They make money NOW either direction; this doesn't mean they will always make money. If a competitor suddenly starts being faster, they are going to start losing money no matter which direction the market goes.

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

#70

Post by anigbrowl » Thu, May 04, 2017, 10:44 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.

Heaven forfend that people should form their own opinions on first principles, even though those opinions might be mistaken.