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Someone got the natural gas report 400 ms early

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Re: Someone got the natural gas report 400 ms early

#261

Post by KMag »

josh2600 wrote: post #206
murbard2 wrote: post #195

Earlier quoted context omitted.

High frequency trader here: This is only looking at the volume on public exchanges. There are a lot of regulations around public exchanges which prevent them from operating efficiently. For instance, unless the stock has a very small price, you cannot offer sub-penny prices on this exchange. Most retail trades actually never see the exchange, they are sold in bulk by brokers to places like Knight or Getco who interna…

Yeah. I don't think it's surprising either, in fact when I was first writing the post I assumed HFT volume was closer to 95% of trade volume but I couldn't find any public numbers above 70%. I think that dark pools are where the next crash will come from, but I'm by no means a financial wizard. The way I perceive it, dark pools and other nearly-invisible investment exchanges are scary in that the ramifications of dar…

Maybe you actually know a lot about dark pools, but by expressing fear without expressing knowledge, you give the impression that you're mostly afraid because the name "dark pool" sounds like some kind of unregulated secret exchange run out of a meat locker by the Russian mafia.

I think Kid Dynamite (a retired trader, non-HFT) has some pretty reasonable articles about dark pools:

http://kiddynamitesworld.com/dark-pools-are-not-scary-shady-...

Disclaimer: my employer helps mutual funds, pension funds, universities, etc. place large orders on the market, using a variety of techniques (including dark pools) to try and smooth out the market impact of these big trades and minimize the the amount clients lose to market participants who are trying to anticipate their short-term trading behavior.

Re: Someone got the natural gas report 400 ms early

#262

Post by KMag »

kunle wrote: post #226
snowwrestler wrote: post #172

Earlier quoted context omitted.

It won't. High frequency trading slices the gap between offer and purchase into an enormous number of tiny slices, and HFT companies compete to see who can collect the most number of slices. But that does not affect the underlying factors that lead to most offers and purchases of stock. For example you could offer OJ futures at improperly high prices a billion times per second, but that does not mean anyone will buy…

> In addition, I wonder by what criteria one would evaluate how "properly" the markets are functioning. Who decides what is proper? For example, based on the business fundamentals it seems ludicrous to me that Apple would have a lower P/E ratio than GM--but it currently does. Couple of things: 1. Reference to Apple PE ratio is likely a market driven phenomenon that has occurred before to the other technology company…

Playing devil's advocate here: if you believe the purpose of the market is to help long-term investors buy and sell at rational/efficient prices (in other words, price discovery), then why is relative volumes of HFT vs. long-term investment relavent.

I'm not saying it's the best metric, or even a good metric, but there's quantitative evidence that when new news comes out and prices move rapidly, HFT reduces the time it takes for markets to settle down after big price moves. By many measures, this makes the markets more rough, since prices move more abruptly. On the other hand, with more rapid price discovery, fewer long-term investors trade at non-consensus prices during the transition period.

Re: Someone got the natural gas report 400 ms early

#263

Post by KMag »

prostoalex wrote: post #233
runT1ME wrote: post #173

Earlier quoted context omitted.

I've been wondering if an exchange that prevented HFT would prosper in the current climate. I'm sure that plenty of companies aren't a fan of their market cap being at the whim of an algorithm and the large number of swings it would undergo. Wouldn't they prefer an exchange that offered liquidity in minutes or even hours, opposed to fractions of a second?

What is your definition of H though? If someone decides to offer a large block of shares for sale, and they break it into 100 lots, are they a high-frequency trader under this definition? What if it's 10,000 lots? 10,000,000? This is a data structure problem at its core - the fact that someone entered one billion BUY orders at $15.51 should not prevent me from seeing that there's an outstanding order at $15.52. The s…

"This is a data structure problem at its core - the fact that someone entered one billion BUY orders at $15.51 should not prevent me from seeing that there's an outstanding order at $15.52. The stock market employs the queue only for legacy reasons."

(1) I'm not sure I understand what you're saying about price information. You seem to be saying that level 2 quotes don't exist. I assure you that for the major exchanges, level 2 quotes do exist, but they're more expensive than what most discout brokerages/Yahoo/Google give you.

(2) I'm not sure what you mean about queuing at price levels being a legacy artifact. There needs to be some objective rule for deciding who trades with whom when there are multiple participants at a given price level. In most markets, it's first-come-first-serve (a queue). I read that MS POOL was going to try prioritizing based on size, but I haven't heard anything since. So, if it's not first-come-first-serve, and there are two offers at $5.43 and a trader comes in and lifts one of the offers (not enough size to lift both), which of the two offers should get lifted?

Re: Someone got the natural gas report 400 ms early

#264

Post by dlitz »

roc wrote: post #130
dice wrote: post #51

Earlier quoted context omitted.

Couldn't it also just be clock skew on a host or local datacenter which set off a chain reaction? I mean, I know that traders are probably pretty anal about accurate clocks, but mistakes do happen.

> "mistakes do happen." Absolutely. I'm just saying there isn't much justification to assume it was a mere mistake. Particularly given the trades that show up just after the report was released, but before a person could conceivably process them and initiate the relevant strategy. That alone suggests gamesmanship, even if the "early" trader went earlier than he meant to .

> Particularly given the trades that show up just after the report was released, but before a person could conceivably process them and initiate the relevant strategy.

Couldn't they be trading based on some natural language processing algorithm?

Re: Someone got the natural gas report 400 ms early

#265

Post by JumpCrisscross »

gbog wrote: post #254
JumpCrisscross wrote: post #248

Earlier quoted context omitted.

Information can cause one of three price reactions: up, down, or flat. Prices stay the same if the market accurately anticipated the information. Chances are, though, that the information will change prices. One thus knows that when an EIA report comes out, ceteris paribus , prices are more likely to spike or dive than stand still. "Veteran" traders set up limit orders so that if prices rose they'd buy and if prices…

"Information can cause one of three price reactions: up, down, or flat." Then there is no cause. Prices change somewhat randomly whether there is some information or not. The only correct predictive model is something like " there is 80pc chance that the price will be between -10 and 30 of its current value". Anything else is reading in a crystal ball. I didn't invent any of these, read Thinking Fast and Slow if you…

By price reaction I meant deviation from the path without the information. I was qualitatively representing the ensemble, i.e. parametric space, of possible price movements on (-∞, ∞) by mapping them to up Let Px(t) be the price at time t. Px(t+δ) given Px(t), i.e. P[Px(t+δ)|Px(t)] is D = Gaussian(Px[t], vol) in an efficient market. We know relevant information is going to be added to the market at t+δ, but we do not precisely know its content until t+δ. The market can, however, make an educated guess. This information is a kernel with a central tendency* and an entropy, i.e. second moment, H. The price at t+δ is now D' = Gaussian(Px[t], vol + Hω), where ω is the weight of the information. Since H and ω are both positive we can see that D' is platykurtic with regards to D. D'-D, the impact of knowing that salient information will hit the market at a certain time, looks like a short butterfly P&L.

Thanks for the book recommendation; I enjoy Kahneman's work.

*If ω were very low or H very high, e.g. a unitary distributed kernel would have infinite Shannon's entropy, you are correct in assuming that it would have no impact on D', i.e. D'-D would be zero.

Re: Someone got the natural gas report 400 ms early

#266

Post by refurb »

JumpCrisscross wrote: post #248
apaprocki wrote: post #104

http://invezz.com/news/alternative-investments/625-uk-report... "Veteran traders would usually wait in anticipation for the weekly report of gas-inventory figures by the U.S. Energy Information Administration released on Thursday at 10.30 AM and then dive into the busiest trading window of the week. This is no longer true as most traders are now staying out of the market due to the HFTs new strategy - sending floods…

Information can cause one of three price reactions: up, down, or flat. Prices stay the same if the market accurately anticipated the information. Chances are, though, that the information will change prices. One thus knows that when an EIA report comes out, ceteris paribus , prices are more likely to spike or dive than stand still. "Veteran" traders set up limit orders so that if prices rose they'd buy and if prices…

This is exactly what happened to a biotech's stock back in 2009.

http://pipeline.corante.com/archives/2009/04/30/dendreons_st...

Basically the company was about to release the findings from a key clinical trial. The stock price would either soar or it would flop.

Tuesday 12pm * stock price is $25

Tuesday 12pm - 12:27pm * massive wave of selling starts the price of the stock dropping

Tuesday 12:27pm - exchange halts trading at $11.81

Mind you, at the exact same time as this was happening, the company was releasing very positive clinical trial data.

So what happened?

The guess is that some large trader did some investigating and found out that a lot of people had stop-loss orders on the stock. The trader slowly accumulated a large position, then rapidly sold off shares right before the announcement.

This caused the stock price to drop, which initiated a number of stop loss orders, which further eroded the stock price. Since it's a small company with a pretty small float, it doesn't take much volume to really swing the price.

The trader then bought back a number of shares (at a very reduced price).

The stock was back over $25 the next day.

Re: Someone got the natural gas report 400 ms early

#267

Post by roc »

dlitz wrote: post #264
roc wrote: post #130

Earlier quoted context omitted.

> "mistakes do happen." Absolutely. I'm just saying there isn't much justification to assume it was a mere mistake. Particularly given the trades that show up just after the report was released, but before a person could conceivably process them and initiate the relevant strategy. That alone suggests gamesmanship, even if the "early" trader went earlier than he meant to .

> Particularly given the trades that show up just after the report was released, but before a person could conceivably process them and initiate the relevant strategy. Couldn't they be trading based on some natural language processing algorithm?

Could be. Are those sufficiently advanced that anyone would be confident-enough to wager amounts, based on their results, of the order at issue here?

Re: Someone got the natural gas report 400 ms early

#269

Post by MrMan »

KMag wrote: post #263
prostoalex wrote: post #233

Earlier quoted context omitted.

What is your definition of H though? If someone decides to offer a large block of shares for sale, and they break it into 100 lots, are they a high-frequency trader under this definition? What if it's 10,000 lots? 10,000,000? This is a data structure problem at its core - the fact that someone entered one billion BUY orders at $15.51 should not prevent me from seeing that there's an outstanding order at $15.52. The s…

"This is a data structure problem at its core - the fact that someone entered one billion BUY orders at $15.51 should not prevent me from seeing that there's an outstanding order at $15.52. The stock market employs the queue only for legacy reasons." (1) I'm not sure I understand what you're saying about price information. You seem to be saying that level 2 quotes don't exist. I assure you that for the major exchange…

several futures markets queue partially or only by order size.

Re: Someone got the natural gas report 400 ms early

#270

Post by MrMan »

white_devil wrote: post #256
apaprocki wrote: post #104

http://invezz.com/news/alternative-investments/625-uk-report... "Veteran traders would usually wait in anticipation for the weekly report of gas-inventory figures by the U.S. Energy Information Administration released on Thursday at 10.30 AM and then dive into the busiest trading window of the week. This is no longer true as most traders are now staying out of the market due to the HFTs new strategy - sending floods…

This is such utter bullshit. Markets are being programmatically gamed , and seriously bright young minds are still flocking to the Vampire Squid's embrace, hoping for a chance to help them do that in exchange for a slice of that phat, fraudulent loot.

it's not any worse than using javascript to further the ad industry
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