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Algorithmic Trading is Not High Frequency Trading

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Re: Algorithmic Trading is Not High Frequency Trading

#31

Post by T_S_ »

reverend_gonzo wrote: post #22
T_S_ wrote: post #17

Accurate article? Yes I think so. Hairsplitting? A bit. Any content about the big picture? Afraid not. Algo trading has been around longer than HFT. It was invented to protect the information that that a big order was being executed. This avoided the risk of front running by handing the order to humans or scaring liquidity providers by executing it all at once. HFT came about when computerized exchanges began to comp…

There are a massive number of HFT shops. Most of these are prop-shops rather than funds, as in they trade their own money and don't take investors. They are physically unable to front run their customers because they simply don't have customers. I will give you that there are some big banks getting into HFT now, and that's a different story, but a statement like "HFT in its worst form amounts to high speed computeriz…

I understand the industry quite well and from experience. BTW My only daggers were aimed at HFT.

Let me be clear. Anybody that puts an order in not expecting to get executed but to create favorable conditions for their next order is engaging in what I call "high speed rumor mongering". There are lots of variations of this game. Never happens? Always happens? You tell me.

But markets aren't chess. "Rumor-mongering" is a legal term I chose on purpose. It is generally prohibited because it destroys liquidity in markets, which hurts investors and issuers. The term is intentionally objectionable, but not inaccurate. Just don't trouble the regulators to figure it out.

Re: Algorithmic Trading is Not High Frequency Trading

#33

Post by FrojoS »

paperwork wrote: post #27

I always find it interesting how much vitriol there is against automated trading, even among programmers. Too many people seem to believe that a small number of, ultra resourceful, nefarious folks are using unfair means to "game the system." The truth, as usual, is less interesting. Doing this type of trading doesn't require millions of dollars and teams of PhDs. You don't have to know the right people and you don't…

>A quant colleague of mine, who has a PhD in Physics from an >Ivy League school told me that he, and many of his friends, >left academia because there were simply no positions for >them.

Then why not work in any other industry? Going from the worst paid to the best paid occupation is not really something you have to push most people to.

Re: Algorithmic Trading is Not High Frequency Trading

#34

Post by chollida1 »

steve8918 wrote: post #21
joezydeco wrote: post #3

In your opinion, Jeff, was the 2010 Flash Crash the work of HFT, or Algo trading? Maybe both?

The 2010 flash crash was caused by "blackhat" HFT traders trying to game the system. It was shown that one, some, or many HFTs were involved in "quote stuffing" which is bidding for stock and then pulling the order, something like 100k times per second. This gave the appearance of liquidity and demand, but it was fake, because as soon as someone would bid for the stock, they would pull their order. But another use of…

> I place a bunch of trades around 25% below the current stock price

Funny, we sat around trying to figure out the right price and this is what we came up with as well.

Too bad this doesn't show up in second level quotes, it would be a good leading indicator of what funds in general thought the chance of a crash was on any given day:)

Re: Algorithmic Trading is Not High Frequency Trading

#35

Post by seanos »

For those that are interested:

Here is a video of an extremely interesting talk, entitled "Human Traders are an Endangered Species!", by Dave Cliff who's involved with the Foresight project:

http://trading-gurus.com/human-traders-are-an-endangered-spe...

and more information on the Foresight project itself:

http://www.bis.gov.uk/foresight/our-work/projects/current-pr...

Re: Algorithmic Trading is Not High Frequency Trading

#36

Post by LiveTheDream »

paperwork wrote: post #27

I always find it interesting how much vitriol there is against automated trading, even among programmers. Too many people seem to believe that a small number of, ultra resourceful, nefarious folks are using unfair means to "game the system." The truth, as usual, is less interesting. Doing this type of trading doesn't require millions of dollars and teams of PhDs. You don't have to know the right people and you don't…

> I am also against the ability to trade by borrwing money from brokers (margin trading or leveraged trading). If an individual trader screws up, they wipe themselves out. If they borrowed money, then the consequences of their bad trades starts to seep out to others. If more than a handful of traders, trading on margin, go belly up, the lender could be in trouble as well...you can see how this could ripple across a system.

In theory, shouldn't those giving the loans account for the risk and thus be protected from wiping out themselves?

Re: Algorithmic Trading is Not High Frequency Trading

#37

Post by seanos »

paperwork wrote: post #27

I always find it interesting how much vitriol there is against automated trading, even among programmers. Too many people seem to believe that a small number of, ultra resourceful, nefarious folks are using unfair means to "game the system." The truth, as usual, is less interesting. Doing this type of trading doesn't require millions of dollars and teams of PhDs. You don't have to know the right people and you don't…

"-75% of trading is now automated, it is just computers trading with each other.

I hope someone will correct me if I'm wrong but I have never figured out if this 75% includes algo trading. If it does include algo trading (my guess is that it does), then I'm surprised it is not 100%. That is like saying 95% of TV channels are controlled by remote-control devices."

From the Foresight project homepage (http://www.bis.gov.uk/foresight/our-work/projects/current-pr...): "For example, today, over one third of United Kingdom equity trading volume is generated through high frequency automated computer trading while in the US this figure is closer to three-quarters."

Re: Algorithmic Trading is Not High Frequency Trading

#38

Post by steve8918 »

flourpower wrote: post #30
steve8918 wrote: post #19

Absolutely terrible blog post. Saying algorithmic trading isn't HFT is like saying a bird isn't an ostrich. HFT is a subset of algorithmic trading. It's as simple as that. Not all algorithmic trading is HFT. But all HFT is algorithmic trading. Algorithmic trading is any type of trading done based on an algorithm, and not based on "traditional investing principles". For example, "buy when the 10-day moving average cro…

What evidence do you have that the stock prices have recently become less predictive of future earnings? Was the market performing its predictive duty in, for instance, September of 1929?

Previously the vast majority of investors were buy and hold, where they believed in companies and that their earnings would increase. Of course, there were always traders like Jesse Livermore that traded off of order flow, but those were the minority. Most were like Warren Buffett where buying and holding was for the best.

Now the majority of trades are done by algorithms with no biases at all towards the earnings growth of a company, be it HFT, or statistical arbitrage, or through other quantitative models.

HFT accounts for 75% of daily volume, and by definition, HFT does not take into consideration things like future earnings growth, etc. For the most part, they simply find arbitrage opportunities and profit from them.

So stocks being bought and sold are not done based on the earnings potential of a company. Case in point, Citigroup before the reverse split was trading hundreds of millions of shares per day, not because so many people believed in the company, but because it was dominated by rebate traders, HFT, day traders, etc. I believe companies like Fannie Mae and Freddie Mac were trading millions of shares before they went pink slip, even though it was known that they were defunct.

Re: Algorithmic Trading is Not High Frequency Trading

#39

Post by steve8918 »

eru wrote: post #24
steve8918 wrote: post #19

Absolutely terrible blog post. Saying algorithmic trading isn't HFT is like saying a bird isn't an ostrich. HFT is a subset of algorithmic trading. It's as simple as that. Not all algorithmic trading is HFT. But all HFT is algorithmic trading. Algorithmic trading is any type of trading done based on an algorithm, and not based on "traditional investing principles". For example, "buy when the 10-day moving average cro…

If nobody were investing long term any longer, wouldn't there be less money in the system, and thus it would be relatively cheap to buy and hold?

Not sure exactly what you're asking, but the fact is that trading has been drying up. Since 2007, volume has plummeted, and August I believe was one of the worst, if not the worst, month for people withdrawing from mutual funds. Less and less retail are staying in the markets because of the volatility.

So I don't know if it will get cheaper to buy and hold. It will definitely get more volatile.

Re: Algorithmic Trading is Not High Frequency Trading

#40

Post by steve8918 »

chollida1 wrote: post #34
steve8918 wrote: post #21

Earlier quoted context omitted.

The 2010 flash crash was caused by "blackhat" HFT traders trying to game the system. It was shown that one, some, or many HFTs were involved in "quote stuffing" which is bidding for stock and then pulling the order, something like 100k times per second. This gave the appearance of liquidity and demand, but it was fake, because as soon as someone would bid for the stock, they would pull their order. But another use of…

> I place a bunch of trades around 25% below the current stock price Funny, we sat around trying to figure out the right price and this is what we came up with as well. Too bad this doesn't show up in second level quotes, it would be a good leading indicator of what funds in general thought the chance of a crash was on any given day:)

I place a limit order, which I guess you could see if the depth were deep enough, but I could very well have programmed an algorithm to just monitor the prices and do market orders instead, which you definitely wouldn't see. I'm sure most traders do it that way.

The interesting thing is that on the day of the Flash Crash, if I'm not mistaken the ES futures contract bounced exactly off the 200 day MA. So, one thing that the flash crash revealed is a lot of algorithms programmed into the markets that would normally never have been revealed. So if you want, keep a floating order just above the 200 day and you might make a few dozen points in a few mins, just like May 6, 2010!

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