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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

#61

Post by erichocean »

lrm242 wrote: post #33
guelo wrote: post #32

Earlier quoted context omitted.

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?

> Direct feeds are available to anyone who wishes to purchase them.

Out of curiosity, how much does a direct feed cost, and is there a practical limit to the number of simultaneous buyers (for example, physical server space in a data center)?

Re: The Idiot's Guide to High Frequency Trading

#62

Post by 001sky »

tptacek wrote: post #59
001sky wrote: post #53

Earlier quoted context omitted.

There are other reasons, but the analogy is, to me, obviously inapplicable. Not quite. Use your example of a large block trade. * Because it is incredibly expensive: check * Because the B/D agmt usually has conditions: check * Because the execution is provided after all the details of the trade/'s financials: check * Because the ruthless withdrawal of a term sheet could put the [trader's book] in a distress situation…

No, you "checked" these by moving the goalposts. Obtaining funding is incredibly hard. Each individual term sheet is also incredibly hard. Shopping a block is hard. Posting a limit order is incredibly cheap, cheaper than it has ever been in human history. Failing to execute also doesn't make posting a next limit order more expensive.

What I outlined above is why your BD acting in bad faith is illegal under the securities law. It's not even a grey area.

Put your security research hat on for a moment. The "other side" of the trade wants to get the info subject to BD confidentiality (pt 2) and the exploit them (pt 3,4). When your BD does this it is expressly illegal. This has a name but mentioning it here would just confuse the issue. The question is this: what tools are available to this "other side" that would put the NPI in the hands of the "other side" but not divulge it more broadly? Would a bad-faith offer to do a ("sweet") biz deal be good enough bait to social engineer selective disclosure? Unless you can rule this out technologically, you have to rule it in for consideration.

It's best not to get sidetracked on whether the divulged info is legally NPI or PI (just yet) and look at it purely from a pragmatic perspective like a security credential. The BD either has it under control or not. And is it physically possible in terms of bits to have selective disclosure? And if it is does the pretext matter?

Make no mistake: the BD cannot hide if he abuses the information directly. He's like an authorized user. The issue is what level of authorization you give the counter-party and how to protect its abuse. The technical details and legality of pretexting security credentials is something I'm sure you could speak authoritatively to. I'm only using it as an example here for illustrative purposes.

Re: The Idiot's Guide to High Frequency Trading

#63

Post by aet »

001sky wrote: post #57
ajtulloch wrote: post #3

Earlier quoted context omitted.

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 correla…

Along these lines, a note on so-called latency arbitrage: http://web.eecs.umich.edu/srg/wp-content/uploads/2013/02/ec3... But in a study last year, University of Michigan professor Michael Wellman and I developed a model across two exchanges. We examined a strategy called latency arbitrage, which utilizes advantages in access and response time to exploit price disparities caused by fragmentation across those dozens o…

Lets say we go to a call structure. Will there be competitive pressure to go back to a continuous market? For example, lets say you demand all U.S. exchanges go to a call structure. Would there be reason for me to go to London and open up a new continuous market?

Re: The Idiot's Guide to High Frequency Trading

#64

Post by kasey_junk »

001sky wrote: post #57
ajtulloch wrote: post #3

Earlier quoted context omitted.

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 correla…

Along these lines, a note on so-called latency arbitrage: http://web.eecs.umich.edu/srg/wp-content/uploads/2013/02/ec3... But in a study last year, University of Michigan professor Michael Wellman and I developed a model across two exchanges. We examined a strategy called latency arbitrage, which utilizes advantages in access and response time to exploit price disparities caused by fragmentation across those dozens o…

This is actually a very good paper and I heartily recommend it if you are into wonky market arbitrage.

You don't mention it, but they actually recommend a centralized discrete call market. How is that to be implemented? They don't say and they don't count the additional added cost/risk of adding a centralized monopoly player into the market (in fact they completely ignore transaction fees). We moved away from centralized markets in the first place because those costs were non-trivial.

Re: The Idiot's Guide to High Frequency Trading

#66

Post by tptacek »

001sky wrote: post #62
tptacek wrote: post #59

Earlier quoted context omitted.

No, you "checked" these by moving the goalposts. Obtaining funding is incredibly hard. Each individual term sheet is also incredibly hard. Shopping a block is hard. Posting a limit order is incredibly cheap, cheaper than it has ever been in human history. Failing to execute also doesn't make posting a next limit order more expensive.

What I outlined above is why your BD acting in bad faith is illegal under the securities law. It's not even a grey area. Put your security research hat on for a moment. The "other side" of the trade wants to get the info subject to BD confidentiality (pt 2) and the exploit them (pt 3,4). When your BD does this it is expressly illegal. This has a name but mentioning it here would just confuse the issue. The question i…

Canceling an order isn't "illegal under the securities law". In fact, neither is backing out of a term sheet.

Re: The Idiot's Guide to High Frequency Trading

#67

Post by fr0sty »

wglb wrote: post #54
foobarqux wrote: post #45

Earlier quoted context omitted.

Or you can blow up like Knight.

Knight had test code that got flipped into production. Worse, they ignored many alarms as the company was sinking.

> Knight had test code that got flipped into production.

This is not correct. Read the SEC report on the incident if you have time, it is pretty in depth: http://www.sec.gov/litigation/admin/2013/34-70694.pdf

The short-version is that they re-used a parameter from an old feature and one of the production machines was not updated so the re-used parameter re-activated the old feature instead of the new one. Furthermore, A refactoring of the code had left the old feature on the wrong side of the share accounting code so the system was not keeping track of the orders it was putting out.

Re: The Idiot's Guide to High Frequency Trading

#68

Post by theorique »

001sky wrote: post #15
theorique wrote: post #8

Complete 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 mo…

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. Would you recommend this as advice to YC companies looking to secure VC? Tactic seems ripe for abuse in M&A negotiations as well.

No doubt there's an appropriate timescale where the offer is on the table, and also a time after which the offer is no longer on the table. The same is true for job offers, university acceptance, matching with a medical residency, and all sorts of other contracts.

Would it be reasonable for a YC (or other investment) offer to be paired with "decide in an hour or we give it to someone else? Probably not. Would it be reasonable for that timeframe to be a week or two? Probably.

Re: The Idiot's Guide to High Frequency Trading

#69

Post by lrm242 »

wglb wrote: post #55
lrm242 wrote: post #12

Earlier quoted context omitted.

Manoj Narang of Tradeworx has stated their average holding time is up to 10 minutes. Is he taking risk? http://washpost.bloomberg.com/Story?docId=1376-N2CB0F6TTDTQ0...

I know of one HFT firm whose hold times, averaged out over a year, came to Zero. This firm accounted for a significant fraction of all stocks traded.

Did Knight take risk?

Re: The Idiot's Guide to High Frequency Trading

#70

Post by 001sky »

tptacek wrote: post #66
001sky wrote: post #62

Earlier quoted context omitted.

What I outlined above is why your BD acting in bad faith is illegal under the securities law. It's not even a grey area. Put your security research hat on for a moment. The "other side" of the trade wants to get the info subject to BD confidentiality (pt 2) and the exploit them (pt 3,4). When your BD does this it is expressly illegal. This has a name but mentioning it here would just confuse the issue. The question i…

Canceling an order isn't "illegal under the securities law". In fact, neither is backing out of a term sheet.

BD == your agent, has fiduciary duty to you...etc

"When executing trade orders on behalf of a customer, the institution is said to be acting as a broker"

https://en.wikipedia.org/wiki/Broker-dealer

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