A High Frequency Trader's Apology, Pt 2 • Hacker News Board

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

#51

Post by yummyfajitas » Thu, Apr 26, 2012, 5:17 PM UTC

rscale wrote: post #41

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…

Flash Crashes are not a phenomenon caused by algorithms. We have actually had two flash crashes - the first was in 1962.

http://online.wsj.com/article/SB1000142405274870395760457527...

Also, the main reason many HFTs pulled out of the market is the risk of broken trades (regulatory risk [1]). Staying in the market would have been a big moneymaker absent that risk - spreads were often huge.

But broken trades were dangerous. If you buy accenture at $1.00, and sell at $30.00, you've helped fix the flash crash. You also just lost $10.00 - your $1.00 trade was broken, and you now have a short position you bought at $30.00 (Accenture recovered to $40.00, so you lost $10.00/share).

[1] Regulation by the exchanges, not the SEC. Maybe there is an SEC regulation mandating they do this, but I have no knowledge on that point.

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

#52

Post by alphaBetaGamma » Thu, Apr 26, 2012, 5:17 PM UTC

btilly wrote: post #49

fr0sty wrote: post #10

Earlier quoted context omitted.

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.…

As far as I understand your suggestion, it exactly describes the way current markets work.

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

#53

Post by Anm » Thu, Apr 26, 2012, 5:17 PM UTC

After reading both articles, it seems to me much of the race for faster trading speed is fueled by the first come, first serve order matching. However, I don't see how this is actually important to either price discovery or liquidity. In other words, this artificial restriction does not actually contribute to greater good of the stock market.

I presume it was designed to ensure fairness, but is it any more 'fair' than random selection (true random, from a physical source that cannot be influenced) from all available matching bids.

Would anyone care to present an argument on how FIFO matching, after best price, is beneficial in the broader sense?

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

#54

Post by daltonlp » Thu, Apr 26, 2012, 5:20 PM UTC

yummyfajitas wrote: post #38

tedunangst wrote: post #2

At the very end, Farnsworth buys from, not sells to, Bender. I think it's clear, but had to read it twice.

Thanks. Fixed it.

One more: "Fry - all he knows is that he bought 100 shares @ $10.00 from anonymous counterparty."

Didn't Fry sell 100 shares to an anonymous counterparty?

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

#55

Post by jcampbell1 » Thu, Apr 26, 2012, 5:21 PM UTC

tptacek wrote: post #43

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.

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.

Isn't more shares available on the books the goal? You are describing an arms race that would be beneficial. Pro-rata based on order size, or a weighted lottery will work out the same over time, except a random lottery doesn't have the problem of clearing tons of tiny trades.

Now since speed is no longer a barrier to entry, the spoils will go to the people willing to provide the most liquidity.

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

#56

Post by kylemaxwell » Thu, Apr 26, 2012, 5:26 PM UTC

I have little to add on the substance other than to note that I find these posts (and the discussions here) incredibly informative. They shed light on an area that turns out to be far more interesting than I would have imagined.

However, the last example may be more realistic than you suppose. DEF CON last year contained a presentation[1] on security considerations in HFT networks, which I attended. It's thought-provoking and something I hope gets a little more attention.

[1]: https://www.youtube.com/watch?v=kjIdzBtTBnI

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

#57

Post by tptacek » Thu, Apr 26, 2012, 5:27 PM UTC

SkyMarshal wrote: post #35

One of the biggest justifications for HFT that I see is that it increases liquidity. However, did major markets ever really have a huge problem with lack of liquidity, 20 or 30 years ago before HFT? I can't help but wonder if this level of liquidity is only really useful to HFT, if it is something that HFT is both the primary provider and beneficiary of, and if they're sort of using their existence to justify their e…

Yes. The reason you didn't read about it is because the markets didn't really consider it a "problem" that they were fleecing people who needed to cross the spreads to make trades; it was just part of the business model.

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

#58

Post by yummyfajitas » Thu, Apr 26, 2012, 5:27 PM UTC

btilly wrote: post #49

fr0sty wrote: post #10

Earlier quoted context omitted.

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.…

...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...

See the first post in the series. This is exactly how the markets work. The best price always wins.

If the bid/ask is $10.00/10.05, and I offer to buy at $10.05, I will trade immediately. If I offer to buy at $10.03, I jump the queue and will be the first to trade (provided someone is willing to sell at $10.03 or lower).

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

#59

Post by kylemaxwell » Thu, Apr 26, 2012, 5:28 PM UTC

AznHisoka wrote: post #50

rauljara wrote: post #14

Earlier quoted context omitted.

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.

It's an intellectual, not ethical, defense, as he explains in the second paragraph. His defense has nothing to do with remorse and everything to do with helping people understand the concepts so they can participate in an informed debate.

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

#60

Post by yummyfajitas » Thu, Apr 26, 2012, 5:29 PM UTC

anonymoushn wrote: post #47

ChristianMarks wrote: post #37

Liquidity has gone down with the advent of HFT: http://opusminimax.wordpress.com/2012/04/20/ardent-support-f...

You don't seem to provide any evidence of this claim.

Indeed - the author seems to confuse trade volume with liquidity.