The Idiot's Guide to High Frequency Trading
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The Idiot's Guide to High Frequency Trading
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Re: The Idiot's Guide to High Frequency Trading
#2If HFT GUARANTEES profits, why are the profits to HFTs declining so sharply, and why do HFT firms make such a small fraction of what the buy-side firms make?
Much more discussion here:
Re: The Idiot's Guide to High Frequency Trading
#3If HFT GUARANTEES profits, why are the profits to HFTs declining so sharply, and why do HFT firms make such a small fraction of what the buy-side firms make? Much more discussion here: https://news.ycombinator.com/item?id=7531429
I think the somewhat sparse academic research on this topic is quite interesting - "The High-Frequency Trading Arms Race: Frequent Batch: Auctions as a Market Design Response" by Budish et. al at Chicago (http://faculty.chicagobooth.edu/eric.budish/research/HFT-Fre...) is one such paper.
The key results in this paper are that:
- market correlations 'predictably' break down at high-frequency horizons
- these correlation breakdowns create a winner-takes-all speed arms race to exploit these opportunities
- a theoretical model can be built to explain the investment in speed as a function of these opportunities
- this model reduces to the prisoner's dilemma from game theory
- the equilibrium state of this model is an environment higher spreads and thinner markets than is socially optimal (without the arms race).
It's a very interesting and readable paper, peppered with interesting market observations and theoretical insights.
Re: The Idiot's Guide to High Frequency Trading
#4[deleted]
Re: The Idiot's Guide to High Frequency Trading
#5If you want to know what the actual effects of HFT are on individual investors rather than hypotheticals, a study was done in Canada last year on that exact question. Spoiler alert: HFT is good for the little guys.
http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeCh...
Re: The Idiot's Guide to High Frequency Trading
#6Re: The Idiot's Guide to High Frequency Trading
#7Some aspects of HFT seem highly analogous to insider trading to me, and insider trading is currently illegal. Abusing the ability to cancel orders fast in order to ping for non-public data about other orders sure seems like an insider advantage. As I understand it this "pinging" is central to HFT strategies. Am I missing something?
Re: The Idiot's Guide to High Frequency Trading
#8Complete idiot's guide is right.
Exchanges offer price-time priority. A 'better' price (higher bid, lower offer) gives you priority over a 'worse' price. Given two orders at the same price, an earlier order gives you priority over a later order.
If you spend millions of dollars on computers, data feeds, and salaries to skilled personnel, to predict the motion of markets correctly and work within the system to make money, then you've earned that money fair and square. Companies that don't operate within the rules get shut down fast and hard by the SEC and/or FINRA. This is a highly regulated and policed industry.
HFT is hardly different from Warren Buffett identifying a company with a 10-100 year time horizon. Should we penalize Buffett because he's smarter and better at that game than everyone else in the world? Is he scamming the person from whom he bought shares in 1984?
As Knight Capital showed us two years ago, you can spend those millions, and still screw up and lose $10M per minute for the better part of an hour until your firm is bankrupt. No one is guaranteed to make money.
Posting an order and canceling it is fair game. When the order is in the market, it's a live intent to trade. When it's canceled, it's no longer a live intent to trade. Why is this "moral" when it's a person doing this on a time scale of seconds or minutes, but "fraud on the market" when it's a computer doing it on a time scale of micro or milliseconds? If someone hits that HFT computer's bid, there's an obligation to fill that order - nothing is different about such an order just because it's placed and canceled quickly. The only objection is fear of the unknown. And the only difference here is that it's being done based on an automated strategy, faster than people can react. Your broker has access to HFT tools. Your 401(k) manager has access to HFT tools. If you're a day trader, your order is probably being routed through HFT tools.
Re: The Idiot's Guide to High Frequency Trading
#9If HFT GUARANTEES profits, why are the profits to HFTs declining so sharply, and why do HFT firms make such a small fraction of what the buy-side firms make? Much more discussion here: https://news.ycombinator.com/item?id=7531429
Declining profitabilities caused by increased competition.
What market risk are the scalp-style of hft strategies (not all hft's are scalping) taking ? If they can cancel orders at abandon and make pennies if they win the race (against other hft's), but can simply x out of their order if the price doesnt go their way is as close to a riskless profit as it gets.
virtu's prospectus as a case in point. https://www.sec.gov/Archives/edgar/data/1592386/000104746914...
Re: The Idiot's Guide to High Frequency Trading
#10If HFT adds no value, rigs the game, adds cost to everyday investors and traders looking to make an honest fair buck from the markets, will it be allowed in the future?
I almost feel like SEC will come down on them hard.
Basically, I'm bummed at the idea that as individuals, we can't innovate in this field without ponying up several million dollars in startup cost.