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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

#121

Post by ig1 »

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…

Some of it does make it back upstream, I know of at least one occasion where RedHat added a low-latency kernel improvement on behalf of a bank. It was a switched option that's off by default, so probably most people don't have it on.

It was something that needed to be deployed across a large number of machines and the bank in question didn't want to take all of the machines out of the support contract (by using custom built kernels) so they decided an upstream fix was the best solution. The fact it was switched probably means most of the bank's competing firms don't even realize it's there.

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

#122

Post by boxy_brown »

sailfrog wrote: post #93
harryh wrote: post #86

Additional evidence that HFTers are not stealing from speculative investors: Anyone can start a market. If HFTers were stealing pennies someone would have come along and started a market that banned HFTers (or changed the rules to otherwise get rid of them). Then all of the speculative investors would use this market instead since they could be assured that no one was siphoning off pennies on every trade. Eventually…

I'm not sure reg NMS allows this. Registered exchanges publish protected quotes that other venues are not allowed to trade through.

> I'm not sure reg NMS allows this.

This is correct. It would be extremely, unequivocally forbidden under Reg NMS to create a quote-disseminating market center with the proposed property.

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

#123

Post by pdovy »

wtvanhest wrote: post #114
yummyfajitas wrote: post #102

Earlier quoted context omitted.

None of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there....In every example OP gives... You clearly ignored one of my examples. Consider the example of Fry and Zoidberg. Fry places his sell order at 12:01. Leela and Bender are absent, so Fry's order goes into the book. Zoidberg places his buy order at $9.50 at 12:05. Th…

I don't think that SomeCallMeTim understands that 0.10/share is a lot of money ($100,000) when a mutual fund is trading 1 million shares over 10 days. Now mulitply that by 60 holdings which are turned over 100% per year and you can see why pensions would want those mutual funds to save $6,000,000/year in liquidity costs. (Obviously mutual funds don't just do program trades, they also negotiate directly with each othe…

Exactly. Even more direct benefit to retail investors - low liquidity costs mean that we can invest in mutual funds and especially ETFs that have extremely low fees. Those funds have to shuffle around their holdings as investors come and go, and they'd have to charge a lot more if they were paying $0.10 to cross the spread.

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

#124

Post by mcphilip »

harryh wrote: post #101
SomeCallMeTim wrote: post #96

OK, answer me this: How does an HFT, in practice , add liquidity to a market? None of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there. Further, I submit that any HFT will only place a buy/sell spread in the case where the volume is high enough that they can complete their purchases within seconds or at most minutes. At…

> How does an HFT, in practice, add liquidity to a market? Bid/ask spreads used to be 10 cents or more. Now they're generally a penny. That is evidence of a more liquid market. In practice, this is because computers are now market makers instead of humans so they can do this job at a lower cost.

Is there evidence that the bid ask spreads have that substantially declined across the board, or is the decline limited to the most actively churned stocks?

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

#125

Post by radikalus »

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).

This hits very close to home for me as well. (I constantly witness how the race to lowest latency is a race to lowest security and lowest safety)

To be fair, a lot of exchanges mandate specific order validation pre-checks and specific firewall hardware.

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

#126

Post by boyd »

yummyfajitas wrote: post #102
SomeCallMeTim wrote: post #96

OK, answer me this: How does an HFT, in practice , add liquidity to a market? None of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there. Further, I submit that any HFT will only place a buy/sell spread in the case where the volume is high enough that they can complete their purchases within seconds or at most minutes. At…

None of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there....In every example OP gives... You clearly ignored one of my examples. Consider the example of Fry and Zoidberg. Fry places his sell order at 12:01. Leela and Bender are absent, so Fry's order goes into the book. Zoidberg places his buy order at $9.50 at 12:05. Th…

That example, however, it not solely germane to ultra-HFT. More traditional market makers have provided that level of liquidity for a long time.

Do you have an example of where sub-100 ms execution truly adds significant liquidity?

I'm open to listening, but have never heard a convincing case for why HFT below such a time threshold adds net value (i.e., enough to make up for the volatility it can cause).

Edit: Changed to "solely germane"

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

#127

Post by jellicle »

> Of course, it’s highly illegal to use trojans to rob retail investors and game the stock market, so this story is not particularly realistic.

But in fact that entire scenario he just described is perfectly legal. The industry calls them "flash orders", and due to industry pushback against an SEC initiative to ban them in 2009, they are still legal.

Nutshell description:

- you put in an order to buy AAPL

- your trusted exchange "flashes" the order to a company that has paid for the information, so they know you want to buy AAPL. They now have exactly .5 second (SEC rule) to act on that information before your order hits the wider market.

- said company goes and buys up the AAPL on the market, ahead of you

- your order to buy AAPL hits, executing at a slightly higher price than you expected

- said company sells AAPL at the new higher price (perhaps to you)

You've acquired AAPL at a slightly inflated price, and another company has pocketed the extra money you paid. They could buy low and sell high with a GUARANTEE of success because they knew your order was coming to the market. We used to call this front-running and call it illegal, but not in the modern U.S. stock market.

This is completely legal in the United States. It's happening now. It happened hundreds of times while you read this sentence.

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

#128

Post by wtvanhest »

pdovy wrote: post #123
wtvanhest wrote: post #114

Earlier quoted context omitted.

I don't think that SomeCallMeTim understands that 0.10/share is a lot of money ($100,000) when a mutual fund is trading 1 million shares over 10 days. Now mulitply that by 60 holdings which are turned over 100% per year and you can see why pensions would want those mutual funds to save $6,000,000/year in liquidity costs. (Obviously mutual funds don't just do program trades, they also negotiate directly with each othe…

Exactly. Even more direct benefit to retail investors - low liquidity costs mean that we can invest in mutual funds and especially ETFs that have extremely low fees. Those funds have to shuffle around their holdings as investors come and go, and they'd have to charge a lot more if they were paying $0.10 to cross the spread.

The ETF concept could be interesting to look at. I was reading Tryenor's book and I thought he mentioned how entering an ETF position still nets out below an index return because of the cost of liquidity.

I wonder if ETFs would have ever grown as large as they had if HFT never existed (the time periods of the rise of ETF parallels to the rise of HFT.) Anybody have any insight here?

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

#129

Post by [deleted] »

yummyfajitas wrote: post #120
rscale wrote: post #117

Earlier quoted context omitted.

Your described scenario with Accenture doesn't describe a market-making HFT strategy. You're describing something akin to a mean-reversion algorithm that would be MFT or slower, and is not a market-making strategy. It demands that you buy and hold inventory to profit. It doesn't provide liquidity. Of course you can make a huge profit when a crash occurs, whether that crash is due to a vicious circle of algorithms, or…

Your described scenario with Accenture doesn't describe a market-making HFT strategy. The HFT could have placed a passive buy order at $1.00 and a sell at $30.00 (or at $2.00, which he revised upwards as the price corrected).

[deleted]

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

#130

Post by sailfrog »

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 imagine you head over to the DMV over lunch to get your license renewed. Rather than have a line of people being served via FIFO they randomly pick who gets serviced next. Your lunch hour expires before you get your license renewed, meanwhile other customers barely have to wait thanks to the random selection. Rushing back to work you get pulled over ...

Silly example I know but FIFO matching is consistent with this idea of fairness. Without it it's possible that market participants could keep getting jumped by the random selection such that they never get an order execution.

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