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A High Frequency Trader's Apology, Pt 2

chrisstucchio.com

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Re: A High Frequency Trader's Apology, Pt 2

#41

Post by rscale »

I have no objection to the provision of liquidity. That said, the flash crash seems to me to be a perfect example of a danger created when liquidity is provided largely by algorithms.

We ran into a situation where the market was already volatile, and a bad trade exacerbated the issue by causing a number of HFTs to take unexpected losses and withdraw from their markets, consuming further liquidity while driving prices down, which created more losses for the remaining market-makers, who had to close their positions, consuming further liquidity, driving prices further down; all of those also negatively affecting long-term investors.

This also seemed to me an example of the opportunism of HFT, where the HFT shaves the spread by a penny or two during calm markets, but withdraws (and exacerbates issues) during volatile and troubled markets, which seems to me the point in time at which liquidity provision is most valuable.

I'm not suggesting that HFT should be outlawed, nor that HFT firms should be forced to register, act, and be regulated as official market-makers, with the associated duties.

But I do note the benefits seem to come with costs.

Long-term, I doubt it matters. It seems inevitable that the provision of liquidity will become commoditized, and that the days of concerns about flash crashes will eventually disappear into the past along with $50 retail trades, and $0.50 bid/ask spreads.

Re: A High Frequency Trader's Apology, Pt 2

#42

Post by [deleted] »

yummyfajitas wrote: post #31
haberman wrote: post #15

Loving this series of articles! Does any of this low-latency work make it back upstream into Linux or other parts of the software stack? As a latency-obsessed person I would love to know that the fruits of all this labor were available to me for my own low-latency systems. To me, that alone would be enough to feel that the latency-race is providing value to the world. Also, one thing that was not clear to me is how e…

Usually the low latency stuff is kept pretty secret. However, I got good at writing performing code, and as a result styloot.com is pretty fast. The article clearly states that they "have no opinion or information on whether Apple is a valuable company." This is an exaggeration. Some HFT's incorporate speculative mechanisms into their strategy, supposedly a few people buy the twitter firehose and market news and feed…

[deleted]

Re: A High Frequency Trader's Apology, Pt 2

#43

Post by tptacek »

jcampbell1 wrote: post #17
growse wrote: post #12

Earlier quoted context omitted.

How else would you do it? At random? Why would that be better?

Possibly. It would stop the arms race that adds little value to the economy. The same arms race happened in the pits, except it was height, not latency. It seems a bit ridiculous that a taller trader would make more money that a smarter one, and that a faster algorithm makes more money than a smarter one.

It would stop one arms race and replace it with another: firms would crowd the books with more orders to increase the number of fills allocated to them.

Re: A High Frequency Trader's Apology, Pt 2

#44

Post by paperwork »

DannoHung wrote: post #40

Why not explain what's going on here and how it's not defrauding markets: http://www.zerohedge.com/news/step-right-its-hft-whack-mole-...

Can you explain what is going on and how it is defrauding markets? There isn't a lot of explanation.

Is the problem that the nbbo is changing too quickly?

Re: A High Frequency Trader's Apology, Pt 2

#45

Post by jcampbell1 »

kiba wrote: post #26
jcampbell1 wrote: post #17

Earlier quoted context omitted.

Possibly. It would stop the arms race that adds little value to the economy. The same arms race happened in the pits, except it was height, not latency. It seems a bit ridiculous that a taller trader would make more money that a smarter one, and that a faster algorithm makes more money than a smarter one.

Intelligence is also a function of speed. All else being equal, a faster solver will win over the slow one. A faster learner will accumulate much more knowledge in less time. In warfare, it pays to react faster than your opponents. You don't have time to think slowly about how you're going to shoot. You'll just have to shoot accurately and utilize tactics that you already know.

Should all the spoils of market making go to the fastest trader, or should the trader who is willing to offer the most volume be rewarded? The goal is liquidity, and it is not obvious which answer is best. Don't dismiss the tradeoff.

At any rate, the current system is much better than rewarding the tallest guy with the ugliest jacket.

Re: A High Frequency Trader's Apology, Pt 2

#46

Post by buff-a »

MarkPNeyer wrote: post #32
chrisaycock wrote: post #21

Earlier quoted context omitted.

The secondary market provides liquidity to investors who participated in the initial company stock issuance. Without a robust means for selling their shares at some point in the future, investors would be loathe to provide capital in the first place.

is there any evidence for this argument? would investment just stop alltogether, or would it change to support lots of smaller ventures instead of a few big ones?

Of course there is evidence: the stock market wasn't invented until 1999. Before 1999, noone dared buy stocks because they were afraid they couldn't sell it later. Its historical fact.

Re: A High Frequency Trader's Apology, Pt 2

#48

Post by yread »

arjunnarayan wrote: post #7

One point that is bothering me is this: how much of the existence of HFTs is an artifact of the rules of the exchange? In particular, the rule that the first bid gets priority in executing the trade. It strikes me that the entire existence of HFTs seems to be taking advantage of this failure of mechanism design.

I wonder if http://en.wikipedia.org/wiki/Dutch_auction could be useful

Re: A High Frequency Trader's Apology, Pt 2

#49

Post by btilly »

fr0sty wrote: post #10
arjunnarayan wrote: post #7

One point that is bothering me is this: how much of the existence of HFTs is an artifact of the rules of the exchange? In particular, the rule that the first bid gets priority in executing the trade. It strikes me that the entire existence of HFTs seems to be taking advantage of this failure of mechanism design.

There was an extensive discussion on this point in the previous HN thread: http://news.ycombinator.com/item?id=3855610 The short summary is no one can come up with something better than price-time priority for matching orders.

I still like my suggestion at http://news.ycombinator.com/item?id=3855846.

True, the HFT folks would still try to provide liquidity by maintaining a bid/ask spread. But every trade that executes because someone wanted to trade while the price was somewhere between the bid and the ask would cut the HFT folks out of the loop to the benefit of everyone else. And scary anomalies like the flash crash would be impossible.

After careful thought I am sure that it would not eliminate HFT. But it would reduce their size and impact on the market.

Re: A High Frequency Trader's Apology, Pt 2

#50

Post by AznHisoka »

rauljara wrote: post #14
AznHisoka wrote: post #3

Why apologize? Noone's robbing anyone here. If it's legal, it's legal.

I can't speak for everyone, but you are probably being downvoted for two reasons: 1) Apologia does not meet "I'm sorry". Read the first few sentences of the article for an explanation. 2) I shudder to think of a world where everyone felt the only criteria for whether it was all right to do something was legality. We should all be grateful that most people don't go through life with that mindset.

I knew what he meant by apology - it was an explanation on why HFT is not unethical. However, I felt writing such an essay showed the author is insecure and has doubts about his profession.
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