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

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

#111

Post by metaphorm » Fri, May 05, 2017, 3:03 AM UTC

infecto wrote: post #44

metaphorm wrote: post #40

Earlier quoted context omitted.

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or the fact that at that same time certain exchanges were catering order types for their big clients and leaving those unpublished (also illegal).

thank you for clarifying

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

#112

Post by SEJeff » Fri, May 05, 2017, 3:05 AM UTC

consz wrote: post #94

mathperson wrote: post #84

Earlier quoted context omitted.

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).

Correct sir! And I've spent the past 9 years of my career as a Linux monkey in electronic trading / HFT / whatever the hip term for it is today.

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

#113

Post by tptacek » Fri, May 05, 2017, 3:23 AM UTC

metaphorm wrote: post #109

tptacek wrote: post #82

Earlier quoted context omitted.

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…

let me be more specific since I think you're misinterpreting me because I wasn't specific enough. hedge-funds that execute a strategy based entirely on leveraging HFT as a means to take advantage of information arbitrage (such as they kind that a fund taking trade orders from its clients would have) are predicated on having that information advantage "front-running". HFT in different contexts is just machine executio…

That's not how a hedge fund works. Hedge funds trade on behalf of other people, but their clients have equity stakes in the fund itself; they're not asking the hedge fund to trade their own positions in things. Hedge fund customers don't inject tradable information.

The canonical example of a front-runner is a broker trading on behalf of (say) a pension fund. The pension fund wants to offload (say) all its shares in CSCO, and pays a broker to do that. That trade is complicated and will move the market. The broker front-runs by first trading CSCO for its own accounts, at the expense of its clients.

An "HFT-enabled" broker could front-run its own clients, but (a) they don't need HFT to do that; they have (relatively speaking) all the time in the world to act on the confidential information that their client is offloading a large block of CSCO, and (b) they're the ones complaining about HFT and setting up new exchanges to combat it.

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

#114

Post by davidmr » Fri, May 05, 2017, 4:33 AM UTC

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…

Respectfully, this is just plain incorrect. You're describing some situations that do happen and just choosing to ignore what happens the rest of the time. When demand precisely matches supply, you're correct--you need a matching engine to connect buyer and seller and no middle man/market maker need get between them. That also happens too.

Assuming that at some point bids and asks will line up and trades will happen doesn't a market make; that's the exchange's job. Making a market means being able to quote prices on both sides of the book and having inventory to trade at the current market price. Carrying that inventory has actual risk involved, and that's why it's not a free service that the exchange (or anyone else) provides. Market makers also get penalized by the exchanges if they're not making markets for some large percentage of the time that the products are trading.

Maybe a better way to look at it is that the exchange is there to match up buyers and sellers at the current price at a given moment in time. The market matches up buyers and sellers at the current price over a period of time. This market stabilizes the price over time. Demand and supply just don't line up perfectly like it seems like they should. That's the difference between the market and the exchange. If I'm buying a product now, I want an idea of the true value of it, and the less the price is whipping around waiting for demand to match the supply, the more I know what the current market rate is.

I'm not saying they're doing gods work, but to say that there's no risk involved or reason for them to exist is incorrect.

If you don't buy any of the above arguments, then I'm interested in your answer to the question of why the exchanges themselves pay market makers to make markets. If the current technology renders market makers obsolete, surely the exchanges would recognize that and keep the money for themselves, no?

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

#115

Post by jasonmunro » Fri, May 05, 2017, 4:54 AM UTC

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.…

The liquidity comes from the HFT market maker's own money. Market makers are required to post bid and offers of a reasonable level of liquidity in all symbols they are registered to "make markets" in. It may seem like a simple skim off the top operation, but it's not that simple. If they do not maintain their bids/offers, they are disqualified from market making.

If they do maintain them, they reap a number of benefits including discounted pricing from trading platforms and IIRC, the ability to do naked short selling (which IMO should be off-limits for all trading firms). I'm not defending HFT here, just stating a fact that market makers are a part of the trading ecosystem.

Keep in mind that "making" and "taking" liquidity is not the same thing as buying and selling. Market makers are required to post both bids and offers. The difference is that market makers put their orders (buy or sell) on the "book", which means they are offering liquidity in both directions. The order that comes in to match (think "market" order to buy or sell) is the "taker". Firms that supply liquidity are rewarded by trading platforms (unsurprisingly, since those firms "make" their market), and firms that match those orders (takers), are charged for the service.

Not all HFT outfits are "market makers", but many are. I can't say specifically if Virtu is a market maker, even if I remembered :) The point is that liquidity providers don't pay for their trades, they are paid for them, so it's a natural fit for a smart HFT operation.

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

#116

Post by jasonmunro » Fri, May 05, 2017, 5:13 AM UTC

davidmr wrote: post #114

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…

Respectfully, this is just plain incorrect. You're describing some situations that do happen and just choosing to ignore what happens the rest of the time. When demand precisely matches supply, you're correct--you need a matching engine to connect buyer and seller and no middle man/market maker need get between them. That also happens too. Assuming that at some point bids and asks will line up and trades will happen…

No exchange operator is doing "gods work" :) Seriously though, you are correct. Market makers are an integral part of how the markets function. Do they skim money from trades because they are better equipped to read the market at a given point in time? Absolutely. Do they also provide liquidity for the retail trader in a given moment to buy/sell shares? They definitely do. Market makers are not a new facet of trading systems, they are just a natural fit for HFT firms. Would it be better for your order of X shares of N company to go unfilled, or to pay .01 cents more per share to have it executed when you want?

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

#117

Post by jandrese » Fri, May 05, 2017, 5:14 AM UTC

davidmr wrote: post #114

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…

Respectfully, this is just plain incorrect. You're describing some situations that do happen and just choosing to ignore what happens the rest of the time. When demand precisely matches supply, you're correct--you need a matching engine to connect buyer and seller and no middle man/market maker need get between them. That also happens too. Assuming that at some point bids and asks will line up and trades will happen…

Market making and HFT are different services, they may be done by the same company, but you don't need sub-ms views of the market if you are actually holding positions.

This is why HFT firms end every day with empty books.

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

#118

Post by smallnamespace » Fri, May 05, 2017, 5:28 AM 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.

Note that I'm not saying that market maker profit is correlated to the performance of the wider stock market, just pointing out that market maker performance can and will be affected by market-related factors that can cause all their market bets to go wrong at the same time, so the actual risk of losing money will always be much greater than what just naively applying the LLN says.

Here's a couple of plausible factors:

1. A flash crash is just a huge coin flip -- even if your market making firm has circuit breakers that stop it from making more trades (and successfully kept its position small), if the exchange ends up ripping up trades en masse you may suddenly have a large position that loses you a lot of money

2. Someone screws up an algo [1] and you burn through more than your entire market cap in half an hour

[1] https://www.bloomberg.com/news/articles/2012-08-02/knight-sh...

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

#119

Post by jasonmunro » Fri, May 05, 2017, 5:36 AM 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…

Your points are valid, but not entirely correct IMO. What you are describing as abuse is "quote stuffing". Sending in buy or sell orders to move the market with no intention of fulfilling said orders. When I worked for an exchange operator we routinely reported this type of abuse to the SEC. It' difficult to discern the difference between a fast moving market maker (and many successful HFT firms are indeed market makers) and simple re-positioning of the spread because of shot term volatility. Your "evil" HFT firms may be abusing the system by cancelling an order placed a millisecond prior, but they don't make any money if a trade does not occur. Quote stuffing without a trade on the modified price does not produce a profit. Manipulating the market in this way is not a fool-proof way of making money - there still has to be a minimal position taken by the trading firm in order to realize a profit.

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

#120

Post by Kenji » Fri, May 05, 2017, 6:29 AM UTC

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.

Idk why I'm being downvoted either. I bet in 2 years there will be a blog post which refines the idea I outlined above and it will be on top of HN and everyone will agree with it. That's how HN works.