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A web-reading bot made millions on the options market

slate.com

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Re: A web-reading bot made millions on the options market

#11

Post by Tsggdjbs »

patio11 wrote: post #7

This touches on several of the Big Issues with being a market maker, shopping large orders, and HFT. Sadly, it's exactly as detailed as you'd expect a Slate article to be. It doesn't matter that it is a bot. The controller of the bot happens to be, in this instance, directional order flow : unlike the overwhelming majority of market volume, he actually has an edge . The options market maker is, unusually for market m…

If the type of trading discussed in the article becomes more common, would market makers stop making markets for these deep out of the money options? Presumably this would be bad for those attempting to use the options as a hedge.

Re: A web-reading bot made millions on the options market

#12

Post by downandout »

"The trade occurred 19 seconds before the tweet, and one second after a headline appeared on the Dow Jones Newswire."

I don't understand the mystery here. It would be trivial to write a bot that could interpret a headline and make a trade on it in under a second, and that's without any special high-speed links. With API documentation for a brokerage house, I could write such a bot in probably half a day. Given the astronomical sums of money involved, I have a hard time believing that this isn't occurring on a daily basis.

Re: A web-reading bot made millions on the options market

#13

Post by xyzzy123 »

downandout wrote: post #12

"The trade occurred 19 seconds before the tweet, and one second after a headline appeared on the Dow Jones Newswire." I don't understand the mystery here. It would be trivial to write a bot that could interpret a headline and make a trade on it in under a second, and that's without any special high-speed links. With API documentation for a brokerage house, I could write such a bot in probably half a day. Given the as…

Probably because you've never bet a lot of money on natural language processing before. Backtest and check alpha. cpercival's idea is pretty good though. I'm reminded of: https://xkcd.com/793/

Re: A web-reading bot made millions on the options market

#14

Post by patio11 »

Tsggdjbs wrote: post #11
patio11 wrote: post #7

This touches on several of the Big Issues with being a market maker, shopping large orders, and HFT. Sadly, it's exactly as detailed as you'd expect a Slate article to be. It doesn't matter that it is a bot. The controller of the bot happens to be, in this instance, directional order flow : unlike the overwhelming majority of market volume, he actually has an edge . The options market maker is, unusually for market m…

If the type of trading discussed in the article becomes more common, would market makers stop making markets for these deep out of the money options? Presumably this would be bad for those attempting to use the options as a hedge.

They aren't allowed to stop making markets, at least in the options market. (This is not true of market makers generally. You or I could, if we had a lot of money, start making markets in any stock we desired to, just by getting a brokerage account and sending the right orders to the exchange. A market maker is a participant like any other and may not be a formal role.)

What would probably happen is tweaking their risk exposure: be less willing to play large resting bids/asks for large positions close to the NBBO, and instead either resize them or layer them over several price points.

My feeling with regards to the fairness of this is that one should not offer to sell 4,000 PUTS for e.g. Zynga at $1 in May 2015 unless one is prepared to accept delivery of 400k shares of Zynga in return for $400k. Some options market participant is signaling their willingness to do that, or something close to it. They are theoretically responsible adults who know the risks. If that trade blows up in their face, and they take to the Internet to decry the unfairness of it all, I will not be maximally sympathetic. (Full disclosure: I was probably their counterparty a time or two buying the option on "Zynga blows up in next short-increment-of-time" and did poorly.)

Re: A web-reading bot made millions on the options market

#15

Post by keyle »

I've had a go at writing something similar in the past. It was against the Australian news on the ASX. Suffice to say I wasn't successful.

Even with a clear understanding of the situation, the reaction from the market was mild compared to the swings of the global tides. When it worked, it worked well. But you had to have the wind in your back to get decent moves.

If I were in the industry with low cost access, and I were on the US market, I think things might have been different. But in my experience, you don't get rich searching for gold, you get rich selling the buckets and the shovels.

Re: A web-reading bot made millions on the options market

#16

Post by ddeck »

downandout wrote: post #12

"The trade occurred 19 seconds before the tweet, and one second after a headline appeared on the Dow Jones Newswire." I don't understand the mystery here. It would be trivial to write a bot that could interpret a headline and make a trade on it in under a second, and that's without any special high-speed links. With API documentation for a brokerage house, I could write such a bot in probably half a day. Given the as…

Agreed. I don't really understand the surprise in article and wince at the "My friend reckons....." style.

This is indeed occurring on a daily basis. A number of funds trade automatically based on fully automated analysis of the news wire and other sources.

I believe most use in house analytics but there are 3rd party solutions:

http://www.ravenpack.com/

I think people outside the industry don't appreciate the depth and breath of automatic trading that is going on. Understandable given that it's in the interest of insiders to stay out of the spotlight, and the public mostly only sees the HFT headlines.

Re: A web-reading bot made millions on the options market

#19

Post by xyzzy123 »

ddeck wrote: post #16
downandout wrote: post #12

"The trade occurred 19 seconds before the tweet, and one second after a headline appeared on the Dow Jones Newswire." I don't understand the mystery here. It would be trivial to write a bot that could interpret a headline and make a trade on it in under a second, and that's without any special high-speed links. With API documentation for a brokerage house, I could write such a bot in probably half a day. Given the as…

Agreed. I don't really understand the surprise in article and wince at the "My friend reckons....." style. This is indeed occurring on a daily basis. A number of funds trade automatically based on fully automated analysis of the news wire and other sources. I believe most use in house analytics but there are 3rd party solutions: http://www.ravenpack.com/ I think people outside the industry don't appreciate the depth…

Oh yup, how come they're an analytics provider and not a fund? ;-p
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