A High Frequency Trader's Apology, Pt 2 • Hacker News Board

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

#141

Post by scott_s » Thu, Apr 26, 2012, 7:33 PM UTC

boyd wrote: post #126

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…

That example, however, it not solely germane to ultra-HFT. More traditional market makers have provided that level of liquidity for a long time. Do you have an example of where sub-100 ms execution truly adds significant liquidity? I'm open to listening, but have never heard a convincing case for why HFT below such a time threshold adds net value (i.e., enough to make up for the volatility it can cause). Edit: Change…

I thought he answered your question well in the section Automated market makers - like humans, but faster and smarter.

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

#142

Post by benthumb » Thu, Apr 26, 2012, 7:33 PM UTC

My 2 cents:

1. Productive is Destructive ... literally (that's why we're in the position now of having figure out a way to mine asteroids -- industrial productivity under the current model is environmentally unsustainable)

2. Markets are (viewed in aggregate) evolving to be something akin to a global autonomic nervous system ... money like transduction makes the world go 'round.

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

#143

Post by scott_s » Thu, Apr 26, 2012, 7:39 PM UTC

ynniv wrote: post #132

My understanding is that HFT has been used for frontrunning (which is undeniably stealing pennies), and associated with unintended market instability (flash crashes) due to unforeseen trader interactions. This post primarily defends algo trading, which does not have the negative connotations of HFT. The author claims speed is mostly important for order precedence, but I find this to be a naive view. The potential ups…

HFT is, essentially, automated market making, and only market makers have the opportunity to do front running.

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

#144

Post by tazzy531 » Thu, Apr 26, 2012, 7:39 PM UTC

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…

Be careful conflating Order and Price. The Order book is the current stack of buyers and sellers. Price is the last executed price.

So when you say a price drifting upwards, that means that both buyers and sellers meet at that price. A corollary is that there were buyers and sellers at that price. In addition, this also means that the market could have also moved away from that price without a trade being executed (ie after major announcements -- last trade 10.50, next bid/ask 8.75/8.80)

So given that, "If the price reaches $10.05 without finding a seller" this statement does not make much sense and/or is irrelevant.

>then I will trade at $10.05 with the HFT folks. Secondly, there is nothing to differentiate, nor should there be, a HFT trader and an individual trader. A trade is a trade. From a buyer's point of view, it doesn't matter if you buy XYZ from MomPop Co vs UltraHFT Co. A trade is a trade.

>But if a seller who is willing to sell at $9.90 comes along before that happens, we will trade with each other at the current price and leave the HFT folks out of the loop. This is currently true right now. If someone enters a sell order below the bid, the trade is executed at the bid price (or whatever is at the top of the order book). It will knock out all the orders up to the limit price that is set.

Also as I mentioned above, "current price" (ie last executed) has no meaning. In the case of of the major announcement, last executed could be far off from the current order books.

>My suspicion is that, if this were implemented, a large fraction of trades would actually execute in the middle ground between what the HFT traders are willing to offer as a bid/ask. Nothing you suggest is anything different from the current system.

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

#145

Post by azmenthe » Thu, Apr 26, 2012, 7:41 PM UTC

ynniv wrote: post #132

My understanding is that HFT has been used for frontrunning (which is undeniably stealing pennies), and associated with unintended market instability (flash crashes) due to unforeseen trader interactions. This post primarily defends algo trading, which does not have the negative connotations of HFT. The author claims speed is mostly important for order precedence, but I find this to be a naive view. The potential ups…

Your association of a dollar amount to morality is unnerving. If Happy Unicorn Widget Inc. upgrades it's production line speed, it experiences some increase in revenue and can thus even make a $100M a day gasp.

I work at a HFT firm and any serious suggestion of frontrunning would probably get you fired. The truth is the majority of HFT is liquidity providing or some form of arbitrage.

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

#146

Post by [deleted] » Thu, Apr 26, 2012, 7:43 PM UTC

grandalf wrote: post #134

jellicle wrote: post #127

> Of course, it’s highly illegal to use trojans to rob retail investors and game the stock market, so this story is not particularly realistic. But in fact that entire scenario he just described is perfectly legal. The industry calls them "flash orders", and due to industry pushback against an SEC initiative to ban them in 2009, they are still legal. Nutshell description: - you put in an order to buy AAPL - your trus…

This is done in order to avoid intra-ETN transaction costs. There is nothing malicious or underhanded going on. This has always happened. Suppose you're in a room with your investor club and you want to buy 500 shares of AAPL. The evil "flash order" is akin to mentioning to your local group "hey guys I want to buy 500 shares of AAPL at $x, in case any of you want the other side of the transaction". If none of your lo…

[deleted]

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

#147

Post by yummyfajitas » Thu, Apr 26, 2012, 7:43 PM UTC

jellicle wrote: post #127

> Of course, it’s highly illegal to use trojans to rob retail investors and game the stock market, so this story is not particularly realistic. But in fact that entire scenario he just described is perfectly legal. The industry calls them "flash orders", and due to industry pushback against an SEC initiative to ban them in 2009, they are still legal. Nutshell description: - you put in an order to buy AAPL - your trus…

They now have exactly .5 second (SEC rule)

No, the SEC mandates that the limit be 500ms, then the exchange would be required to publish the flash order.

The limit was 30ms at Direct Edge, and I believe everywhere else as well.

There are also mandatory fill rates - i.e., if you don't fill at least 30% (or some such fraction) of the orders that are flashed to you, you get kicked out of the ELP program.

Your timeline is also wrong:

- said company goes and buys up the AAPL on the market, ahead of you - your order to buy AAPL hits, executing at a slightly higher price than you expected

Your limit order to buy AAPL at $610.00 hits the market and goes unfilled.

In fact, the ELP program was mainly about increasing order flow. It was a way for some HFT's to jump the queue - rather than being faster with public bids on ARCA, you can just flash people on Direct Edge.

The people being flashed chose to be flashed (note: there was a flag you could set to turn flash orders off) because it would reduce their routing fees.

A much more legitimate criticism of flash orders is that they benefit Goldman or Getco to the detriment of Joe's HFT Shop.

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

#148

Post by grandalf » Thu, Apr 26, 2012, 7:49 PM UTC

jellicle wrote: post #140

grandalf wrote: post #134

Earlier quoted context omitted.

This is done in order to avoid intra-ETN transaction costs. There is nothing malicious or underhanded going on. This has always happened. Suppose you're in a room with your investor club and you want to buy 500 shares of AAPL. The evil "flash order" is akin to mentioning to your local group "hey guys I want to buy 500 shares of AAPL at $x, in case any of you want the other side of the transaction". If none of your lo…

>There is nothing malicious or underhanded going on. And yet most market participants think banning them is a no-brainer. http://blog.themistrading.com/when-exchanges-attack/

You've provided data for my assertion that the big, establishment players oppose flash orders. Of course the NYSE opposes flash orders. The NYSE is the big, old, fat cat. The ETNs where flash ordering is common are small upstarts that offer lower transaction fees and better technology.

The NYSE's members are the big market making firms who have the most to lose if there is more competition -- IE more small firms using market making strategies.

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

#149

Post by yummyfajitas » Thu, Apr 26, 2012, 7:50 PM UTC

sokoloff wrote: post #109

btilly wrote: post #85

Earlier quoted context omitted.

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 unders…

I think what he calls "price" is an arbitrary variable the exchange defines (along with some set of rules that price follows), and then imposes the rule that trades occur at it.

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

#150

Post by grandalf » Thu, Apr 26, 2012, 7:53 PM UTC

[deleted] wrote: post #146

grandalf wrote: post #134

Earlier quoted context omitted.

This is done in order to avoid intra-ETN transaction costs. There is nothing malicious or underhanded going on. This has always happened. Suppose you're in a room with your investor club and you want to buy 500 shares of AAPL. The evil "flash order" is akin to mentioning to your local group "hey guys I want to buy 500 shares of AAPL at $x, in case any of you want the other side of the transaction". If none of your lo…

[deleted]

The tiers are only necessary bc the establishment players act as gatekeepers and try to charge excessive fees for electronic access. That other tiers exist shows how much ingenuity exists in the rest of the industry. 20 years ago anyone would have laughed if someone had described the tiered structure of ETNs. In my opinion it's an amazing triumph.

Incidentally, the NBBO rules are sold as a way of protecting the interest of the little guy, but they simply concentrate power with the big exchanges. Obviously if you're trading on a peripheral ETN and getting free transactions you are OK with being a few cents off here and there (and if you're too dumb to realize you're overpaying for something, your strategy is not likely to succeed). NBBO imposes a huge network tax on the entire system, which is deplorable.

In a properly decentralized and competitive system, anyone who cares what the NBBO price is willing to pay extra for the information, and those who don't care can take whatever amount of risk they are comfortable with.