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A High Frequency Trader's Apology, Pt 2

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

#181

Post by haberman »

anonDataUser wrote: post #91
haberman wrote: post #15

Loving this series of articles! Does any of this low-latency work make it back upstream into Linux or other parts of the software stack? As a latency-obsessed person I would love to know that the fruits of all this labor were available to me for my own low-latency systems. To me, that alone would be enough to feel that the latency-race is providing value to the world. Also, one thing that was not clear to me is how e…

Here's the secret sauce: http://appli8.hec.fr/rosu/research/news.pdf

Awesome, thanks for the reference!

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

#182

Post by yummyfajitas »

SomeCallMeTim wrote: post #174
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…

Ummm...so the only example where an HFT has helped someone out is the one where the HFT screwed up and lost money? In other words, the better an HFT gets, the less benefit they're providing. This isn't doing much to convince me. Yes, in that case, it would suck to be Fry. But the problem at that point is that the price dropped before Fry got his order in, and that's a price of doing business in the stock market. Cons…

Ummm...so the only example where an HFT has helped someone out is the one where the HFT screwed up and lost money?

Yes. This isn't all that uncommon - see insurance companies, for example.

Without Leela, the problem is not that the market moved before Fry got his order in. The problem is the market moved before his order was filled.

ALO? How does that differ from a limit order?

It's a limit order which Adds Liquidity Only. But it's not even necessary in this case - if Fry is willing to accept execution risk, he can place a sell order at $10.05 instead of $10.00:

Sell(Fry, $10.05, 100) Sell(Leela, $10.05, 100) ---------------- Buy(Leela, $10.00, 100) Buy(Bender, $10.00, 100)

If Zoidberg and Amy each buy 100 shares, Fry's order gets filled. If not, Fry loses money.

Fry could also have placed his sell order at $10.04 and jumped the queue:

Sell(Leela, $10.05, 100) Sell(Fry, $10.04, 100) ---------------- Buy(Leela, $10.00, 100) Buy(Bender, $10.00, 100)

In this case Fry gets filled before Leela, so he doesn't need Amy to show up.

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

#183

Post by moe »

yummyfajitas wrote: post #147
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…

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.

When I read about these things it reminds me of when I was working for a gambling site a few years back. Arbitrary rules, designed to maximize profit for the bank.

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

#185

Post by haberman »

SomeCallMeTim wrote: post #174
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…

Ummm...so the only example where an HFT has helped someone out is the one where the HFT screwed up and lost money? In other words, the better an HFT gets, the less benefit they're providing. This isn't doing much to convince me. Yes, in that case, it would suck to be Fry. But the problem at that point is that the price dropped before Fry got his order in, and that's a price of doing business in the stock market. Cons…

> Ummm...so the only example where an HFT has helped someone out is the one where the HFT screwed up and lost money?

They haven't lost money until they sell at a lower price. The price could still go back up and the HFT would make money overall. But Fry is still better off in this case because he got to sell right away at a better price than he could have gotten if Leela wasn't around.

In this case, everyone benefited: Fry got to sell when he wanted at a better price than the non-HFT's were offering and Leela made money. Leela made money by taking on risk. Leela makes money overall only if she is smart enough to win more often than she loses.

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

#186

Post by [deleted] »

yummyfajitas wrote: post #110
btilly wrote: post #97

Earlier quoted context omitted.

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).

[deleted]

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

#187

Post by wtvanhest »

SomeCallMeTim wrote: post #176
wtvanhest wrote: post #114

Earlier quoted context omitted.

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 othe…

I get that $0.10/share is significant, or I wouldn't have bothered posting. Why be annoyed at a process that isn't costing anyone anything significant? I also know that HFTs are taking money out of the equation, not adding money into the equation. If they weren't, they wouldn't be doing it -- and if the only value they're adding is reducing the time that a trade takes place by minutes or seconds, then I still submit…

I also know that HFTs are taking money out of the equation, not adding money into the equation. If they weren't, they wouldn't be doing it

This assumption is questionable. There are a vast number of market participants who do loose money.

The best start up example is the bias toward reporting companies who just got funding and not reporting all the companies that hit the dead pool.

We don't really have a good idea on the net of HFT strategies and it is just as safe to assume they net zero.

Lets just say HFT firms did net to zero, would you still have the same argument?

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

#188

Post by rscale »

mseebach wrote: post #70
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…

What was the cost of the flash crash? As I see it, the important take away from it wasn't the crash, but the immediate rebound. That's evidence of the inherent stability of the set up, rather than the opposite. Yes, some people living on the edge of the market, picking pennies in front of steam rollers, probably had a few days shaved off their life expectancies due to adrenalin spikes, but I could really care less.

The cost is quite hard to measure. An asset that can decline 10% in 5 minutes without any changes in it's fundamentals is likely to trade lower than one that can't, and that volatility (or perception of volatility) has a cost.

The most substantial costs were probably borne by unlucky individuals who had stop-losses that executed solely due to the downward spike, and afterwards found themselves facing a loss, and possibly a tax bills, but I have no idea how common that situation was. I do know that one of my close friends booked his career best day that day, so surely there were also some people who took substantial losses because they didn't expect the problem that occurred.

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

#189

Post by yummyfajitas »

moe wrote: post #183
yummyfajitas wrote: post #147

Earlier quoted context omitted.

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…

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. When I read about these things it reminds me of when I was working for a gambling site a few years back. Arbitrary rules, designed to maximize profit for the bank.

The fill rate is not an arbitrary rule. The goal of ELP is to allow more orders to be filled on Direct Edge (i.e., not routed to INET/ARCA), thus saving Direct Edge customers routing fees (and making DE more money).

If your ELP members aren't filling orders, then customers pay more to have their orders routed and DE makes less money.

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

#190

Post by saurik »

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…

I think the argument here (which I am not saying actually happens or can happen, as everything I know about this comes from reading this discussion) is that it is a little underhanded if you go "anyone want to be the other side of this transaction?" and someone in the room decides that you were a sucker for giving him the announce notice, opens his laptop, manages to find out that outside the room the going price is actually $450, quickly buys some at that lower price, and then sells it to you at $500, whereas if he didn't get involved that $50 difference would have stayed with you (as your $500 intention would have been fulfilled at the slightly lower rate in the larger market).
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