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A High Frequency Trader's Apology, Pt 2

chrisstucchio.com

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Re: A High Frequency Trader's Apology, Pt 2

#101

Post by harryh »

SomeCallMeTim wrote: post #96

OK, answer me this: How does an HFT, in practice , add liquidity to a market? None of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there. Further, I submit that any HFT will only place a buy/sell spread in the case where the volume is high enough that they can complete their purchases within seconds or at most minutes. At…

> How does an HFT, in practice, add liquidity to a market?

Bid/ask spreads used to be 10 cents or more. Now they're generally a penny. That is evidence of a more liquid market.

In practice, this is because computers are now market makers instead of humans so they can do this job at a lower cost.

Re: A High Frequency Trader's Apology, Pt 2

#102

Post by yummyfajitas »

SomeCallMeTim wrote: post #96

OK, answer me this: How does an HFT, in practice , add liquidity to a market? None of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there. Further, I submit that any HFT will only place a buy/sell spread in the case where the volume is high enough that they can complete their purchases within seconds or at most minutes. At…

None of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there....In every example OP gives...

You clearly ignored one of my examples.

Consider the example of Fry and Zoidberg. Fry places his sell order at 12:01. Leela and Bender are absent, so Fry's order goes into the book. Zoidberg places his buy order at $9.50 at 12:05. The bid/ask spread is now $0.50 and Fry has not traded.

In this case Fry is better off with Leela in the market.

At any point that an HFT is willing to buy stock, it's because there's a high likelihood that someone will show up to pay more after a few seconds or minutes.

If you want to take that risk, place an ALO order at the bid or ask price. You won't cross the spread, though your order might go unfilled.

The fact that most people don't place ALO orders suggests they don't want to take the risk.

Re: A High Frequency Trader's Apology, Pt 2

#103

Post by albertsun »

Going off the last example, what difference does it make if there is a trojan or not? Bender might very well have chosen to buy at $10.10 and sell at $10.15 without any evil foreknowledge to narrow the spread and it would have caused the some effect on Prof. Farnsworth.

Yes, it does mean that whoever had a sell order at $10.10 gets their order filled faster. But is that trade off worth it?

Re: A High Frequency Trader's Apology, Pt 2

#104

Post by sailfrog »

tolos wrote: post #79

What makes me uneasy about HFT is the speed in which things happen. For example, I believe the BATS IPO that happened last month began trading around $15, and was below $1 in about 900ms before trading was halted. (Nanex.net has news postings about these kinds of things, and I wouldn't mind hearing other people's opinion about the site) I guess my question is, is it possible for traders to make money in the short ter…

Insofar as Nanex is concerned remember they are attempting to sell you a product, so be aware of their motivations before swallowing any unsubstantiated assumptions. With that said from what I have seen their charts are accurate but the interpretation of what they mean is sometimes a bit dramatic :)

I can't speak directly to the BATS IPO debacle but I can say that when the NBBO in a symbol is locked or crossed (market speak for the bid and ask being the same or being inverted) matching engines can ignore the NBBO. This results in trades being executing at prices all over the map and can explain how a stock can go from $15 to $1 almost immediately.

Re: A High Frequency Trader's Apology, Pt 2

#105

Post by jcampbell1 »

tptacek wrote: post #94
jcampbell1 wrote: post #90

Earlier quoted context omitted.

"orders" contain the price and the number of shares. Let's not split hairs here. No one cares about the absolute number of orders, but rather the total number of shares/contracts/etc available at each price. By spoils, I mean the returns to market making. Right now market makers are largely rewarded for being the fastest and beating out other market makers rather than for providing the most liquidity to speculators/i…

How can a market maker be the fastest without providing liquidity? An HFT market maker's willingness to buy XYZ from Alice at $10/shr to allow her out of her XYZ position is practically the definition of liquidity; its willingness to turn around and sell XYZ at $10.05/shr to Bob is more liquidity still. Alice wants to sell and can do so immediately and at a price she accepts; Bob wants to buy and can do so immediatel…

I think we are talking about two different things. Here is the scenario I imagine. Two market makers, Speedy and Big. They both decide to shave a penny off the spread, but Speedy is faster.

The order book now looks like:

SELL BIG - 1000 $600

SELL SPEEDY - 200 $600

-----

Buy SPEEDY - 200 $599

BUY BIG - 1000 $599

A buy and sell order comes in for 200 shares at market, and SPEEDY makes $200. BIG makes nothing. The problem is that BIG is offering more liquidity to the market (1000 shares vs 200), but all the rewards go to SPEEDY. With a pro-rata, BIG would make $166 and SPEEDY would make $33.

Pro-rata rewards volume, FIFO rewards speed. It is debatable which is better.

Re: A High Frequency Trader's Apology, Pt 2

#106

Post by bo1024 »

yummyfajitas wrote: post #102
SomeCallMeTim wrote: post #96

OK, answer me this: How does an HFT, in practice , add liquidity to a market? None of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there. Further, I submit that any HFT will only place a buy/sell spread in the case where the volume is high enough that they can complete their purchases within seconds or at most minutes. At…

None of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there....In every example OP gives... You clearly ignored one of my examples. Consider the example of Fry and Zoidberg. Fry places his sell order at 12:01. Leela and Bender are absent, so Fry's order goes into the book. Zoidberg places his buy order at $9.50 at 12:05. Th…

Will your proposal be along the lines of "only allow trades every x (milli) seconds, and randomize among the bids/asks submitted in the most recent time interval"? This seems like the most natural, simple solution one might suggest. How does it sound to you?

(Edit: sorry, this doesn't really relate particularly to this sub-topic.)

Re: A High Frequency Trader's Apology, Pt 2

#107

Post by davidmr »

SomeCallMeTim wrote: post #96

OK, answer me this: How does an HFT, in practice , add liquidity to a market? None of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there. Further, I submit that any HFT will only place a buy/sell spread in the case where the volume is high enough that they can complete their purchases within seconds or at most minutes. At…

> Anyone who is worried about waiting a few minutes for a trade to complete is Doing It Wrong.

Why do you get to decide that? I could think of several examples where I would be concerned about a trade happening quickly (hedging bets made elsewhere, breaking news affecting the underlying value of a product, etc.)

Re: A High Frequency Trader's Apology, Pt 2

#108

Post by tazzy531 »

harryh wrote: post #101
SomeCallMeTim wrote: post #96

OK, answer me this: How does an HFT, in practice , add liquidity to a market? None of the examples given showed liquidity being added, because the people involved would have traded with each other directly without an HFT being there. Further, I submit that any HFT will only place a buy/sell spread in the case where the volume is high enough that they can complete their purchases within seconds or at most minutes. At…

> How does an HFT, in practice, add liquidity to a market? Bid/ask spreads used to be 10 cents or more. Now they're generally a penny. That is evidence of a more liquid market. In practice, this is because computers are now market makers instead of humans so they can do this job at a lower cost.

Even fractions of a penny in some cases.

Re: A High Frequency Trader's Apology, Pt 2

#109

Post by sokoloff »

btilly wrote: post #85
alphaBetaGamma wrote: post #52

Earlier quoted context omitted.

As far as I understand your suggestion, it exactly describes the way current markets work.

Then you did not understand the suggestion. :-( The key point of what I suggested is that the price drifts slowly, and orders can only execute at the current price. In today's market the price can move instantaneously. That's a pretty big difference.

You're creating a new notion that doesn't currently exist: that there is "a price" in a stable equilibrium condition, when in fact, there is a spread. (I think if you draw out an order book of bids and asks, and then try to overlay your notion of a "single price" on it, you will find that your system is not an improvement, at least not for people who value certainty.)

Part of the problem that others are having understanding you (assuming your system is, in fact, better) is that you don't seem to be giving a full explanation that relates to the actual order book initial conditions and new incoming order flow. I'm not an expert by any means, but I can't understand, concretely, EXACTLY how your proposal is intended to work. It feels hand-wavy to me, which usually means that an idea isn't fully-formed. (I mean no disrespect here; just stating my perception.)

I WANT the price to move instantaneously, even though my only interface is via Etrade's retail and mobile site, and I probably execute 400 trades a year. I strongly prefer instant over a few pennies here and there, even though I'm at a (at least theoretical) disadvantage in terms of market access as compared to the HFTs.

Re: A High Frequency Trader's Apology, Pt 2

#110

Post by yummyfajitas »

btilly wrote: post #97
yummyfajitas wrote: post #58

Earlier quoted context omitted.

...every trade that executes because someone wanted to trade while the price was somewhere between the bid and the ask would cut the HFT folks out of the loop... See the first post in the series. This is exactly how the markets work. The best price always wins. If the bid/ask is $10.00/10.05, and I offer to buy at $10.05, I will trade immediately. If I offer to buy at $10.03, I jump the queue and will be the first to…

You either did not read my suggestion, or did not understand it, because it is very different from how the markets work today. Suppose that the bid/ask is $10.00/10.05. Suppose that I am willing to buy at $10.20. In today's market I will immediately make the trade at $10.05. In my suggested market there is another fact to consider, the price. Suppose that it is $10.03. Then I become an outstanding buy order, and for…

I definitely misunderstood what you proposed.

Your idea is definitely interesting. It certainly slows down price discovery, though probably not enough to matter.

I'd need to think more carefully about whether it's a good idea or not, but it's definitely the best suggested tweak to market mechanics I've heard in this thread (or the last one).

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