Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

The Idiot's Guide to High Frequency Trading

blogmaverick.com

Post reply on HN
Print view View original

31–40 of 99 posts

Re: The Idiot's Guide to High Frequency Trading

#31

Post by JumpCrisscross »

The NYSE has always required market makers continuously buy and sell the stocks they specialise in. They must do this in all market conditions, even if it means running a loss. In exchange, they get privileged access to order flow information. This is why those seats are valuable. NASDAQ challenged that model by removing the physical trading floor. Instead of humans standing in a pit there were humans sitting behind screens. But in both cases there is an institution guarding access to the market's nerve centres. Barriers to entry were raised and the incumbents protected.

HFT takes the abstraction one step further. Democratised is that access to privileged order flow - anyone who can pay can get it. Lost is the role of a designated market maker - HFTs can pull out when markets get rough. This is a valid debate.

But don't confuse yourself. The order flow privileges being criticised have always accrued to institutional market makers. It is no surprise that those incumbents are the ones driving the present lobby.

Re: The Idiot's Guide to High Frequency Trading

#32

Post by guelo »

lrm242 wrote: post #14
a8da6b0c91d wrote: post #7

Some 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?

There is nothing about HFT that is analgous to insider trading. Unfortunately the people describing it in public like Cuban simply don't understand what's going on. There is no non-public information at work here.

The information that the HFT traders pay millions of dollars to acquire before the rest of the market does is not public at the time that they acquire it by any definition of public that does not include having to pay millions of dollars to acquire the information.

Re: The Idiot's Guide to High Frequency Trading

#33

Post by lrm242 »

guelo wrote: post #32
lrm242 wrote: post #14

Earlier quoted context omitted.

There is nothing about HFT that is analgous to insider trading. Unfortunately the people describing it in public like Cuban simply don't understand what's going on. There is no non-public information at work here.

The information that the HFT traders pay millions of dollars to acquire before the rest of the market does is not public at the time that they acquire it by any definition of public that does not include having to pay millions of dollars to acquire the information.

That's fundamentally wrong. Direct feeds are available to anyone who wishes to purchase them. Do you have a source for a piece of data purchasable by a firm that isn't on the public side of the information pipe?

Re: The Idiot's Guide to High Frequency Trading

#34

Post by stygiansonic »

lrm242 wrote: post #20
stygiansonic wrote: post #16

My (non-expert) take: HFT is a tool and it can be used for good or bad. Potential good uses may include: reduction of bid/ask spreads, improved liquidity and faster arbitrage of things like ETFs. However, it can also be used for bad: http://www.sec.gov/News/PressRelease/Detail/PressRelease/136... In that link, the SEC charges that a certain firm employed a trading strategy using non-bona fide orders to attract intere…

The action you link to was not perpetuated by HFT. The vast majority of Lightspeed's business is good ole fashioned screen traders, and that is likely what this was. Previous actions for spoofing and layering were also the result of manual traders using regular day trading tools.

My mistake. I assumed HFT was involved because the timescale of the "layering" orders and subsequent cancellation (following the bona fide order execution) was on the order of several hundred milliseconds.

Re: The Idiot's Guide to High Frequency Trading

#35

Post by dllthomas »

tptacek wrote: post #26
mayukh wrote: post #18

Earlier quoted context omitted.

'Average' holding times don't help understand the issue. You could have one position that was a long-term bet edit: I did not imply that none of the hft strategies were taking market risk. The ones that scalp certainly seem to.

This is the second time you've used the word "scalp", as if all liquidity on the public markets for the last century weren't funded by "scalping". In the absence of "scalping", trading in stocks works like trading in houses. There are lots of buyers. There are lots of sellers. In the majority of cases, they disagree materially on the correct price. Therefore, it (a) takes forever to enter or exit a position, and (b)…

Though houses also have the additional complication that they're not (at all) fungible.

Re: The Idiot's Guide to High Frequency Trading

#36

Post by AndrewBissell »

JumpCrisscross wrote: post #31

The NYSE has always required market makers continuously buy and sell the stocks they specialise in. They must do this in all market conditions, even if it means running a loss. In exchange, they get privileged access to order flow information. This is why those seats are valuable. NASDAQ challenged that model by removing the physical trading floor. Instead of humans standing in a pit there were humans sitting behind…

> The NYSE requires designated market makers to buy and sell the securities they specialise in. They must do this even in violent market conditions

This "mandate" tended to break down when tested by actual market panics. Bids dried up in 1987, and histories of the 1929 crash often mention clerks and floor runners who entered stink bids at $0.01 for stocks that had recently traded at $30 or $40, and got filled because the specialists had abandoned their posts.

Whether human or computer, market makers know better than to stand in front of a freight train.

Re: The Idiot's Guide to High Frequency Trading

#37

Post by snowwrestler »

a8da6b0c91d wrote: post #7

Some 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?

If they get reactions to their "pings" then by definition the data is not privileged; they're just faster at seeing and reacting to it than other market participants

Insider trading allows someone to plan a course of action prior to other market participants having the opportunity to react.

Re: The Idiot's Guide to High Frequency Trading

#38

Post by jarrett »

mayukh wrote: post #9
tptacek wrote: post #2

If 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.g…

There is still risk. Even if you never lose money on a trade, your firm can lose money. You're paying fixed costs such as colocation. It's conceivable that all your trades are profitable, yet the sum of all those profits is lower than your fixed costs.

That becomes more likely for any given firm as the competition increases. Spreads get smaller; there's more competition for any given trading opportunity. For each firm, that can mean declining profits per trade and declining numbers of trades made. When the product of those two numbers gets too low, you're in the red.

Re: The Idiot's Guide to High Frequency Trading

#39

Post by arjn »

Correct me if I'm wrong but couldn't this problem be solved by some simple rules or act of legislation ?

For example, make it a rule that when you buy a stock, you have to hold it for at least some time - say a minimum of 5 minutes.

Or you could just impose a fee/penalty on traders that buy sell the same stock within one day of trading.

(note - I'm merely speculating here and have no specialized knowledge)

Post reply on HN