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Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

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Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#51

Post by Animats »

kasey_junk wrote: post #25
dsl wrote: post #21

Earlier quoted context omitted.

They don't care about "target markets" or what anyone else thinks. This technology is to protect their own trades. The goal is to be able to execute buys across multiple exchanges (because the orders are so large) without other high frequency firms being able to see a trade on one exchange, then buy and resell stock to them at a higher price on another exchange.

> without other high frequency firms being able to see a trade on one exchange, then buy and resell stock to them at a higher price on another exchange This is a pretty common misconception of how latency arbitrage works. In reality the other HFT are not buying/selling new orders. Instead what they are doing is cancelling or modifying their existing orders so that they don't get hit by incoming orders. HFT firms can…

"In reality the other HFT are not buying/selling new orders. Instead what they are doing is cancelling or modifying their existing orders so that they don't get hit by incoming orders."

Right. One of the strategies is:

- Put in standing order to sell a small amount of security slightly below market and leave it active.

- Wait until a buy order triggers it.

- Buy same security faster than rest of buy order can be processed.

- Sell security just bought at higher price.

- Profit.

There are lots of variations on this, but that's the basic idea. It has the profitability of front-running, but is legal.

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#52

Post by toast0 »

dahdum wrote: post #3

Its invention, developed by the firm’s co-chief executive officers, Robert Mercer and Peter Brown, first sends an order to a central server, which breaks it up into multiple smaller orders. Those are then routed to venues that offer the best prices and most liquidity, much the same as brokers do now. But before that happens, the smaller orders are sent to servers located as close to the exchanges as possible, along w…

I don't know why you need a great clock either, if you have stable, symmetric network paths from a central location to all your servers colocated at exchanges, you can predict the delay between sending from the server and getting to the exchange, you can split your order and send it to the various exchanges with appropriate delays and know that everything will arrive at the same time. If you're wrong, it's going to still be close enough that nobody will be able to see it on one exchange and react to it on another before your order gets there.

This was the first thing I thought of when hearing the flash boys story on the radio: The banker was complaining he couldn't capture the whole book across exchanges because resting orders were cancelled before his order got there -- he just needs to get his orders to arrive close enough in time (although expect a bigger tick, probably)

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#53

Post by yummyfajitas »

nsedlet wrote: post #37
dsl wrote: post #28

Earlier quoted context omitted.

Front running is seeing your friend looking at a car on craigslist, buying it, and then selling it to him. Renaissance is using satellites to monitor retail store foot traffic to predict quarterly earnings. (both as hypothetical examples)

Are you saying front-running is not an HFT strategy? Because that is incorrect. In equities markets, for trades of a sufficient size it's not possible to place the order all at once. You'll hammer the order book, and take very suboptimal pricing for the latest marginal shares you buy/sell. Therefore you have to split up the order into chunks. HFT firms will try to detect when equities traders are doing this. e.g. If…

HFT firms will try to detect when equities traders are doing this. e.g. If they see a pattern indicating that chunks of shares are being bought, they will try to buy, too.

Price discrimination against large traders - grandma gets a better price than Bill Ackman - is a valid and real HFT strategy. They do it in the manner you describe.

But it's not front running. It's only front running when your agent (usually your broker) does it based on private information.

Front running is just a term Michael Lewis misused in his misleading advertisement for IEX.

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#54

Post by bpchaps »

harryh wrote: post #20
WestCoastJustin wrote: post #19

Highly recommend reading Flash Boys [1] and it explains why time is so important and HFT firms. Great book for filling in the picture of what HFT is and I found it pretty entertaining too. [1] https://www.amazon.ca/Flash-Boys-Michael-Lewis/dp/0393244660

Highly recommend reading Flash Boys: Not So Fast [1] and it explains how Flash Boys gets it almost entirely wrong. [1] https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-...

comment was entirely irrelevant - deleting

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#55

Post by kasey_junk »

Animats wrote: post #51
kasey_junk wrote: post #25

Earlier quoted context omitted.

> without other high frequency firms being able to see a trade on one exchange, then buy and resell stock to them at a higher price on another exchange This is a pretty common misconception of how latency arbitrage works. In reality the other HFT are not buying/selling new orders. Instead what they are doing is cancelling or modifying their existing orders so that they don't get hit by incoming orders. HFT firms can…

"In reality the other HFT are not buying/selling new orders. Instead what they are doing is cancelling or modifying their existing orders so that they don't get hit by incoming orders." Right. One of the strategies is: - Put in standing order to sell a small amount of security slightly below market and leave it active. - Wait until a buy order triggers it. - Buy same security faster than rest of buy order can be proc…

> Buy same security faster than rest of buy order can be processed.

How? You can't because your competition is already resting orders there (from potentially weeks ago) and any order you put in there will be behind your competitors no matter how fast you are.

What does happen is that you all are resting orders up and down the order book. When a big order takes out several levels of your orders, you race as fast as possible to cancel those same levels at other exchanges. If you are faster than the big order you only get hit for a single exchange.

Its a risk mitigation technique, to keep your profits from your regular business of making the spread, not risk free profit.

So one place firms are racing is on the cancel side. The other is on filling back in orders after the big order has cleared levels. The faster you are there the better priority your resting orders will have (potentially weeks from now).

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#56

Post by yummyfajitas »

Animats wrote: post #51
kasey_junk wrote: post #25

Earlier quoted context omitted.

> without other high frequency firms being able to see a trade on one exchange, then buy and resell stock to them at a higher price on another exchange This is a pretty common misconception of how latency arbitrage works. In reality the other HFT are not buying/selling new orders. Instead what they are doing is cancelling or modifying their existing orders so that they don't get hit by incoming orders. HFT firms can…

"In reality the other HFT are not buying/selling new orders. Instead what they are doing is cancelling or modifying their existing orders so that they don't get hit by incoming orders." Right. One of the strategies is: - Put in standing order to sell a small amount of security slightly below market and leave it active. - Wait until a buy order triggers it. - Buy same security faster than rest of buy order can be proc…

You haven't even described a strategy. Guess what, I made a bunch of money off brexit by buying low and selling high!

Consider the alternative way this "strategy" can go:

- Put in a standing order to sell a small amount slightly below market.

- Wait until you receive a "TRADE CONFIRMATION 100@$10" message.

- Buy a lot of same security very fast and put in a sell order at higher price.

- No one actually buys it.

- Loss

This is actually a very risky strategy and very few people do it.

What's actually happening most of the time is a far less risky one:

- Put in standing order SELL 100@$10, 100@$10.05, 100@$10.10

- When you receive TRADE CONFIRMAtiON @ $10, cancel other orders and reprice higher (maybe $10.20 and $10.30).

- Maybe put prices back if you don't get filled in an hour.

The goal here is to offer a good price $10.00 to Joe Sixpack (no delta toxicity), but to offer a worse price to Bill Ackman (high delta toxicity).

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#57

Post by Lazare »

darawk wrote: post #14
nsedlet wrote: post #10

A few weird things stand out to me: (1) Renaissance is super secretive. If they want to use this strategy to make money, a patent reveals to competitors what they're doing and creates more issues than it seems to resolve. (2) Renaissance is an HFT firm. Why are they interested in thwarting HFT? (3) This really isn't that fancy an idea. It's fairly general: send orders ahead to co-located servers to be executed at spe…

Renaissance is not that type of hft firm. Renaissance uses algorithms to predict price movements before they happen. The type of hft this system is designed to prevent is front-running. Which is me seeing your order on exchange A and buying ahead of you on exchange B before your order arrives. Those types of hft firms are surely eating into Renaissance's profits in a big way.

Front running is a serious crime, with clear definitions.

What you are describing isn't front running (or even illegal).

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#58

Post by reddytowns »

homero wrote: post #39
kasey_junk wrote: post #4

Earlier quoted context omitted.

I havent read the patent but I can say this is an exceedingly common (I'd probably say standard) strategy. I can only assume the atomic clock bit is what's novel.

And with hft guarded so well, can't they just use the patent and not get caught?

The idea doesn't help the hft'ers. It takes an order, secretly transmits it to computers each as near to the major markets as possible, with instructions so that the computers submit the trade offer at precisely the same time.

The hft'ers can't make money since they can't outrun trade offers that are synchronous across all markets.

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#59

Post by pgwhalen »

bpchaps wrote: post #54
harryh wrote: post #20

Earlier quoted context omitted.

Highly recommend reading Flash Boys: Not So Fast [1] and it explains how Flash Boys gets it almost entirely wrong. [1] https://www.amazon.com/Flash-Boys-Insiders-Perspective-High-...

comment was entirely irrelevant - deleting

Dark Pools isn't by Michael Lewis, it's by Scott Patterson.

Re: Hedge Fund Wants to Use Atomic Clocks to Beat High-Speed Traders

#60

Post by andylei »

darawk wrote: post #14
nsedlet wrote: post #10

A few weird things stand out to me: (1) Renaissance is super secretive. If they want to use this strategy to make money, a patent reveals to competitors what they're doing and creates more issues than it seems to resolve. (2) Renaissance is an HFT firm. Why are they interested in thwarting HFT? (3) This really isn't that fancy an idea. It's fairly general: send orders ahead to co-located servers to be executed at spe…

Renaissance is not that type of hft firm. Renaissance uses algorithms to predict price movements before they happen. The type of hft this system is designed to prevent is front-running. Which is me seeing your order on exchange A and buying ahead of you on exchange B before your order arrives. Those types of hft firms are surely eating into Renaissance's profits in a big way.

this is what the term "front running" means: https://en.wikipedia.org/wiki/Front_running
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