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

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

#161

Post by soup10 » Thu, Apr 26, 2012, 8:51 PM UTC

chrisaycock wrote: post #154

soup10 wrote: post #133

Earlier quoted context omitted.

I'll say it very simply: People insist that more liquidity is a good thing. I'm saying it's not that good, and we have plenty of liquidity already. Companies that do HFT(and otherwise provide more liquidity) are part of the larger problem of financial companies that hire a lot of smart people and make them do work that has little value to society, but happens to be very profitable.

> financial companies that hire a lot of smart people and make them do work that has little value to society Would you rather I build a photo-sharing site? Chase tenure with esoteric publications? Do you even know why I do HFT? I do it because it's intellectually stimulating and pays well, plus I work in a small firm of ten smart people and no corporate politics. As for the value to society you don't believe I'm prov…

There's is nothing wrong with honest work, but if you are a highly skilled programmer and think that HFT is the most impactful/important work you can do. Then you aren't thinking hard enough.

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

#162

Post by ynniv » Thu, Apr 26, 2012, 9:01 PM UTC

azmenthe wrote: post #145

ynniv wrote: post #132

My understanding is that HFT has been used for frontrunning (which is undeniably stealing pennies), and associated with unintended market instability (flash crashes) due to unforeseen trader interactions. This post primarily defends algo trading, which does not have the negative connotations of HFT. The author claims speed is mostly important for order precedence, but I find this to be a naive view. The potential ups…

Your association of a dollar amount to morality is unnerving. If Happy Unicorn Widget Inc. upgrades it's production line speed, it experiences some increase in revenue and can thus even make a $100M a day gasp . I work at a HFT firm and any serious suggestion of frontrunning would probably get you fired. The truth is the majority of HFT is liquidity providing or some form of arbitrage.

Your association of a dollar amount to morality is unnerving

That's a silly assertion. What if it were $100B a day? That's $35T/year, or half the GDP of the world. Do you think that a company could receive half of the productivity of the entire world morally?

I work at a HFT firm and any serious suggestion of frontrunning would probably get you fired.

Another silly statement. Of course people don't talk about it openly - who plans illicit activities openly? I would expect that anyone involved in such a system would have no knowledge of it being used immorally/illegally - there is too much risk in that.

HFT is an assault rifle. People who make them talk about how they keep the peace, but that isn't the use that caused them to be outlawed.

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

#163

Post by nhaehnle » Thu, Apr 26, 2012, 9:14 PM UTC

yummyfajitas wrote: post #138

boyd wrote: post #126

Earlier quoted context omitted.

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: Change…

That example, however, it not solely germane to ultra-HFT. More traditional market makers have provided that level of liquidity for a long time. The studies I link to provide compelling evidence that traditional market makers provided much lower levels of liquidity. Do you have an example of where sub-100 ms execution truly adds significant liquidity? Please reread my post starting from the words "The Latency Arms Ra…

Actually, out of the three links the first one does not talk about HFT at all, but about algorithmic trading. I don't think anybody seriously thinks algorithmic trading is bad per se.

The third link talks about reducing the bid/ask spread. Fair enough. However, what people seem to forget in these discussions is that if you are genuinely trading in the long run, then the bid/ask spread is mostly irrelevant anyway, because it is totally dominated by intraday fluctuations. Whether I buy at the offered price at 12am vs 1pm makes a much bigger difference than whether a HFT reduced the spread by some small amount. I have yet to see an argument that the sum of intraday fluctuations + bid/ask spread is helped at all by HFT.

So one study remains (this one: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1624329). This one might genuinely apply - I haven't had the time to go through it - but the abstract isn't exactly enthusiastic, and probably disregards the social costs that come from people being sucked into the field. So I am still skeptical. Confirmation bias applies as well, I guess ;)

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

#164

Post by nhaehnle » Thu, Apr 26, 2012, 9:17 PM UTC

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…

Please explain why small improvements in the spread are relevant compared to intraday movements. If I were trading a million shares over 10 days, then I would be much more worried about trading them at the right time of day, rather than worrying about bid/ask spreads.

Edit: I am assuming here that we are talking about trades that actually change my long-term position. That is, I am selling or buying those million shares for good because I am re-weighting my portfolio or something like that.

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

#165

Post by JumpCrisscross » Thu, Apr 26, 2012, 9:23 PM UTC

jellicle wrote: post #127

> 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 trus…

A trojan informs the HFT of your order before you place it; it is thus front-running. Flash orders can't know your order before you place it - they just flash it to HFTs who fulfill it faster. The losers here are the slower market makers, not the retail trader.

Equating flash orders and front-running does not make sense as the HFT doesn't know of the order before it is placed vis-à-vis the retail trader. The HFT appears to have prevoyance vis-à-vis slower market makers, which is why they are the ones complaining about high frequency market makers. It's actually quite analogous to Hollywood complaining about Netflix, which is why it confuses me that HN participants find technology in the capital markets so anathema.

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

#166

Post by ikirill » Thu, Apr 26, 2012, 9:59 PM UTC

yummyfajitas wrote: post #51

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 dang…

Flash Crashes are not a phenomenon caused by algorithms.

The SEC/CFTC report on the 2010 Flash Crash describes how it happened. Quote:

One key lesson is that under stressed market conditions, the automated execution of a large sell order can trigger extreme price movements, especially if the automated execution algorithm does not take prices into account. Moreover, the interaction between automated execution programs and algorithmic trading strategies can quickly erode liquidity and result in disorderly markets.

http://www.sec.gov/news/studies/2010/marketevents-report.pdf

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

#167

Post by btilly » Thu, Apr 26, 2012, 10:09 PM UTC

tazzy531 wrote: post #144

btilly wrote: post #97

Earlier quoted context omitted.

You either did not read my suggestion, or did not understand it, because it is very different from how the markets work today. Suppose that the bid/ask is $10.00/10.05. Suppose that I am willing to buy at $10.20. In today's market I will immediately make the trade at $10.05. In my suggested market there is another fact to consider, the price. Suppose that it is $10.03. Then I become an outstanding buy order, and for…

Be careful conflating Order and Price. The Order book is the current stack of buyers and sellers. Price is the last executed price. So when you say a price drifting upwards, that means that both buyers and sellers meet at that price. A corollary is that there were buyers and sellers at that price. In addition, this also means that the market could have also moved away from that price without a trade being executed (i…

You are trying to figure out a way in which I could be describing the current system, "correcting" me on all of the ways that I am not describing the current system, and then telling me that I am describing the current system.

Take that blinder off.

In the model that I suggest, the price is a number set by the exchange that trades are allowed to happen at, that moves in a predetermined fashion. Even if there are buyers and sellers who are willing to trade at a different price right now, the exchange won't allow that trade to complete until the price set by the exchange goes into a range where that trade can happen.

Under this model, which IS NOT how the market currently works, the people who have an opinion on which direction the stock will go will experience trading delays, but they have an improved opportunity of making trades in the middle of the range that market makers would be willing to offer.

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

#168

Post by aprescott » Thu, Apr 26, 2012, 10:42 PM UTC

scotty79 wrote: post #16

What's the social and economical value of precisely discovering the price of casino tokens? Stock market is economically important only when company issues new stock. Apart from that it's just a huge casino where people like to play with their or other peoples money.

I can think of two benefits beyond "gambling" on the price:

1. Dividends.

2. Stock buybacks.

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

#169

Post by wtvanhest » Thu, Apr 26, 2012, 10:44 PM UTC

nhaehnle wrote: post #164

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…

Please explain why small improvements in the spread are relevant compared to intraday movements. If I were trading a million shares over 10 days, then I would be much more worried about trading them at the right time of day, rather than worrying about bid/ask spreads. Edit: I am assuming here that we are talking about trades that actually change my long-term position. That is, I am selling or buying those million sha…

They are both relevant. In general a portfolio manager + investment analysts are worried about stock price movements but the trader for the fund is worried about liquidity spreads and about buying the shares for the lowest price while selling shares for the greatest price.

While $6M in not large by percentage, there is no reason to want to give that up.

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

#170

Post by teamonkey » Thu, Apr 26, 2012, 11:07 PM UTC

tptacek wrote: post #71

harryh wrote: post #64

Earlier quoted context omitted.

> 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…

Humans are also far less transparent than algorithmic market makers. Talk to professionals about the specialist system. It's (words chosen carefully) hard to take anyone seriously who pines for the good old days of 1970's and 1980's trade execution .

> hard to take anyone seriously who pines for the good old days of 1970's and 1980's trade execution.

I've just read through the entire thread and I don't think anyone has suggested that.