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

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

#81

Post by tptacek » Thu, May 04, 2017, 11:16 PM UTC

anigbrowl wrote: post #63

wayn3 wrote: post #60

Earlier quoted context omitted.

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…

I really think EMH is a red herring here, for what it's worth. This is more a market microstructure issue. You can entirely disbelieve the EMH and still benefit from HFT.

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

#82

Post by tptacek » Thu, May 04, 2017, 11:18 PM UTC

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?

HFT is in basically no sense predicated on front-running. Front-running is an agency problem: it occurs, for instance, when you're trading on behalf of someone else, and before you execute their orders, you submit your own orders that benefit you at the expense of your client.

The whole premise of the market is that people have informational advantages. They don't work without it. The point is that they aggregate the information of all the participants. You can call that, or anything else, "front-running", but that's a meaningless definition.

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

#83

Post by vzcx » Thu, May 04, 2017, 11:21 PM UTC

baq wrote: post #22

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'd say it is a bug of capitalism that HFT is a profitable line of business. it's easily fixed by taxing, but maybe it's already taxed properly, i don't know.

HFT is not necessarily a feature (nor a bug) of capitalism, although something you might recognize as capitalism is a prerequisite for the phenomenon, but of the fact that information sources and financial exchanges form a distributed system, i.e. one that is spread out across space and time.

Of course, in the absence of markets altogether, we have no exchanges, no finance, and no HFT.

But... Why do you see this as a problem to be fixed? Who does HFT harm besides those whose bottom lines they cut into: the big, fat, and slow dealers who wish they could drop a block anywhere and have it fill?

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

#84

Post by mathperson » Thu, May 04, 2017, 11:24 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.

My friend at a different hit firm says they tend to make MORE profit in high volatility regimes

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

#85

Post by anigbrowl » Thu, May 04, 2017, 11:25 PM UTC

wayn3 wrote: post #76

anigbrowl wrote: post #63

Earlier quoted context omitted.

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…

I'm being called oblivious by people who confuse HFT and market making which each other. That's cute. There are companies that provide liquidity. They do nothing else. They don't take a position in the market. Its their job to quote both a bid and an ask and to trade with anyone who wants to hit those quotes. They are not allowed to not quote a price, unless trading is suspended. Those are called market-makers. They…

You're projecting far more into my post than I said. I have not proposed banning HFT, for example.

Also, you really need to work on your manners, which is why I'm not going to bother addressing the rest of your remarks. Perhaps we can have a more constructive conversation some other time.

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

#86

Post by lotsoflumens » Thu, May 04, 2017, 11:26 PM UTC

vostok wrote: post #51

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 changi…

I think you're confused about the meaning of "value".

HFTs don't provide any value, but they do extract a lot of money from what used to be called a "market".

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

#87

Post by anigbrowl » Thu, May 04, 2017, 11:30 PM UTC

wayn3 wrote: post #64

anigbrowl wrote: post #62

Earlier quoted context omitted.

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 alway…

I studied economics. Also, I used to install trading systems for hedge fund managers. Your reply is not responsive to the question I posed, and tells me nothing I don't already know.

And yes, people do die from drinking too much water. https://en.wikipedia.org/wiki/Water_intoxication

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

#88

Post by mathperson » Thu, May 04, 2017, 11:30 PM UTC

anigbrowl wrote: post #48

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…

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 liquid…

I think are pretty large barriers to entry to hft. You need enough capital to develop a sophisticated, heavily error checked trading strategy, set up your own network to ensure low latency, the IT infrastructure/engineers to manage this,.. it's not like a few burnt out traders can open up hft firm in their garage so I think any stampede is unlikely

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

#89

Post by hsitz » Thu, May 04, 2017, 11:35 PM UTC

tptacek wrote: post #79

hsitz wrote: post #35

Earlier quoted context omitted.

> 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…

Just substitute "cost of trading" with "liquidity". It's true that at this point, now that market making is pretty much all automated, there isn't much more cost to squeeze out of this component of the market. But be careful not to imply that liquidity is binary: the more liquidity you have, the less it costs to buy or sell something.

I'm not implying that liquidity is binary. I'm implying that it does not scale linearly, but rather exponentially towards an asymptote. That is, you can add as much as you want, the total amount approaches a limit.

Said a different way, with your "trading costs" substitution: If x amount of human effort is required to reduce trading costs from, say, 5% of a transaction to 0.001%, perhaps (let's assume) that's justified. But is it then wise for a society to encourage expenditure of 10x more effort just to reduce costs to 0.0001%? (This analogy doesn't really hold, because cost of trading could be 0 and there could still be 0 liquidity, just no other parties interested in buying or selling, but it still seems to point at a real issue when restricted to talking about liquidity.)

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

#90

Post by cortesoft » Thu, May 04, 2017, 11:42 PM UTC

tptacek wrote: post #78

cortesoft wrote: post #67

Earlier quoted context omitted.

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 inter…

Is this question as interesting as it might seem to someone unfamiliar with trading? Electronic trading firms do more than make markets, but stipulate that market-making is the sort of baseline approach they take to making money. Are you really asking "how do market makers make money on 51% of their trades"? Because that question is easy to answer; it's the premise of a market maker, whether done by a computer or by…

I probably don't know enough about market making and trading to really say whether this question is interesting to people who are.

My thinking, and why I found it interesting, is that the connotation behind showing that the company 'never has a losing day' because of the law of large numbers is that the company is taking practically no risk. I was trying to ask a question about that point; do these companies really have no risk? Are they basically printing money?

I am sure the answer is no, because no company has zero risk. I want to know where the risk is, and I figured the answer to that question is answered by answering the 'how do they make money on 51% of their trades' question.

That might not be the right question, but I don't think my question was equivalent to asking 'how do MARKET MAKERS make money on every trade', because traditional market makers (i.e. the stock exchanges) are not the same as HFTs. A stock exchange has inertia on its side to protect their profits; a competitor has to fight against the network effect to take them on. An HFT has none of that protection.