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

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

#61

Post by tptacek » Thu, Apr 26, 2012, 5:30 PM UTC

kylemaxwell wrote: post #56

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-prov…

What did you learn from this? I found the slides and read them, and it seems like he's just saying "the people who build these systems believe that firewalls and TLS add too much latency to be deployed".

(I have a lot of opinions on this subject but I am mercifully restricted from sharing most of them owing to professional obligation; we do a lot of work in this field).

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

#62

Post by kylemaxwell » Thu, Apr 26, 2012, 5:33 PM UTC

tptacek wrote: post #61

kylemaxwell wrote: post #56

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-prov…

What did you learn from this? I found the slides and read them, and it seems like he's just saying "the people who build these systems believe that firewalls and TLS add too much latency to be deployed". (I have a lot of opinions on this subject but I am mercifully restricted from sharing most of them owing to professional obligation; we do a lot of work in this field).

Mostly, insight into the technical underpinnings. I had absolutely no concept of the existence of this world before that talk. In terms of take-home value, not much more than I got from your talk at BH last year, though largely because of the fire-hose effect there. :)

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

#63

Post by ddlatham » Thu, Apr 26, 2012, 5:34 PM UTC

growse wrote: post #12

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.

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

Decrease the minimum bid increment from $0.01 to a value such that ties are rare.

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

#64

Post by harryh » Thu, Apr 26, 2012, 5:34 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…

> However, did major markets ever really have a huge problem with lack of liquidity, 20 or 30 years ago before HFT?

Yes. It used to be that humans were the market makers. Humans are (generally) a lot more expensive than computers so providing liquidity came at a higher cost. Bid/ask spreads used to be much higher.

HFT it just an example of computers replacing humans at a lower cost. A phenomenon that can be observed in many industries.

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

#65

Post by tptacek » Thu, Apr 26, 2012, 5:35 PM UTC

jcampbell1 wrote: post #55

tptacek wrote: post #43

Earlier quoted context omitted.

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.

The books don't hold "shares", they hold "orders". The spoils are supposed to go to the people willing to provide the most liquidity; the "spoils" you're referring to are "the expense involved in executing orders".

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

#66

Post by yummyfajitas » Thu, Apr 26, 2012, 5:37 PM UTC

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-...

I discussed this phenomenon before - it's basically just poorly written algorithms behaving oddly.

http://news.ycombinator.com/item?id=1564445

Note that your article provides no explanation as to who is being defrauded ("markets" isn't a person) or how, so I don't know what you want me to explain.

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

#67

Post by tptacek » Thu, Apr 26, 2012, 5:38 PM UTC

kylemaxwell wrote: post #62

tptacek wrote: post #61

Earlier quoted context omitted.

What did you learn from this? I found the slides and read them, and it seems like he's just saying "the people who build these systems believe that firewalls and TLS add too much latency to be deployed". (I have a lot of opinions on this subject but I am mercifully restricted from sharing most of them owing to professional obligation; we do a lot of work in this field).

Mostly, insight into the technical underpinnings. I had absolutely no concept of the existence of this world before that talk. In terms of take-home value, not much more than I got from your talk at BH last year, though largely because of the fire-hose effect there. :)

If you're looking for good talks on the security or technical implications of trading markets, look for microstructure details. Any talk that has a diagram of "orders" going to a "trading engine" is addressing itself at a higher level than you're interested in. Just the order entry side of a real firm OMS is too complicated to get one bubble in a diagram.

Again: strongly recommend _Trading & Exchanges_ by Harris. The TCP/IP Illustrated of markets. Supremely readable.

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

#68

Post by beagle3 » Thu, Apr 26, 2012, 5:39 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…

> However, did major markets ever really have a huge problem with lack of liquidity, 20 or 30 years ago before HFT?

Well, officially some traders in US exchanges are privileged in both information and fees ("specialist" market makers) in exchange for guaranteeing liquidity. I was not following the markets 20 or 30 years ago, but those "specialists" always claimed that they were, in fact, helping the market rather than themselves (it was demonstrably false in the mid 2000s for almost all specialists; I don't know about the 80s).

European exchanges in which no such privileged traders exist were able to pick up a lot of international and american trading volume in the last 10 years thanks to perceived anonymity and fairness. The german exchanges went as far as to slow down data streams to better connected users until they were able to offer the better connection across the board.

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

#69

Post by harryh » Thu, Apr 26, 2012, 5:39 PM UTC

Anm wrote: post #53

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' tha…

Let's say I want to sell 100 shares of MomCorp at $10. Bob also wants to sell 100 shares of MomCorp at $10.

If, instead of employing first come first serve you use a random selection then both of us have an incentive to tell the market that we actually want to sell more than 100 shares to increase the odds that we'll actually get to sell what we want. Various bad/unpredictable/unstable things start to happen in this sort of situation.

FIFO matching leads to a stable market.

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

#70

Post by mseebach » Thu, Apr 26, 2012, 5:40 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…

What was the cost of the flash crash? As I see it, the important take away from it wasn't the crash, but the immediate rebound. That's evidence of the inherent stability of the set up, rather than the opposite.

Yes, some people living on the edge of the market, picking pennies in front of steam rollers, probably had a few days shaved off their life expectancies due to adrenalin spikes, but I could really care less.