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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

#111

Post by yummyfajitas »

bo1024 wrote: post #106
yummyfajitas wrote: post #102

Earlier quoted context omitted.

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.)

No, my proposal is much simpler.

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

#112

Post by tptacek »

jcampbell1 wrote: post #105
tptacek wrote: post #94

Earlier quoted context omitted.

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 probl…

It looks to me that in either case, 1200 "shares worth of liquidity" are being offered to the market. If 2000 shares of "buy" comes in, it will soak up their whole "sell".

It also looks like "Speed" and "Bigness" are orthogonal issues; you're just irritated that "Speed" got to the book first. But "Speed" is getting compensated for soaking up more risk; because "Speed"'s order fills first, "Big" has more time to react to negative market changes.

Note that in any case, traders are penalized in a variety of other ways for laying large block orders onto the book.

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

#113

Post by soup10 »

tptacek wrote: post #92
soup10 wrote: post #27

Earlier quoted context omitted.

Most markets have far more liquidity than is really needed.

What does it mean to have "too much liquidity"? Liquidity is the cost of buying or selling. You're saying that it would be better if it cost more to sell out of a position, or to buy into a new one?

Well the question is what's the point of the stock market and financial sector if the only time investment is really happening is when shares are offered. The answer the parent suggested is that the stock market provides liquidity that is necessary for people to be willing to invest.

I believe that most stocks have far far more liquidity than is necessary for people to feel comfortable investing in them. More liquidity has very little value at this point.

It's a problem because thousands of bright minds are piped into the financial industry when they could be contributing much more to society.

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

#114

Post by wtvanhest »

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…

I don't think that SomeCallMeTim understands that 0.10/share is a lot of money ($100,000) when a mutual fund is trading 1 million shares over 10 days.

Now mulitply that by 60 holdings which are turned over 100% per year and you can see why pensions would want those mutual funds to save $6,000,000/year in liquidity costs.

(Obviously mutual funds don't just do program trades, they also negotiate directly with each other etc. but the example still stands).

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

#115

Post by yummyfajitas »

albertsun wrote: post #103

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?

...what difference does it make if there is a trojan or not?

Absent the Trojan, Bender has no idea if Farnsworth will show up or not. If Farnsworth doesn't show up, this might happen:

BUY(bender, $10.10, 100, 12:00:00.000)

SELL(bender, $10.15, 100, 12.00:00.100)

...crickets chirping...

SELL(hermes, $10.05, 100, 12.00.10.000)

SELL(zapp, $10.00, 100, 12.00.15.000)

BUY(amy, $10.00, 100, 12.00.16.000) (Amy trades with Zapp)

...MomCorp continues it's downward slide.

I.e., without the trojan Bender is just a guy who thinks MomCorp is going up.

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

#116

Post by tptacek »

soup10 wrote: post #113
tptacek wrote: post #92

Earlier quoted context omitted.

What does it mean to have "too much liquidity"? Liquidity is the cost of buying or selling. You're saying that it would be better if it cost more to sell out of a position, or to buy into a new one?

Well the question is what's the point of the stock market and financial sector if the only time investment is really happening is when shares are offered. The answer the parent suggested is that the stock market provides liquidity that is necessary for people to be willing to invest. I believe that most stocks have far far more liquidity than is necessary for people to feel comfortable investing in them. More liquidi…

I don't understand. "Liquidity" is another way of saying "cost of trading". You're saying, "most stocks cost so little to trade that people are already willing to trade them, so why upset the applecart for people who make a profit scalping off those trades"?

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

#117

Post by rscale »

yummyfajitas wrote: post #51
rscale wrote: post #41

I have no objection to the provision of liquidity. That said, the flash crash seems to me to be a perfect example of a danger created when liquidity is provided largely by algorithms. We ran into a situation where the market was already volatile, and a bad trade exacerbated the issue by causing a number of HFTs to take unexpected losses and withdraw from their markets, consuming further liquidity while driving prices…

Flash Crashes are not a phenomenon caused by algorithms. We have actually had two flash crashes - the first was in 1962. http://online.wsj.com/article/SB1000142405274870395760457527... Also, the main reason many HFTs pulled out of the market is the risk of broken trades (regulatory risk [1]). Staying in the market would have been a big moneymaker absent that risk - spreads were often huge. But broken trades were dang…

Your described scenario with Accenture doesn't describe a market-making HFT strategy. You're describing something akin to a mean-reversion algorithm that would be MFT or slower, and is not a market-making strategy. It demands that you buy and hold inventory to profit. It doesn't provide liquidity.

Of course you can make a huge profit when a crash occurs, whether that crash is due to a vicious circle of algorithms, or a vicious circle of human psychology. There are algorithms out there that look to do just that, trying to profit from exploitable market anomalies, and it's great that those people have found a way to get paid for fixing some problems. But they're not HFT market-makers, they're a different group of quant/algo traders.

Personally I care little about HFT. The flaws in the technology will get ironed out; the competition for the low-hanging fruit will continue to intensify, and eventually many of the functions will become commoditized as they mature.

In the meantime, I think it makes sense for HFT market participants to be sensitive to the fact that many individual market participants have trouble identifying the value they've received because of HFT participation, but can clearly remember fears that have been induced by HFT driven events.

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

#118

Post by yummyfajitas »

tptacek wrote: post #73
yummyfajitas wrote: post #66

Earlier quoted context omitted.

I discussed this phenomenon before - it's basically just poorly written algorithms behaving oddly. http://news.ycombinator.com/item?id=1564445 Note that your article provides no explanation as to who is being defrauded ("markets" isn't a person) or how, so I don't know what you want me to explain.

What is your take on Zero Hedge? It drives me sort of bananas, but I'm not a pro.

It's like a conspiracy theory site but without the theories.

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

#119

Post by sailfrog »

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…

The way I am reading these comments it would seem that HNers are more curious than idolizing. Personally I do not believe that the length of time in which an entity chooses to own a stock makes that entity inherently bad or good. It is not unreasonable to think a fast execution could make a position unprofitable if delayed by minutes, and I fail to see how that is doing anything wrong.

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

#120

Post by yummyfajitas »

rscale wrote: post #117
yummyfajitas wrote: post #51

Earlier quoted context omitted.

Flash Crashes are not a phenomenon caused by algorithms. We have actually had two flash crashes - the first was in 1962. http://online.wsj.com/article/SB1000142405274870395760457527... Also, the main reason many HFTs pulled out of the market is the risk of broken trades (regulatory risk [1]). Staying in the market would have been a big moneymaker absent that risk - spreads were often huge. But broken trades were dang…

Your described scenario with Accenture doesn't describe a market-making HFT strategy. You're describing something akin to a mean-reversion algorithm that would be MFT or slower, and is not a market-making strategy. It demands that you buy and hold inventory to profit. It doesn't provide liquidity. Of course you can make a huge profit when a crash occurs, whether that crash is due to a vicious circle of algorithms, or…

Your described scenario with Accenture doesn't describe a market-making HFT strategy.

The HFT could have placed a passive buy order at $1.00 and a sell at $30.00 (or at $2.00, which he revised upwards as the price corrected).

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