Why Do High-Frequency Traders Cancel So Many Orders? • Hacker News Board

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#231

Post by crdoconnor » Sat, Oct 10, 2015, 6:33 AM UTC

tptacek wrote: post #181

crdoconnor wrote: post #159

Earlier quoted context omitted.

If that were so, dark pools would have been around for as long as we've had public exchanges. Yet they only appeared on the scene after HFT did.

I'm confused. Dark pools (ie, private exchanges) are devices used primarily by giant investment banks and hedge funds to try to load or unload large amounts of stock without moving the market. What point are you trying to make about them? That if we didn't have HFT, we wouldn't need them? That's an argument for HFT, not against.

Dark pools exist largely to prevent HFT from parasitically extracting value from large trades. Spearing whales I believe it's called. Giant investment banks, hedge funds, insurance companies and pension funds use them.

>That if we didn't have HFT, we wouldn't need them? That's an argument for HFT, not against.

Dark pools are an evolved defense against parasitic market players that is not cheap. These costs are then passed on to you via your pension fund, index fund or if you buy insurance.

I don't see how that's an argument for them unless you or your friends were personally profiting from it.

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#232

Post by crdoconnor » Sat, Oct 10, 2015, 6:43 AM UTC

tptacek wrote: post #183

crdoconnor wrote: post #52

Earlier quoted context omitted.

It's a legal distinction. Economically the effect is the same.

How could the economic effect be the same? In its real-world legal sense, front-running is an agent-principal problem. HFTs are not agents brokering for clients; in fact, they're usually proprietary traders.

>How could the economic effect be the same?

If a value trader goes and does a lot of good research on a company and then executes smart trades based upon that research they will make a profit. All well and good.

If a value trader goes and does a lot of good research on a company and executes some smart trades based upon that and their broker front runs them, a substantial portion of their profits are handed over to the broker. Not good. Value trader may not bother doing all that research in future (market for lemons; equity market becomes ever more disconnected from the real world). Broker parasitically extracted the value of value trader's real world research from them.

If a value trader goes and does a lot of good research on a company and executes some smart trades based upon that and an HFT detects the trade they're putting through and trades ahead of them using their superior speed, a substantial portion of their profits are, likewise, handed over to the HFT. Not good. Value trade probably won't bother doing all that research in future (market for lemons).

Front running is both a principal/agent problem and a market for lemons problem.

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#233

Post by rancur » Sat, Oct 10, 2015, 7:09 AM UTC

WhoBeI wrote: post #206

norea-armozel wrote: post #179

Earlier quoted context omitted.

Oddly this reminds me of station trading in Eve Online where users fight over the price of their goods based on mere cents on an ISK.

Ah, yes, good old Jita. In Eve market bots aren't allowed though, they are considered unfair, so there is some difference.

so a game that's more fair than real life. weird....

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#234

Post by JoachimSchipper » Sat, Oct 10, 2015, 7:53 AM UTC

ycombobreaker wrote: post #227

patio11 wrote: post #176

I happen to have 144 lines of Ruby which implement the world's most braindead market making algorithm, coded by someone who had literally never written a trading system before. It cancels ~98% of orders before they are hit when running on a single stock on a single venue.

Is it profitable? Or just paper trading/simulated? Braindead stuff works if it is the fastest in the world, but as you slow down you need to get smarter to cover losses due to getting "picked off" more frequently.

I'm pretty sure it's a competitor for Patrick's StarFighter game. It's not supposed to be impossible to beat.

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#235

Post by beagle3 » Sat, Oct 10, 2015, 9:14 AM UTC

ctlby wrote: post #212

beagle3 wrote: post #204

Earlier quoted context omitted.

> it meaningfully decreases incentives to post serious size Do you have support for that claim? (I don't have an opinion; Trying to form one based on data)

The second page contains a succinct summary of theoretical reasons why this is true. The rest of the paper goes over empirical findings: http://www.acsu.buffalo.edu/~keechung/MGF743/Readings/G2%20D... Since then, we have additional data points from the decimalized US equity markets. See http://www.sec.gov/rules/other/2014/34-72460.pdf for a bibliography. The weight of the evidence points towards thinner books. Incide…

Thanks!

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#236

Post by tptacek » Sat, Oct 10, 2015, 1:39 PM UTC

crdoconnor wrote: post #232

tptacek wrote: post #183

Earlier quoted context omitted.

How could the economic effect be the same? In its real-world legal sense, front-running is an agent-principal problem. HFTs are not agents brokering for clients; in fact, they're usually proprietary traders.

>How could the economic effect be the same? If a value trader goes and does a lot of good research on a company and then executes smart trades based upon that research they will make a profit. All well and good. If a value trader goes and does a lot of good research on a company and executes some smart trades based upon that and their broker front runs them, a substantial portion of their profits are handed over to t…

I'm not sure I understand the superpower you've just assigned HFTs. If a value trader does a ton of research and decides to adjust their position in a stock, exactly what is it that an HFT can do to capture "a substantial portion of their profits"?

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#237

Post by yummyfajitas » Sat, Oct 10, 2015, 1:46 PM UTC

crdoconnor wrote: post #232

tptacek wrote: post #183

Earlier quoted context omitted.

How could the economic effect be the same? In its real-world legal sense, front-running is an agent-principal problem. HFTs are not agents brokering for clients; in fact, they're usually proprietary traders.

>How could the economic effect be the same? If a value trader goes and does a lot of good research on a company and then executes smart trades based upon that research they will make a profit. All well and good. If a value trader goes and does a lot of good research on a company and executes some smart trades based upon that and their broker front runs them, a substantial portion of their profits are handed over to t…

I believe the claim is that David Einhorn, Steve Cohen and other super rich hedge fund managers are providing incredibly valuable information discovery services to the markets. By by forcing them to suffer the price impact of their trades, we then reduce the incentive of such people to provide more information discovery.

tl;dr; Joe 401k should pay more for his retirement savings because by indexing, he's freeloading on the valuable labor provided by prop traders. HFT is bad because it makes this freeloading cheaper.

(Weird to hear argument lionizing hedge fund managers and calling out workers as freeloaders coming from left wing types.)

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#238

Post by cpach » Sat, Oct 10, 2015, 1:48 PM UTC

tptacek wrote: post #236

crdoconnor wrote: post #232

Earlier quoted context omitted.

>How could the economic effect be the same? If a value trader goes and does a lot of good research on a company and then executes smart trades based upon that research they will make a profit. All well and good. If a value trader goes and does a lot of good research on a company and executes some smart trades based upon that and their broker front runs them, a substantial portion of their profits are handed over to t…

I'm not sure I understand the superpower you've just assigned HFTs. If a value trader does a ton of research and decides to adjust their position in a stock, exactly what is it that an HFT can do to capture "a substantial portion of their profits"?

Good question!

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#239

Post by yummyfajitas » Sat, Oct 10, 2015, 1:55 PM UTC

tptacek wrote: post #236

crdoconnor wrote: post #232

Earlier quoted context omitted.

>How could the economic effect be the same? If a value trader goes and does a lot of good research on a company and then executes smart trades based upon that research they will make a profit. All well and good. If a value trader goes and does a lot of good research on a company and executes some smart trades based upon that and their broker front runs them, a substantial portion of their profits are handed over to t…

I'm not sure I understand the superpower you've just assigned HFTs. If a value trader does a ton of research and decides to adjust their position in a stock, exactly what is it that an HFT can do to capture "a substantial portion of their profits"?

The HFT can afford to provide a tight spread to Joe 401k, who typically buys at most 1 lot at a time. He can afford to do this because when there is a large surge of demand, he has the ability to rapidly reprice his orders.

I describe the process in a bit more detail here: https://www.chrisstucchio.com/blog/2014/fervent_defense_of_f...

This enables market makers to price discriminate between Joe 401k (who pays less) and David Einhorn (who pays more).

Re: Why Do High-Frequency Traders Cancel So Many Orders?

#240

Post by tptacek » Sat, Oct 10, 2015, 2:53 PM UTC

crdoconnor wrote: post #231

tptacek wrote: post #181

Earlier quoted context omitted.

I'm confused. Dark pools (ie, private exchanges) are devices used primarily by giant investment banks and hedge funds to try to load or unload large amounts of stock without moving the market. What point are you trying to make about them? That if we didn't have HFT, we wouldn't need them? That's an argument for HFT, not against.

Dark pools exist largely to prevent HFT from parasitically extracting value from large trades. Spearing whales I believe it's called. Giant investment banks, hedge funds, insurance companies and pension funds use them. >That if we didn't have HFT, we wouldn't need them? That's an argument for HFT, not against. Dark pools are an evolved defense against parasitic market players that is not cheap. These costs are then p…

Large trades should move the market!

You and I buy stocks in small amounts. Intuitively, after each of our trades, we understand that the market moves to take the impact of those trades into account. That's the point of markets!

So why on earth should it be that a hedge fund should be able to buy or sell huge amounts of stock without having the market move? You don't have that power. Why do they? The fact that a giant entity is trying to move huge amounts of stock is information. The point of the market is to capture that information and build it into prices. That's exactly what HFTs are doing in this scenario.

The expectation that hedge fund managers have that they should be able to capture the spot price of a security and then buy or sell arbitrary amounts at that price, taking their information advantage out of the hides of every other market participant, seems totally unfair. Again: you don't have that privilege on the market. Why do they?