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The high-frequency trading arms race: frequent batch auctions (2015)

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Re: The high-frequency trading arms race: frequent batch auctions (2015)

#61

Earlier quoted context omitted.

I'm merely an observer, but it feels, intuitively, that HFT was great when things were fairly predictable -- or more like the major indices and individual names moved a most 2% on any given day -- and now, in the post-covid era, starting with the DPZ spike, and you could argue the TSLA original call buying spree, everything is in shambles. A lot of HFTs I know of suffered serious losses... Could you explain, indirect…

I’m not sure about delta one firms but almost all the options MM firms have been having record years in the COVID / meme stock era. In broad strokes, the things that hurt market makers the most are long winded price trends and accumulation of inventory. So generally MMs can and often will eat large initial losses (depending on how many wings they happened to have owned at the time) when huge volatility spikes happen…

[deleted]

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#62

Earlier quoted context omitted.

So if we started with a clean slate, no trading room floor history framing our perspectives, how could we do it?

thats that billion/trillion dollar question :) so I think theres a huge design space, and I think it partially turns into a "mechanism design" challenge to articulate a landscape of transaction / market auction mechanisms that 1) incentivize maximizing market liquidity 2) recognize the speed of light is finite, and have that inform the minimal time scale matching can happen on. 3) obviate/remove the need to obscure l…

Couldn't agree more on the mechanism design front. There are so many dimensions to the problem - especially for US equities - that the design becomes quite nuanced and tradeoffs have to be made somewhere or other. The duration aspect of waiting for trades to be matched (and for liquidity to accumulate) is an especially challenging one in fast financial markets.

I'm curious if you've come across OneChronos (upcoming US equities ATS - I'm a founder there along with @lpage; disclaimer). A lot of what you describe is baked in as a goal of our auction design. Most importantly, drawing out liquidity by incentivizing truthful bidding and allowing people to encode things like substitutability. We try to do that by giving people the tools to express their full intent to the venue[1]. Don't wanna get any more salesy than I already have here, but I always like to get points of view from other practitioners.

[1]: https://www.onechronos.com/docs/expressive/

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#63

Is there any mathematical proof that it's harder to game batch auctions than what we have now? For example, while other markets and the real world moves on, you gain info. So the later in the batch you can submit a trade, the greater your advantage.

The US Markets generally operate multiple sessions: pre open, on-open, regular-market trading, on-close, post-close or after-hours.

Open and closing auctions are batch auctions.

To facilitate liquidity seeking, the major exchanges publish a periodic "imbalance" feeds in the minutes and seconds up to the auction. As you can imagine, its gamed in a multitude of ways, including special order types (D-Quotes on the NYSE anyone?) that only a select few market participants know about or have access to.

The point is, whatever mechanism you choose: over time that mechanism morphs and transforms. New options are provided under the guise of liquidity seeking but really serve to benefit the HFTs.

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#64

While I was at jpmorgan I actually spent some time thinking about alternative auction structures (vs the order book model). The current trading model is ultimately a mechanization of the rules from trading happened in a literal trading floor room, and a lot of the structural issues stem from those rules treating time as infinite resolution and the speed of information propagation/light being instaneous. There’s some…

Worth studying the multiple mechanisms that drive the Tokyo Stock Exchange. Itayose vs Zaraba - and the role of the saitori. Here's an interesting paper from 1991:

https://www.researchgate.net/publication/24139396_Specialist...

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#65
post #51

If you're a market maker, you really, really want to be able to do low-latency trading in order to hedge fills before the market moves against you. If market makers can't do this, they will make worse markets - show less size and wider prices, or just get out of the game. How do you do this under continuous batch auctions? I have an underdeveloped idea that what we really need is limit order types with built-in hedgi…

Putting what amounts to trading bot logic into the orders themselves seems like a bad idea for scalability. Is all order logic visible to all market participants? If so, then everyone has to run their own local market logic resolver to determine actual liquidity. If not, then true market liquidity is now opaque.

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#66

Earlier quoted context omitted.

Moved into a small company that does process control (SCADA) systems development. Took a fairly large drop in salary but the work/life balance improved and job satisfaction increased. I'd previously done a lot of work in embedded SCADA systems (hence the fit for working with with FPGAs in HFT). I left mainly because I genuinely felt that there was a certain futility with ultra low latency trading...it's less about tr…

I'm merely an observer, but it feels, intuitively, that HFT was great when things were fairly predictable -- or more like the major indices and individual names moved a most 2% on any given day -- and now, in the post-covid era, starting with the DPZ spike, and you could argue the TSLA original call buying spree, everything is in shambles. A lot of HFTs I know of suffered serious losses... Could you explain, indirect…

It's kind of an open secret, but retail traders hopping onto meme stocks like DPZ and TSLA is, counterintuitively to an outsider, actually very profitable for HFTs and market makers.

A good example might be - imagine you are a car dealership, so serving as a rough approximation of a market maker. What kind of entities do you want to trade against? Other car dealerships (informed counterparties), or your average suburban minivan owner (uninformed counterparties)?

It's immediately obvious - the rationale is that when you trade against uninformed order flow, your measure of adverse selection is far lower than if you trade against informed order flow. Your average suburban minivan owner is going to be more time-sensitive and price-insensitive than another car dealership who is willing to look high and low for better deals.

Adverse selection, in this context, is that of the orders you're offering to the market, only the subset which have the greatest likelihood of immediately losing you money are selected. From the perspective of your counterparty, they will only lift your offer if they think it will make them an immediate unrealized profit. Keeping track of your adverse selection is an extremely important part of HFT - in fact, HFTers will try to identify informed vs uninformed order flow and only try to trade against the latter, to reduce immediate unrealized losses due to adverse selection.

This is why PFOF (payment for order flow) exists. It's because companies like Virtu think that traders on RobinHood have no clue what they're doing, and they [Virtu] can come in and eat all the alpha. Virtu doesn't frontrun RH orderflow - instead, they get what's called "first look" at the flow. They get to decide to either immediately fill the offer, or let it hit the real market. From the perspective of a RH user, this is really no harm, because whether Virtu trades against you, or your offer gets lifted against the broader market, doesn't really matter to you.

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#67
post #40
post #5

Earlier quoted context omitted.

The way I see it, HFT firms provide liquidity to the market, which is good. They do so in an automatic fasion which makes it cheaper than the past system of human traders. But they also do a speed competition which is mostly wasteful. There may be some benefit for the overall market of faster communications but it is pretty low. All systems have waste, some more and some less. This is unavoidable. So the discussion m…

How do HFTs add valuable liquidity to the market? Does the 500ns faster transaction time for a block of AMZN matter to literally anyone? Other than the two sides of the trade who lost some money to the HFT who MITM'd them.

Faster transaction times result in tighter spreads, as HFT firms compete each other on the price-time priority queue. HFT firms compete against each other on time, and while yes, that's a zero sum game, the end-result to the broader market is useful.

An analogy might be something like Uber and Lyft competing with each other for clients and drivers. From the perspective of everyone else, it doesn't matter much if they ride Uber or they ride Lyft. But the adversarial games that they play against each other [Uber and Lyft] are beneficial to both riders and drivers. Perhaps a duopoly isn't the best example, so you may extrapolate this to any industry where there's a sufficient amount of participants to keep things competitive.

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#68
post #66

Earlier quoted context omitted.

I'm merely an observer, but it feels, intuitively, that HFT was great when things were fairly predictable -- or more like the major indices and individual names moved a most 2% on any given day -- and now, in the post-covid era, starting with the DPZ spike, and you could argue the TSLA original call buying spree, everything is in shambles. A lot of HFTs I know of suffered serious losses... Could you explain, indirect…

It's kind of an open secret, but retail traders hopping onto meme stocks like DPZ and TSLA is, counterintuitively to an outsider, actually very profitable for HFTs and market makers. A good example might be - imagine you are a car dealership, so serving as a rough approximation of a market maker. What kind of entities do you want to trade against? Other car dealerships (informed counterparties), or your average subur…

> PFOF (payment for order flow) exists

So my inner self says that these are red herrings, or false flags set by 'real players' to lead the stampede into your living room.

It feels like there's never been a better 'cover' than r/wallstreetbets for firms with real capital to put material volume behind names that would in other scenarios be extremely suspect, or near manipulation. Now you can say, 'see, retail said they like AMD, AMC, etc... (THE STOCK)" because, yes, some random user with karma can now be the input to your 'algo' to move $name_of_stock, or generally, SPY calls / 'poots' in size wildly impossible otherwise.

Humbly, I think it's brilliant

[Edit] to put this comment in context of my response to another poster, I believe the macro can be independent of the micro (aka many little names can get blown up while your main indices maintain some sense of normalcy).

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#69
post #66

Earlier quoted context omitted.

It's kind of an open secret, but retail traders hopping onto meme stocks like DPZ and TSLA is, counterintuitively to an outsider, actually very profitable for HFTs and market makers. A good example might be - imagine you are a car dealership, so serving as a rough approximation of a market maker. What kind of entities do you want to trade against? Other car dealerships (informed counterparties), or your average subur…

> PFOF (payment for order flow) exists So my inner self says that these are red herrings, or false flags set by 'real players' to lead the stampede into your living room. It feels like there's never been a better 'cover' than r/wallstreetbets for firms with real capital to put material volume behind names that would in other scenarios be extremely suspect, or near manipulation. Now you can say, 'see, retail said they…

The more retail traders, the more money that institutional traders can make! Institutional traders love the uninformed flow. It's no fun trading purely against other algorithms (and also not nearly as profitable)

Re: The high-frequency trading arms race: frequent batch auctions (2015)

#70

Is there any mathematical proof that it's harder to game batch auctions than what we have now? For example, while other markets and the real world moves on, you gain info. So the later in the batch you can submit a trade, the greater your advantage.

See Proposition 6 on pg. 1600. The argument is purely economic and based on a simplified (but first-order reasonable) model of liquidity provisioning and price action. Price-priority uniform clearing price batch auctions (with or without randomized call times) transform competition over speed into competition over price.

Technical/practitioner notes:

1. Gaming is a bit of an overloaded term, and in this context, implies that agents are doing something wrong. Mechanism design assumes that agents will respond rationally and strategically to the mechanism they're presented with, so whatever happens is on the designer. Ideally, the mechanism chosen will result in an individual response that collectively optimize the designer's objective function, e.g., maximizing social welfare or the auctioneer revenues. Suppose the mechanism chosen isn't the "best" one for a specific set of agents & goods. In that case, agents might have individually rational behaviors that result in sub-optimal outcomes relative to what was achievable with another mechanism.

2. Prop 6 isn't entirely predicated on having a random call time (there will be competition over price as long as there are two "fast" types in the market). However, randomizing auction call times is still practically speaking useful.

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