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The Idiot's Guide to High Frequency Trading

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Re: The Idiot's Guide to High Frequency Trading

#21

Post by drawkbox »

a8da6b0c91d wrote: post #7

Some aspects of HFT seem highly analogous to insider trading to me, and insider trading is currently illegal. Abusing the ability to cancel orders fast in order to ping for non-public data about other orders sure seems like an insider advantage. As I understand it this "pinging" is central to HFT strategies. Am I missing something?

The whole pinging to cancel seems like it could really end up compounding into problems, it is abuse of a needed cancelation system.

What happens when it spams so much that it triggers other market reactions? (Flash crashes - which seem like it would happen more as more HFT is increased as you don't have the balance of unpredictable individual investors. HFT vs HFT only in the market, who wins?)

What effect does this have on exchange systems bandwidth / capacity / reliability?

Pretty soon every trade one makes will have to fire off 10x the fake orders to stay camouflaged. What happens when HFT DDoS the whole market with fake orders? Right now HFT is trying to fly under the radar but it could get more intense if not checked early at least with some sort of limit. A good market is a fair market, noone wants to start the race a lap back.

HFT skims now but what is in place when HFT decides to take.

Re: The Idiot's Guide to High Frequency Trading

#23

Post by tptacek »

001sky wrote: post #15
theorique wrote: post #8

Complete idiot's guide is right. Exchanges offer price-time priority. A 'better' price (higher bid, lower offer) gives you priority over a 'worse' price. Given two orders at the same price, an earlier order gives you priority over a later order. If you spend millions of dollars on computers, data feeds, and salaries to skilled personnel, to predict the motion of markets correctly and work within the system to make mo…

Posting an order and canceling it is fair game. When the order is in the market, it's a live intent to trade. When it's canceled, it's no longer a live intent to trade. Would you recommend this as advice to YC companies looking to secure VC? Tactic seems ripe for abuse in M&A negotiations as well.

Are you genuinely asking someone to make a list of the reasons how a VC term sheet differs from a resting limit order?

Re: The Idiot's Guide to High Frequency Trading

#24

Post by 001sky »

tptacek wrote: post #23
001sky wrote: post #15

Earlier quoted context omitted.

Posting an order and canceling it is fair game. When the order is in the market, it's a live intent to trade. When it's canceled, it's no longer a live intent to trade. Would you recommend this as advice to YC companies looking to secure VC? Tactic seems ripe for abuse in M&A negotiations as well.

Are you genuinely asking someone to make a list of the reasons how a VC term sheet differs from a resting limit order?

No, I asking why bad faith in purchasing private equity would be any different than public.

Re: The Idiot's Guide to High Frequency Trading

#25

Post by a8da6b0c91d »

theorique wrote: post #8

Complete idiot's guide is right. Exchanges offer price-time priority. A 'better' price (higher bid, lower offer) gives you priority over a 'worse' price. Given two orders at the same price, an earlier order gives you priority over a later order. If you spend millions of dollars on computers, data feeds, and salaries to skilled personnel, to predict the motion of markets correctly and work within the system to make mo…

It's more like taking a peek at the other players' cards, when only you have the ability to do that.

We have a bunch of laws that establish the pretense that everybody in the market is equal. I suspect we should get rid of most of the laws and drop the pretense. Folks should participate with the understanding that there are unfairly advantaged operators at all levels. But until that happens it's hard to morally square aspects of HFT.

Re: The Idiot's Guide to High Frequency Trading

#26

Post by tptacek »

mayukh wrote: post #18
lrm242 wrote: post #12

Earlier quoted context omitted.

Manoj Narang of Tradeworx has stated their average holding time is up to 10 minutes. Is he taking risk? http://washpost.bloomberg.com/Story?docId=1376-N2CB0F6TTDTQ0...

'Average' holding times don't help understand the issue. You could have one position that was a long-term bet edit: I did not imply that none of the hft strategies were taking market risk. The ones that scalp certainly seem to.

This is the second time you've used the word "scalp", as if all liquidity on the public markets for the last century weren't funded by "scalping".

In the absence of "scalping", trading in stocks works like trading in houses. There are lots of buyers. There are lots of sellers. In the majority of cases, they disagree materially on the correct price. Therefore, it (a) takes forever to enter or exit a position, and (b) often forces people to accept terribly unfavorable pricing.

The "scalp" market makers take is the market price for always having a counterparty willing to trade with you at a price near the true market value of the trading instrument.

If you want the markets to work more like the real estate market, you can do that: place limit orders. The fact that market orders carry a premium price isn't a subtle detail of the market; it's trading 101.

All things being equal, you want the "scalp" to be as thin as possible. The wider the spread, the closer the scalping blade comes to the skull. Liquidity has a price, and investors want that price to be as low as possible.

So now, an exercise for you: at the height of HFT profit-taking, was the price of liquidity (a) lower or (b) higher than it was during the 1990s?

Re: The Idiot's Guide to High Frequency Trading

#28

Post by tptacek »

001sky wrote: post #24
tptacek wrote: post #23

Earlier quoted context omitted.

Are you genuinely asking someone to make a list of the reasons how a VC term sheet differs from a resting limit order?

No, I asking why bad faith in purchasing private equity would be any different than public.

* Because it is incredibly expensive to obtain a term sheet.

* Because the term sheet usually has conditions that the entrepreneur is obliged to honor.

* Because the term sheet is provided after the VC is given access to all the details of the entrepreneur's financials.

* Because the ruthless withdrawal of a term sheet puts the entrepreneur in a distress situation that harms their ability to obtain other term sheets.

There are other reasons, but the analogy is, to me, obviously inapplicable.

Re: The Idiot's Guide to High Frequency Trading

#30

Post by lrm242 »

a8da6b0c91d wrote: post #25
theorique wrote: post #8

Complete idiot's guide is right. Exchanges offer price-time priority. A 'better' price (higher bid, lower offer) gives you priority over a 'worse' price. Given two orders at the same price, an earlier order gives you priority over a later order. If you spend millions of dollars on computers, data feeds, and salaries to skilled personnel, to predict the motion of markets correctly and work within the system to make mo…

It's more like taking a peek at the other players' cards, when only you have the ability to do that. We have a bunch of laws that establish the pretense that everybody in the market is equal. I suspect we should get rid of most of the laws and drop the pretense. Folks should participate with the understanding that there are unfairly advantaged operators at all levels. But until that happens it's hard to morally squar…

No one can see the other players cards in trading unless the player shows them. Brokers sending IOIs to dark pools releases info to the market. Hitting venue A and then venue B in a serial fashion will release info the market, letting some traders cancel before you get to B.

There is no mechanism on the lit markets for anyone to see an order BEFORE it interacts by either posting to the book or being crossed with another order and generating a trade. Anyone who says otherwise is unfortunately misinformed.

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