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Algorithmic Trading is Not High Frequency Trading

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Re: Algorithmic Trading is Not High Frequency Trading

#51

Post by yummyfajitas »

steve8918 wrote: post #45
flourpower wrote: post #42

Earlier quoted context omitted.

You're talking about volume, not price. Increased volume should, if a market is performing "properly", accompany new information. If there's new information, there's a reason to trade. The examples you cited seem like evidence of the stock market's predictive value - for instance, increased volume in Citi stock was a piece of evidence that something about the security was expected to change. Moreover, it's not true t…

I probably wasn't clear with my original statement. I said the stock market used to be a "predictive market of future earnings". What I meant more precisely was that the stock market used to be a market where people would make prediction about future earnings about companies. If you thought a company was doing well, you would buy and hold it, a la Warren Buffett. Some people traded order flow and other things, but th…

I said the stock market used to be a "predictive market of future earnings". What I meant more precisely was that the stock market used to be a market where people would make prediction about future earnings about companies.

These two statements are not even discussing the same thing.

One statement discusses the practical computational power of a system. The other statement discusses the motivations of a majority of the people participating in that system.

Re: Algorithmic Trading is Not High Frequency Trading

#52

Post by getsat »

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…

> The regulators will never catch on and try to fix it

Can you elaborate a bit (even at a high level) about why HFT is particularly bad? I always hear everyone deriding HFT, but never any specific reasons why aside from people complaining about them not contributing anything to society.

Re: Algorithmic Trading is Not High Frequency Trading

#53

Post by Retric »

LiveTheDream wrote: post #36
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 s…

This is one of those cases where in theory you could be correct. Unfortunately, historical evidence does not support your viewpoint.

Re: Algorithmic Trading is Not High Frequency Trading

#54

Post by philwelch »

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…

Finance sounds like another case where the more you know about something, the less vehement you are in your opinions about it.

Re: Algorithmic Trading is Not High Frequency Trading

#55

Post by Retric »

getsat wrote: post #52
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…

> The regulators will never catch on and try to fix it Can you elaborate a bit (even at a high level) about why HFT is particularly bad? I always hear everyone deriding HFT, but never any specific reasons why aside from people complaining about them not contributing anything to society.

The major issue is HFT can create wild market swings with little to no basis in reality. It's actually possible for them to suck up all the outstanding bids over a few seconds using small amounts of capital and while a human might desire to sell if a stock goes up by 2% the seconds or minutes it takes US to make that choice is eons for the algorithms. The net result of this is actually less liquidity as someone buying or selling can't place large orders on the market or the algorithms with eat them alive. Also, they are often setup to simply stop all actions if the market deviates to far from the norm which pushes things even further out of whack.

Re: Algorithmic Trading is Not High Frequency Trading

#56

Post by getsat »

Retric wrote: post #55
getsat wrote: post #52

Earlier quoted context omitted.

> The regulators will never catch on and try to fix it Can you elaborate a bit (even at a high level) about why HFT is particularly bad? I always hear everyone deriding HFT, but never any specific reasons why aside from people complaining about them not contributing anything to society.

The major issue is HFT can create wild market swings with little to no basis in reality. It's actually possible for them to suck up all the outstanding bids over a few seconds using small amounts of capital and while a human might desire to sell if a stock goes up by 2% the seconds or minutes it takes US to make that choice is eons for the algorithms. The net result of this is actually less liquidity as someone buyin…

Thanks for the reply.

Are HFT firms really doing enough volume to even move the needle, or are they simply targeting lower end stocks/securities? I guess I'm still in a forex mindset where billions is not considered an especially large amount.

Re: Algorithmic Trading is Not High Frequency Trading

#57

Post by rayiner »

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…

Re: the "best and brightest" it's more at the undergraduate level then the PhD level. My brother has tippy-top grades in physics at one of Harvard/Yale/Princeton and legit research experience in nano-tech, and he like many of his friends in similar positions are choosing between going into industry or R&D and going into finance. The lure of $120k the first year out of school and guaranteed admission to a Harvard/Stanford/Wharton MBA is hard to compete with.

A big part of the problem is systemic. The researcher that discovers new technology gets a nice $30k bonus. The owners of the capital get the millions of dollars resulting from that invention. So if you're a bright physics student in the US, why on earth would you pursue R&D? It is far more remunerative to work for those who own the capital figuring out new ways to move money around.

Re: Algorithmic Trading is Not High Frequency Trading

#58

Post by bd_at_rivenhill »

LiveTheDream wrote: post #36
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 s…

This is exactly what happened during the stock market crash of 1929, and regulations were put into place in the 1930s to prevent excessive margin leverage that might result in liquidity problems at brokerages (and in the banks that lend to them). These regulations have been in place since then and probably mitigated the effects of the dot com crash in 2000. See http://en.wikipedia.org/wiki/Regulation_T as a good starting point for research.

Interestingly, I read somewhere that there were similar regulations regarding residential mortgage loans that were repealed during the 1980s, does anybody have a reference to this? I think that requiring a 20% equity/debt ration when originating or refinancing a mortgage loan probably would have made the 2008 real-estate crash look a lot more like the dot com bust and would have saved a lot of economic pain.

Re: Algorithmic Trading is Not High Frequency Trading

#59

Post by msellout »

getsat wrote: post #56
Retric wrote: post #55

Earlier quoted context omitted.

The major issue is HFT can create wild market swings with little to no basis in reality. It's actually possible for them to suck up all the outstanding bids over a few seconds using small amounts of capital and while a human might desire to sell if a stock goes up by 2% the seconds or minutes it takes US to make that choice is eons for the algorithms. The net result of this is actually less liquidity as someone buyin…

Thanks for the reply. Are HFT firms really doing enough volume to even move the needle, or are they simply targeting lower end stocks/securities? I guess I'm still in a forex mindset where billions is not considered an especially large amount.

Recent reports say that the majority of trading volume in the US is HFT.

Re: Algorithmic Trading is Not High Frequency Trading

#60

Post by justincormack »

steve8918 wrote: post #45
flourpower wrote: post #42

Earlier quoted context omitted.

You're talking about volume, not price. Increased volume should, if a market is performing "properly", accompany new information. If there's new information, there's a reason to trade. The examples you cited seem like evidence of the stock market's predictive value - for instance, increased volume in Citi stock was a piece of evidence that something about the security was expected to change. Moreover, it's not true t…

I probably wasn't clear with my original statement. I said the stock market used to be a "predictive market of future earnings". What I meant more precisely was that the stock market used to be a market where people would make prediction about future earnings about companies. If you thought a company was doing well, you would buy and hold it, a la Warren Buffett. Some people traded order flow and other things, but th…

Historically there have been people trading off various schemes other than fundamental value forever, whether they be the public rushing into the bubble before the 1929 crash, or the chart-trading technical traders who have been around since at least the 1980s. And dont forget the people manipulating and cornering the market. None of this is new...
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