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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

#221

Post by yummyfajitas »

SomeCallMeTim wrote: post #210
riazrizvi wrote: post #198

Earlier quoted context omitted.

When speculators (HFTs) trade they either move prices in the right direction or they make a mistake and move prices in the wrong direction. When they move prices in the right direction, they provide a valuable price setting service to the market, and when that happens they also make a profit, in effect the market pays them for this service. When they move prices in the wrong direction they lose money, and they pay th…

>they provide a valuable price setting service to the market [Citation Needed] My thesis above is that there IS no value added. You're saying that they are being paid for value provided, but other than possibly causing the price to be updated more quickly (on the 100 millisecond scale mostly, but possibly as much as a few minutes sooner), I don't see how that provides any real value. And honestly I don't see how even…

In ALL the examples in the OA...

Except for the example you choose to ignore, even after it was pointed out to you.

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

#222

Post by yummyfajitas »

jfager wrote: post #206

This is a great series so far, but I think some people are taking it too seriously. This is roughly the equivalent of giving you a good tutorial about how a short map-reduce implementation works and then asking you to agree that Hadoop is awesome. It may or may not be, but the toy example isn't sufficient to make the determination. It's just background information for the uninitiated. Some relevant questions that are…

It's just background information for the uninitiated.

That's all it's intended to be.

Is there anything forcing them to keep supplying liquidity even if the market's moving against them?

No.

If not, and they earn a premium, why isn't that evidence that something's broken?

Wait for part 3. I do believe HFTs are capturing fractions of a penny in rent and I have an idea of how to fix this.

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

#223

Post by yummyfajitas »

DannoHung wrote: post #214
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.

> poorly written algorithms behaving oddly Or algos that are actively working other algos. The only good reason to have marketplaces is to get efficient price discovery. Explain to me how HF algos stuffing quotes helps to do so. Explain how this isn't just a way to salami slice the cumulative market orders for any given stock?

Explain to me how HF algos stuffing quotes helps to do so.

Explain to me how the heat generated by Amazon's data centers helps bring packages to my door.

The answer is that it doesn't. It's a harmless side effect of the process that does.

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

#224

Post by fr0sty »

grandalf wrote: post #192
saurik wrote: post #190

Earlier quoted context omitted.

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…

That may be the nature of the complaint, and it is definitely the underlying concern of the NBBO rules. But by saying "hey, anyone want to be the other side of this transaction" you're stating the price at which you'd find a trade beneficial. This gets back to the nature of the market price. There is a fallacy that the market price is the price of the last trade. At any price, there is some combination of supply and…

>The genius of ETN creators

What is your definition of "ETN"? The only definition I know is "Exchange Traded Note" which doesn't make sense here. Do you mean "ECN"(Electronic Communications Network)?

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

#225

Post by wtvanhest »

danenania wrote: post #219
wtvanhest wrote: post #196

Earlier quoted context omitted.

Do VCs all make money? Mutual funds beat the bench? Hegde funds? Airlines? They spend a ton of money on fixed costs. Some make money some do not.

They all have revenues. Whether they make profits is another question, but that's not relevant to the point. If HFTs didn't at least have positive revenues from their trades, then no, they wouldn't be buying expensive servers and hiring expensive talent. Money extracted from the market is the issue here, not whether the amount extracted is sufficient to cover costs.

I understand where you are coming from, but investments are not made the way you are assuming.

An HFT investment likely involves someone deciding they want to create an HFT fund, going out to institutional investors and selling them on the idea that THEIR fund will be profitable.

That happens over and over and investors in these HFTs (as well as hedge funds, PE etc. all think they are picking winners who can make it work. Whether they can or not will depend on execution.

Investment in a sector, industry, or asset class does not mean there is net winning from that sector.

At the end of the day, HFT is still competitive since they are bidding against each other (hence the arms race for faster equipment). Even if the market is growing for HFT now, it does not mean it will be forever. At some point it will become mature and all that will be left is net negative HFT profitability with all the benefit going to investors in the form of liquidity.

I am not backing up HFT because I trade in HFT, I do not. I am backing it up because I find it agitating that smart people on HN look at HFT and assume because they are smart, and because they don’t understand it that it must be bad. If something in the market is happening you don’t fully understand it really pays to sit back for a second and think about it.

(I’m guilty of not doing that with a variety of topics too and I do not fully understand HFT, but I understand enough to say that I cannot say with any certainty that it is bad and lean more to saying it is net good.)

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

#226

Post by ChristianMarks »

anonymoushn wrote: post #213
ChristianMarks wrote: post #208

Earlier quoted context omitted.

http://www.zerohedge.com/news/market-stoned-its-1999

This, like your blog post, is about volume and not about liquidity. Do you have any evidence regarding liquidity? When answering, bear in mind that "liquidity" increases with the depth of the book, increases as the spread narrows, and does not have anything to do with "volume."

Observe the arrogant attempt to control the answer with the implication that the characterization of liquidity is a settled matter instead of an area of research. One model in your favor is given in this article: http://www.sciencedirect.com/science/article/pii/S0304405X07... which says that liquidity is related to the variance of volume but is weakly correlated with volume. It does not mention depth of book, which would be "the number of shares that could be bought or sold without changing the price of a stock." There are other models, however.

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

#227

Post by wtvanhest »

nhaehnle wrote: post #215
wtvanhest wrote: post #169

Earlier quoted context omitted.

They are both relevant. In general a portfolio manager + investment analysts are worried about stock price movements but the trader for the fund is worried about liquidity spreads and about buying the shares for the lowest price while selling shares for the greatest price. While $6M in not large by percentage, there is no reason to want to give that up.

While $6M in not large by percentage, there is no reason to want to give that up. On the other hand, imagine a world of only portfolio managers and no HFT. That is, trades happen only between portfolio managers with no middle man. Then yes, on one day you as a portfolio manager would have to give up $6M. But where do those $6M go? Logically, they must go to another portfolio manager. By symmetry of portfolio managers…

The macro case is as follows:

HFTs will not net positive out over the long term so they are not taking away from other investors. (this is based on what I said in another comment above).

Mutual funds trade huge volume and need liquidity to take advantage of market research. Without liquidity their size would require them to stay smaller and require more investment professionals for any dollar amount they have under management. Without liquidity you would see smaller and smaller mutual funds as their capacity got capped which would lead to higher expense structures for investors.

--- As far as the arms race, I agree with you.

But the arms race to ever lower latencies just seems useless from the point of view of society.

5 years ago it made sense and helped investors, now or at some point in the future the market will reach the point of dimishing returns from incremental small gains in hardware. At the same time HFTs will be investing more in hardware than they will be netting out of the system. Soon, if not already the HFT business will be mature and they will net negative and become consolidated. At that point (if it hasn't happened already) HFTs will have benefited the market with additional liquidity but any profitability long term will be negative.

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

#228

Post by TimGebhardt »

soup10 wrote: post #161
chrisaycock wrote: post #154

Earlier quoted context omitted.

> financial companies that hire a lot of smart people and make them do work that has little value to society Would you rather I build a photo-sharing site? Chase tenure with esoteric publications? Do you even know why I do HFT? I do it because it's intellectually stimulating and pays well, plus I work in a small firm of ten smart people and no corporate politics. As for the value to society you don't believe I'm prov…

There's is nothing wrong with honest work, but if you are a highly skilled programmer and think that HFT is the most impactful/important work you can do. Then you aren't thinking hard enough.

And I think he's asking you: what should he do then since you're judging that the work he's doing isn't valuable? Impact and importance are judgement calls.

You're already making the judgement that the work he's doing isn't valuable, finish it up and judge what he should do.

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

#229

Post by DannoHung »

yummyfajitas wrote: post #223
DannoHung wrote: post #214

Earlier quoted context omitted.

> poorly written algorithms behaving oddly Or algos that are actively working other algos. The only good reason to have marketplaces is to get efficient price discovery. Explain to me how HF algos stuffing quotes helps to do so. Explain how this isn't just a way to salami slice the cumulative market orders for any given stock?

Explain to me how HF algos stuffing quotes helps to do so. Explain to me how the heat generated by Amazon's data centers helps bring packages to my door. The answer is that it doesn't. It's a harmless side effect of the process that does.

What a horrible analogy. You're offering no evidence that it's harmless. Any system trying to analyze price discovery on a security is going to look at the depth of book and try to use the imbalance to determine where in the spread the current optimal price lies. Stuffing quotes is going to make that information meaningless. Stuffing quotes when you have the ability to do so faster than other market participants is evil.

The problem could be solved if there was a latency buffer on quotes being placed and canceled on the market. If HF algos had to wait 100ms before cancelling a buy or sell then quote stuffing would disappear. Tell me why having to wait a tenth of a second before cancelling a quote is horrible.

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

#230

Post by jcampbell1 »

tazzy531 wrote: post #193
jcampbell1 wrote: post #105

Earlier quoted context omitted.

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…

Fine, SPEEDY gets that 200 share trade, now the order book looks like this: SELL BIG - 1000 $600 ----- Buy SPEEDY - 200 $599 BUY BIG - 1000 $599 Another buy order at $600 comes in and BIG makes the trade. Now the order book looks like this: SELL BIG - 800 $600 ----- Buy SPEEDY - 200 $599 BUY BIG - 1000 $599 At this point, SPEEDY wants to get back in so he offers 200 shares @ $600. The Order book now looks like this:…

You are right that the interaction is much more complicated to model correctly multi-period than either of us has described. Either way, it is clear that being faster will produce higher returns for a given algo. The question is how much. Given the extreme things HFT guys do, I think it is clear they understand a tiny increase in speed can result in handsome returns. Is this efficient for the exchange?

What if the exchange traded once every 5 seconds in a blind auction, then there would be no real advantage to speed. Each computer would have 4.5-4.95 seconds to parse the auction results and post new orders.

Would this exchange be more or less liquid? (I don't know, but it is interesting to think about.) The barrier to entry to be a market maker would be lower. The market making code would look more like Poker bot code, rather than what HFT does now.

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