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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]

#91

Post by lotsoflumens »

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…

>> Then there are companies, or rather teams inside companies, that send buy and sell orders into the exchange that they never want to execute, on millisecond timescales, to disrupt the market. They are trying, in simplified terms, to create signals for other market participants that do not really exist, and then execute trades that they know will be profitable by exploiting other participants for whom they generated buy signals.

This is well-known. But for some reason, only kids trading in their parents basement, across the ocean, over a non-fibre connection to the internet, get charged and convicted.

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

#92

Post by anigbrowl »

tptacek wrote: post #80
anigbrowl wrote: post #48

Earlier quoted context omitted.

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 apologize for repeating a point I just made, but I'll make it here too: You can mentally substitute "cost of trading" for "liquidity". It's true that you can get costs down to a point where they don't matter. But I think you'll have an easier and more intellectually honest time engaging with the issue if you avoid the jargon and focus on the impact of the jargon. Cost is why we care about liquidity. As markets get…

I get this. I just have an intuition that some friction in a dynamic system is actually a good thing, and also wonder if the growth of HFT might not lead to an unsustainable deviation from an underlying power law distribution of trading activity.

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

#93

Post by consz »

ravibala1 wrote: post #31
SEJeff wrote: post #16

Earlier quoted context omitted.

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 give…

Those number absolutely include payments. It's rare (in my experience) for an equity market making strategy to be positive in gross terms (prior to the maker-taker rebate). These numbers you hear from Virtu/KCG should be net of exchange trading costs/rebates.

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

#94

Post by consz »

mathperson wrote: post #84
SEJeff wrote: post #16

Earlier quoted context omitted.

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

That's exactly what SEJeff is saying (profit is positively correlated with both trading volume and price volatility).

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

#95

Post by consz »

cortesoft wrote: post #90
tptacek wrote: post #78

Earlier quoted context omitted.

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 h…

HFT firms make money by having sufficiently more accurate predictions of the future price than those they trade against -- here, for prediction, you can take any reasonable metric, such as the change in price in the next 10 seconds. Note that this can be done by simply being faster, as having the same prediction in 400ns that took everyone else 2000ns to discover is still having better predictions.

HFT firms typically have anywhere from little to very, very little trading risk, so long as the above conditions hold. Their actual risks are operational (How Knight blew up) or the above situation no longer holding (How Getco, Teza, etc. died).

Also, one thing I have to mention in your post -- stock exchanges were not the market makers of the past. That role was played by someone called a specialist; you can think of them as doing exactly what an HFT market maker does these days, except far, far dumber and far, far slower. Those people were typically (always?) not employed by the exchange. An exchange is simply a centralized place to display orders, not a counterparty that you trade against.

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

#96

Post by jandrese »

maxerickson wrote: post #41
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.

Literal front running is illegal. The thing to accuse them of is book stuffing.

You are right, the Wall Strret banks are known for their rigid moral codes and absolute devotion to the law over the potential for free profits.

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

#97

Post by lotsoflumens »

airza wrote: post #17
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…

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…

No, the idea the HFTs reduce spreads is false. See the research done by Nanex: http://www.nanex.net/aqck2/4594.html

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

#98

Post by jandrese »

maxerickson wrote: post #43
jandrese wrote: post #36

Earlier quoted context omitted.

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.

Computerized trading. Sellers basically publish their positions on a server and buyers query for the best price on a stock and the place the order. None of this requires or benefits from HFT.

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

#99

Post by consz »

hsitz wrote: post #89
tptacek wrote: post #79

Earlier quoted context omitted.

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 justifi…

I think an interesting point you might consider -- let's suppose there is such a thing as "too much" liquidity, and as a corollary, there's a "perfect" amount of liquidity. What do you think happens when more liquidity than the perfect amount is introduced?

I think a lot of arguments which support the idea of HFT being too much liquidity seem to take, as a premise, that the extra liquidity costs consumers -- namely, non-HFT participants in the market trading against the HFTs, the "buyers" of liquidity. Does it? If you have too much liquidity, doesn't that just mean that the buyers don't buy any of it? They saw as much liquidity as they needed, completed their trades, and went home. It seems like the actual cost of too much liquidity is HFT firms which send orders that don't get traded against, so they have no benefit (to the HFT), but still have a cost (the firm has to run, after all). Yes, there's some cost to society here, in the same way that there's a cost any time someone takes on a speculatively profitable business that turns out not to be.

I'm sure there are some strong arguments you could make that HFTs are unnecessary, but the argument of "too much" liquidity always felt shaky to me (in part, because it's one of those arguments that relies on playing fast and loose with nebulous terms).

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

#100

Post by consz »

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.

The round trip time between NYC to Tokyo is very short; Any computer system could beat any human, even at that scale. I'm not sure what you think you'd accomplish here; you'd just have HFT with 150ms response times instead of 1us. But you'd still have HFTs.
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