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Mark Cuban: High-Frequency Traders Are the Ultimate Hackers

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Re: Mark Cuban: High-Frequency Traders Are the Ultimate Hackers

#101

Post by jasonwatkinspdx »

chii wrote: post #68
jasonwatkinspdx wrote: post #56

Earlier quoted context omitted.

That you can, does not mean you should. And who pays for your failures?

For a corporation, the psycopathic behaviour is that if it makes a profit and is not illegal (yet), then do it. The real problem is that large financial institutions have somehow ingrained themselves in society in such a way that they bring us all down when they fail, and so society would _have_ to bail them out. It is an ingenious stragegy - by aligning failure with the downfall of many others, these large financial…

It's interesting how many other areas of the economy have pulled off the same hat trick, but largely go unnoticed. Regulatory capture is a good marker because it's as conspicuous as it is essencial.

Re: Mark Cuban: High-Frequency Traders Are the Ultimate Hackers

#102

Post by JonnieCache »

asto wrote: post #98

If a person is successful in one business should we subject ourselves to his idiotic views on another business? By definition they can’t go into an equity unless there already is liquidity. HFTs who are usually market makers [1] maintain liquidity in the market by constantly having buy/sell orders open for many instruments/scrips. In their absence, a counter trade may not exist for matching against when you or I put…

>hould we treat them as being harmful because computers make mistakes at a significantly faster rate?

Yes. Significantly doesn't really cover it. When you increase the rate of an activity by many orders of magnitude and put an AI behind it, it becomes a totally different activity, even if the mechanics are notionally the same.

Re: Mark Cuban: High-Frequency Traders Are the Ultimate Hackers

#103

Post by yaix »

cletus wrote: post #86

This post is being used as somewhat of a stalking horse for any number of other agendas and soapboxes, which I guess isn't surprising, so I'll join the fray. 1. There is a misconception about market makers and the nature of a spread. In particularly illiquid markets, market makers allow you to buy and sell immediately. This is a service. The spread pays for this service. The more liquid a market is the lower the spre…

"""The SEC is either toothless or has been subverted by political interests."""

Or politics is subverted by financial interests? If you have to find your own financial sponsors in order to run for a government office, it is hardly surprising that finance runs the show.

Re: Mark Cuban: High-Frequency Traders Are the Ultimate Hackers

#104

Post by ajtulloch »

drblast wrote: post #20
twoodfin wrote: post #9

Earlier quoted context omitted.

Why should our best hackers and mathematical minds be wasted on something so shallow as gaming the market? If you think they're wasting their time, don't give them your money.

I don't think it's as simple as all that. There are legitimate parties at either end of a stock transaction, and the HFT's are pretty much just siphoning off small amounts of the proceeds. The reason this can occur is that our government ensures that public companies have to do business this way. And all of these rules are in place for good reasons and it works pretty well, but HFT is an aberration. A good analogy is…

This is flat out wrong. The correct analogy is:

Before HFT, to execute a block trade, your only option was to go to a specialised liquidity provider a.k.a your friendly local investment bank - the CC company in your analogy - , who would take a huge spread - the 3%-5% drain on the economy that you mentioned - in exchange for taking that liquidity risk.

Now, with HFT, the increased speed of markets has democratised liquidity provision. There is a corresponding larger supply of liquidity in the markets, and so spreads have come down - very significantly.

The aggregate affect - it is now cheaper to trade on stock exchanges. What does this mean? When your 401(k), pension fund, mutual fund, etc. rebalances, it doesn't lose 3% of your money to an investment bank. It loses ~0.01%-0.05% (1-5bp) of your money as a transaction cost (earned by HFT firms as compensation for taking on the liquidity risk), and thus you keep more of your money.

It's easy to say that HFT's provide 'no benefit to anyone but themselves' without any understanding of the historical context, but once you do, it's hard to see it in such black and white terms.

Full disclosure - I was an algo trader in a previous life.

Re: Mark Cuban: High-Frequency Traders Are the Ultimate Hackers

#105

Post by ajtulloch »

ajays wrote: post #75

I keep hearing about HFT, and have read about it a little. But there's a surprising dearth of data. Can someone come up with a data set? For example: here are N inputs to the program. If the program can make a decision D in time T, then it can make money. Or something to that effect. I have no idea right now what the inputs to these HFT programs are; what the expected actions under the time constraints are; and how t…

Sure:

1. Data set - order book of your chosen stock exchange. Events being streamed in at rates up to 1Gb/s [1]. This is the entire set of actions affecting the order book - bids, offers, cancellations, adjustments, etc. - it's huge. If you want to get fancy - most do - you would typically pull in several of these feeds (or subscribe to a consolidated feed) containing several exchanges, and look to arb any price/book inefficiencies.

2. Actions - given the changes to the order book, figure out how you need to change your positioning to make money. Time is everything here - steps here are counted in tenths of milliseconds, and overall response times in low ms. HFT firms even try to minimise cable lengths within the colocated datacentres to shave the time to response down even further.

3. Effectiveness - if you didn't blow up, and if so, if you made money - typically you'd examine intraday PnL volatility, returns, etc. and assess yourself on those and other metrics.

Re: Mark Cuban: High-Frequency Traders Are the Ultimate Hackers

#106

Post by olalonde »

chewxy wrote: post #24
javert wrote: post #19

Earlier quoted context omitted.

Then I discovered the minimum sunk costs of running a HFT startup and my balls shrank. Care to elaborate?

Everything matters if you're doing HFT (or back in the day, high speed algorithmic trading). In Australia, the support for algorithmic trading means you're required to house your server in ASX itself (ASX has recently introduced their HFT platform in 2011). And that meant ball-shrinking dollar values from place rental alone, not to mention the hardware and software times. So I concluded that it's not where I could be…

You mean minimum capital investment? Sunk cost doesn't seem to be the right term in this context. http://en.wikipedia.org/wiki/Sunk_costs

Re: Mark Cuban: High-Frequency Traders Are the Ultimate Hackers

#107

Post by nhaehnle »

zhoutong wrote: post #90
bokonist wrote: post #59

" As far as narrowing spreads, that’s absolutely true, but in absolute terms what does it translate into? For the individual investor it might save them a quarter a month. " In a properly designed, information age stock market there should not be a spread. All stocks should trade via a programmed, black box auction that runs on an interval. The HFT practice of creating phony orders that are immediately canceled, just…

This is not efficient. If you use interval bidding, there will frequently be gaps in market prices. Remember that at any instant, the order book (bids and asks) represents only a small portion of market sentiment (real demand and supply). The market prices move smoothly when people are able to react to order changes and price spikes. If it's a black box, it's very easy to manipulate the market in a massive scale. For…

This is why we have Game Theory and Mechanism Design. Mathematicians and computer scientists study the different types of auction methods for their properties. Let's take a look at your example:

AAPL is $600 now. (...) If a large institutional investor wants to manipulate the price, he can place huge buy and sell orders at $700.

All your example shows is that a good auction mechanism should avoid this possibility of manipulation. But that's easy enough: the investor's buy at $700 will be matched with sells that are closer to $600, the same as in the current system. The sell at $700 doesn't affect anything.

So in fact the price will move the same as it would in continuous buying.

Re: Mark Cuban: High-Frequency Traders Are the Ultimate Hackers

#108

Post by chewxy »

olalonde wrote: post #106
chewxy wrote: post #24

Earlier quoted context omitted.

Everything matters if you're doing HFT (or back in the day, high speed algorithmic trading). In Australia, the support for algorithmic trading means you're required to house your server in ASX itself (ASX has recently introduced their HFT platform in 2011). And that meant ball-shrinking dollar values from place rental alone, not to mention the hardware and software times. So I concluded that it's not where I could be…

You mean minimum capital investment? Sunk cost doesn't seem to be the right term in this context. http://en.wikipedia.org/wiki/Sunk_costs

TIL I fail as an economist.

Re: Mark Cuban: High-Frequency Traders Are the Ultimate Hackers

#109

Post by zhoutong »

nhaehnle wrote: post #107
zhoutong wrote: post #90

Earlier quoted context omitted.

This is not efficient. If you use interval bidding, there will frequently be gaps in market prices. Remember that at any instant, the order book (bids and asks) represents only a small portion of market sentiment (real demand and supply). The market prices move smoothly when people are able to react to order changes and price spikes. If it's a black box, it's very easy to manipulate the market in a massive scale. For…

This is why we have Game Theory and Mechanism Design. Mathematicians and computer scientists study the different types of auction methods for their properties. Let's take a look at your example: AAPL is $600 now. (...) If a large institutional investor wants to manipulate the price, he can place huge buy and sell orders at $700. All your example shows is that a good auction mechanism should avoid this possibility of…

Not exactly. In a black box, there will be less orders because market participants are discouraged to be market makers, because the point their orders have been triggered is also likely the point the market deviates significantly and they have no chance to cancel or stop loss immediately in a non-continuous market. Market makers are resistance of such manipulation. And most market makers place orders to fill the "gaps" in the order book. Without a visible order book, it's much more risky to provide liquidity without any actual demand or supply for the shares. I think it's okay to assume that less than 1% of traders place orders based on real supply and demand. You know you would sell AAPL if it spikes to $700 today, but you won't place an order until that happens. (The financial market is an incomplete coverage of demand and supply anyway, so the more liquidity, the better.)

Re: Mark Cuban: High-Frequency Traders Are the Ultimate Hackers

#110

Post by bogger »

MC is confused.

High frequency trading covers a broad range of trading strategies, some of which are beneficial to market participants.

In particular, were all automated market making to be banned, we would see a huge jump in the cost of trading.

The fuss about HFT is distracting people from the much more serious problem of good old-fashioned insider trading, which remains rampant.

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