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The rise of high frequency trading - graphic animation

nanex.net

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Re: The rise of high frequency trading - graphic animation

#11

Post by _delirium »

yummyfajitas wrote: post #9
nanex wrote: post #8

Hi, I am Eric Hunsader from Nanex and created this animation using our own custom software tools and our NxCore data feed. Our position on HFT can be summed up in the first lines of text below the image: "It's not high frequency trading (HFT) that concerns us. It's high frequency quoting". Links are included for details. Our latest paper on HFT can be found here: http://www.nanex.net/aqck2/3532.html Anyone who has ta…

I'd be curious to know what you believe the harm is. Specifically, since you claim HFT harms long term investors, what are the mechanics by which it does so?

One thing the site seems to do is keep an occasional catalog of patterns they believe to be evidence of attempts to harm price discovery in the markets through various quote-system-gaming tricks, presumably intended to set up some other strategy. Here's one, an algorithm that seems (in their opinion) designed to target a particular stock and jack up its volatility: http://www.nxcoreapi.com/aqck/3271.html

Re: The rise of high frequency trading - graphic animation

#12

Post by yummyfajitas »

_delirium wrote: post #11
yummyfajitas wrote: post #9

Earlier quoted context omitted.

I'd be curious to know what you believe the harm is. Specifically, since you claim HFT harms long term investors, what are the mechanics by which it does so?

One thing the site seems to do is keep an occasional catalog of patterns they believe to be evidence of attempts to harm price discovery in the markets through various quote-system-gaming tricks, presumably intended to set up some other strategy. Here's one, an algorithm that seems (in their opinion) designed to target a particular stock and jack up its volatility: http://www.nxcoreapi.com/aqck/3271.html

I've seen the graphs. But I have yet to see an explanation of how you actually make money that way.

The best I've heard are theories along the line of a DOS attack. I.e.:

1) Eve sends an order, receives an ack, and receives the quote. (The last two steps can be in any order.)

2) Alice receives the quote, and spends more time processing it than Eve spends on the order, ack and quote.

3) ???

4) Eve profits. (Perhaps because Alice and Eve are both HFT's, and this attack lowers Eve's latency relative to Alice?)

Re: The rise of high frequency trading - graphic animation

#13

Post by lrm242 »

nanex wrote: post #8

Hi, I am Eric Hunsader from Nanex and created this animation using our own custom software tools and our NxCore data feed. Our position on HFT can be summed up in the first lines of text below the image: "It's not high frequency trading (HFT) that concerns us. It's high frequency quoting". Links are included for details. Our latest paper on HFT can be found here: http://www.nanex.net/aqck2/3532.html Anyone who has ta…

You don't like high message rates because it makes your job harder. You guys are a great data provider (I used to be a customer) and you're doing a pretty good job (if not somewhat biased, perhaps unconsciously so) of informing folks about the happenings of the market. However, message rate limits are already managed by exchanges, what more would you ask?

Theories related to quote stuffing to cause ticker plants to stall and other gaming related items just don't jive, to be honest. It's always been the responsibility of the trader to ensure they can manage the data flow. If they can't they can get a vendor who can help them.

Data rates will naturally manage themselves and will always grow towards available bandwidth. It's the nature of our market, especially as we move towards tighter spreads. The markets are becoming more and more continuous and that necessitates the need to quote at high rates.

The charts you guys put together are interesting but let's be clear: no human looks at data at these levels, only machines. And machines don't care about visual patterns in data flow. So, as a means to help illustrate how markets are evolving I'm all for the visualization. However, as a means to denigrate the very real needs of important market participants to remain competitive, I think you're doing a disservice to the uninformed reader of your reports.

Re: The rise of high frequency trading - graphic animation

#14

Post by [deleted] »

yummyfajitas wrote: post #12
_delirium wrote: post #11

Earlier quoted context omitted.

One thing the site seems to do is keep an occasional catalog of patterns they believe to be evidence of attempts to harm price discovery in the markets through various quote-system-gaming tricks, presumably intended to set up some other strategy. Here's one, an algorithm that seems (in their opinion) designed to target a particular stock and jack up its volatility: http://www.nxcoreapi.com/aqck/3271.html

I've seen the graphs. But I have yet to see an explanation of how you actually make money that way. The best I've heard are theories along the line of a DOS attack. I.e.: 1) Eve sends an order, receives an ack, and receives the quote. (The last two steps can be in any order.) 2) Alice receives the quote, and spends more time processing it than Eve spends on the order, ack and quote. 3) ??? 4) Eve profits. (Perhaps be…

[deleted]

Re: The rise of high frequency trading - graphic animation

#15

Post by [deleted] »

[deleted] wrote: post #14
yummyfajitas wrote: post #12

Earlier quoted context omitted.

I've seen the graphs. But I have yet to see an explanation of how you actually make money that way. The best I've heard are theories along the line of a DOS attack. I.e.: 1) Eve sends an order, receives an ack, and receives the quote. (The last two steps can be in any order.) 2) Alice receives the quote, and spends more time processing it than Eve spends on the order, ack and quote. 3) ??? 4) Eve profits. (Perhaps be…

[deleted]

[deleted]

Re: The rise of high frequency trading - graphic animation

#16

Post by lrm242 »

peteretep wrote: post #10
nanex wrote: post #8

Hi, I am Eric Hunsader from Nanex and created this animation using our own custom software tools and our NxCore data feed. Our position on HFT can be summed up in the first lines of text below the image: "It's not high frequency trading (HFT) that concerns us. It's high frequency quoting". Links are included for details. Our latest paper on HFT can be found here: http://www.nanex.net/aqck2/3532.html Anyone who has ta…

Your data shows the increase in HFQ relative to much lesser increase in HFT well, but neither of the links I followed to why HFQ is bad gave me much of an idea, other than "it's extra network traffic".

Exactly. Nanex does not like high message rates because it increases the cost of running their service. like yummyfajitas and yourself no one can explain to me why high-rate quoting is bad. Producing pretty graphs showing quotes at regular intervals doing interesting things is not indicative of bad behavior, especially when many of those charts include after market data when the depth is extremely thin. And remember, every venue enforces message rate limits already.

Re: The rise of high frequency trading - graphic animation

#17

Post by muench »

lrm242 wrote: post #16
peteretep wrote: post #10

Earlier quoted context omitted.

Your data shows the increase in HFQ relative to much lesser increase in HFT well, but neither of the links I followed to why HFQ is bad gave me much of an idea, other than "it's extra network traffic".

Exactly. Nanex does not like high message rates because it increases the cost of running their service. like yummyfajitas and yourself no one can explain to me why high-rate quoting is bad. Producing pretty graphs showing quotes at regular intervals doing interesting things is not indicative of bad behavior, especially when many of those charts include after market data when the depth is extremely thin. And remember,…

The link in the original post labeled "high frequency quoting" led to a page [1] that makes a more concrete claim. Basically they say that the NBBO (national best bid and offer) are being manipulated to be small when there is no trading and larger when there is trading.

I think that's at least a little disingenuous though... If there is no trading then it makes sense that bids will be increased and offers decreased in order to 'entice' trades. No trading means the bid/offer are too low/high - basic econ 101.

As soon as there is trading two things happen: 1) bids and offers are hit, meaning they are removed, leaving lower/higher bids/offers as the next best. 2) The HFT algorithms know that when there is a lot of trading they should lower bids and raise offers, because excess demand indicates the bid/offer are lower/higher than they need to be. Essentially, they are realizing that they are leaving money on the table.

This all might look like price manipulation to an outsider, but to anyone that knows what is going on it's just the way markets work. The difference is that it happens a lot slower in markets humans are used to.

In my mind what would indicate a problem is if bids and offers widen AHEAD of trading. This would mean the HFTs are finding out that somebody wants to trade and adjusting their quotes BEFOREHAND. That's front-running and illegal. But I don't see evidence of that here.

[1] http://www.nanex.net/aqck/2685.HTML

Re: The rise of high frequency trading - graphic animation

#18

Post by theorique »

I like Nanex's work - the company has done a lot of excellent analysis of the progress of HFT over the past few years.

I'm wondering why there tends to be so much value judgment and moralizing in this area coming from various sources (such as Themis).

For example: HF traders are taking value from "real" traders ("real" defined by whom?), the systems are "too fast" (compared to what?) or quoting "too much" (compared to what?), and so forth.

Exchanges already seem to be penalizing participants with very high quote-to-trade ratios, suggesting that the existing regulatory and commercial system is responding to the needs of its stakeholders.

Maybe this kind of reaction is inevitable. I'm sure that there was moralizing in ancient Greece when some entrepreneur bought a load of olive oil at a low price in Athens and ran it on a fast chariot to Thessaloniki, unfairly undercutting the honest merchants of Thessaloniki and pocketing a tidy profit through their "high-speed trading" … same thing with those who used an undersea New York - London cable to gain advance knowledge of events.

Re: The rise of high frequency trading - graphic animation

#19

Post by brazzy »

Variance wrote: post #6

This is an excellent graphic, but the author has a strong stance against HFT (such as the pages he links to about high frequency quoting) that readers should moderate with an understanding of what HFT does in an ideal economic context--the "purpose" of HFT. At the level of HFT, the decisions being made are too fast and frequent to be based on the fundamentals of the stocks being traded. Instead, algorithms are used t…

I think you missed the main point of the article: that the activity of HFT algorithms overwhelmingly takes the form of quotes that never lead to trades and only serve to manipulate prices or create an information asymmetry.

Re: The rise of high frequency trading - graphic animation

#20

Post by jamii »

Variance wrote: post #6

This is an excellent graphic, but the author has a strong stance against HFT (such as the pages he links to about high frequency quoting) that readers should moderate with an understanding of what HFT does in an ideal economic context--the "purpose" of HFT. At the level of HFT, the decisions being made are too fast and frequent to be based on the fundamentals of the stocks being traded. Instead, algorithms are used t…

> Sometimes, obviously, the use of these algos goes wrong. You get a flash crash with a death by ten billion cuts as the market moves to smooth in some incorrect way.

I learned recently that there have been many similar crashes throughout history, well before even the invention of computers eg

http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929

http://en.wikipedia.org/wiki/Black_Monday_%281987%29

http://en.wikipedia.org/wiki/Friday_the_13th_mini-crash

http://en.wikipedia.org/wiki/October_27,_1997_mini-crash

It seems to be more a matter of market dynamics rather than crazy algos. If some market shock drops prices too quickly you pass from a stable equilibrium into panic selling. Market makers will only accept so much risk before they start trying to offload stocks too, leading to a feedback loop. Lots of exchanges now have measures in place to break this feedback loop by halting trading on a stock if the price moves too fast and running an auction instead.

The 2010 flash crash was really only notable in that the move to electronic trading made both the crash and the subsequent recovery much faster. Panic selling itself is a problem with the market structure, not with the machines on the other end.

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