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Algorithmic Trading is Not High Frequency Trading

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Re: Algorithmic Trading is Not High Frequency Trading

#71

Post by gaius »

davidw wrote: post #70
gaius wrote: post #68

Earlier quoted context omitted.

It's completely wrong, because it ignores both time and risk. It's worth real value to me to have money now rather than later. It's worth real value to me to give you some money, and you take some risk off my hands. And on the other hand, if you think my risk is lower than I think it is, and if you have money to spare, let's make a deal. Remember, if both parties aren't better off, why would the trade even happen?

> Remember, if both parties aren't better off, why would the trade even happen? That certainly is true for goods and services, but it just seems awfully abstract from, say, high frequency trading as a profession. How much value is that adding to the world, compared with, say, going out and creating something? I'm not saying it should be banned or anything along those lines, just that I'm not convinced that it's addin…

Well, party A says "I will be hurt if the price of this asset falls" and party B says "Well, I don't think it will, so if you pay me a smaller fee upfront, I'll cover any losses you make for the next T time". Multiply by thousands of assets (which a big mutual fund may well hold) and thousands of updates a second as everyone else in the market trades to their own ends, and you have the essence of HFT.

Re: Algorithmic Trading is Not High Frequency Trading

#72

Post by ovi256 »

eru wrote: post #48
steve8918 wrote: post #39

Earlier quoted context omitted.

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.

If the increased volatility is driving people out of the market, people who don't mind the volatility should profit, shouldn't they?

Exactly, until their counterparts are all gone and they're left moving hot potatoes among themselves.

Re: Algorithmic Trading is Not High Frequency Trading

#73

Post by sireat »

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…

We all can agree that increased liquidity is good for everyone, mom and pop, traders, investors, America, etc., Of course one can argue whether we really need sub 100ms liquidity but that is not the biggest problem.

The biggest problem with HFT provided liquidity is that it is far from a sure thing as the Flash crash proved. The liquidity dried up so fast, because most players algorithms "said" the situation was too unpredictable so the easiest thing to do was to close up shop temporarily.

In older days, market makers on the floor were allowed to make the money from the spread with the understanding that if the things got rough they would HAVE TO stay in the game. Some got rich, some died broke, some jumped out of windows, but overall the game continued.

Increasingly, the role of a market maker has been delegated to HFT firms, but without any obligations placed on them.

Who is to blame for such state of affairs is a question someone else can answer better than me.

Re: Algorithmic Trading is Not High Frequency Trading

#74

Post by davidw »

gaius wrote: post #71
davidw wrote: post #70

Earlier quoted context omitted.

> Remember, if both parties aren't better off, why would the trade even happen? That certainly is true for goods and services, but it just seems awfully abstract from, say, high frequency trading as a profession. How much value is that adding to the world, compared with, say, going out and creating something? I'm not saying it should be banned or anything along those lines, just that I'm not convinced that it's addin…

Well, party A says "I will be hurt if the price of this asset falls" and party B says "Well, I don't think it will, so if you pay me a smaller fee upfront, I'll cover any losses you make for the next T time". Multiply by thousands of assets (which a big mutual fund may well hold) and thousands of updates a second as everyone else in the market trades to their own ends, and you have the essence of HFT.

The material facts that stock values are supposedly based on do not change 1000's of times a second, though - it seems like it's trading for the sake of trading, rather than trading to best distribute goods and services to where they're desired and will be most effectively used.

One thing is deciding that IBM has a brilliant future and that the stock is a steal at the current price, and trading with someone who feels the opposite, another entirely to have thousands of transactions a second. Even the former transaction seems a bit zero-sum in that one of the people involved has the wrong idea and is going to either lose money or lose potential money.

That said, maybe I'm missing something - I don't know that much about HFT and stocks/finance in general, so I don't claim to have everything figured out.

Re: Algorithmic Trading is Not High Frequency Trading

#75

Post by gaius »

davidw wrote: post #74
gaius wrote: post #71

Earlier quoted context omitted.

Well, party A says "I will be hurt if the price of this asset falls" and party B says "Well, I don't think it will, so if you pay me a smaller fee upfront, I'll cover any losses you make for the next T time". Multiply by thousands of assets (which a big mutual fund may well hold) and thousands of updates a second as everyone else in the market trades to their own ends, and you have the essence of HFT.

The material facts that stock values are supposedly based on do not change 1000's of times a second, though - it seems like it's trading for the sake of trading, rather than trading to best distribute goods and services to where they're desired and will be most effectively used. One thing is deciding that IBM has a brilliant future and that the stock is a steal at the current price, and trading with someone who feels…

Yes - but the risk experienced by a portfolio does change thousands of times a second. Once every time every underlying asset is traded in fact.

Re: Algorithmic Trading is Not High Frequency Trading

#76

Post by chollida1 »

steve8918 wrote: post #40
chollida1 wrote: post #34

Earlier quoted context omitted.

> 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 th…

> 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.

yes, but then you run the danger of your order not getting to the exchange in time and buying at the very bottom after everyone else has been filled.

We nixed this idea as being too risky:(

Re: Algorithmic Trading is Not High Frequency Trading

#77

Post by paperwork »

Turing_Machine wrote: post #44
FrojoS wrote: post #33

Earlier quoted context omitted.

>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.

They can't do the work they love, so they at least want to be well paid for doing other work that's less interesting. It makes sense to me.

btw, the work is not always less interesting. Think of it this way, this industry has ambitious people from pure science PhDs, mathematicians, statisticians, programmers, MBAs, idiot nephews of rich uncles...everyone is competing.

If you are successful, you can justify building a huge Hadoop cluster, experimenting with hardware TCP/IP processing, buying (or storing) petabytes of data for statistical analysis. Pretty interesting stuff for a geek.

Obviously, not every one in the industry gets these chances and all this not necessary. I know of people who earn their living doing automated trading in ... visual basic (not VB .NET) :)

Re: Algorithmic Trading is Not High Frequency Trading

#78

Post by paperwork »

seanos wrote: post #37
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.g…

Thanks for the pointer! As soon as I have some time, I'll dig into this more.

Re: Algorithmic Trading is Not High Frequency Trading

#79

Post by _delirium »

gaius wrote: post #75
davidw wrote: post #74

Earlier quoted context omitted.

The material facts that stock values are supposedly based on do not change 1000's of times a second, though - it seems like it's trading for the sake of trading, rather than trading to best distribute goods and services to where they're desired and will be most effectively used. One thing is deciding that IBM has a brilliant future and that the stock is a steal at the current price, and trading with someone who feels…

Yes - but the risk experienced by a portfolio does change thousands of times a second. Once every time every underlying asset is traded in fact.

It's not clear to me that the financial system as an enabler of liquidity/commerce/trades/etc. would be significantly worse if the granularity were slightly reduced, though. Say, run exchanges in a discrete-time world of 100ms timesteps. Are there real-world use cases where this would make the finance system unable to facilitate the economy?

If there are ways to make profit by trading at sub-100ms resolution, but a 1ms-resolution exchange is not any better at facilitating the outside-finance economy than a 100ms-resolution one would be, then it seems like HFT is solving problems of the exchange's own creation. It could even genuinely be solving those problems, but if they're problems that only arise in the context of extremely-high-granularity exchanges, and there is no practical benefit to such high time resolution, then why not just axe the problems?

Re: Algorithmic Trading is Not High Frequency Trading

#80

Post by paperwork »

sireat wrote: post #73
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…

We all can agree that increased liquidity is good for everyone, mom and pop, traders, investors, America, etc., Of course one can argue whether we really need sub 100ms liquidity but that is not the biggest problem. The biggest problem with HFT provided liquidity is that it is far from a sure thing as the Flash crash proved. The liquidity dried up so fast, because most players algorithms "said" the situation was too…

As far as I know, market makers still have this obligation.

I believe Taleb has argued that HFT liquidity disappears when it is most needed, like seat-belts which work all the time, except during accidents (his metaphor may have been different)

Paul Wilmott argued that this much liquidity is actually not necessary. If someone will have trouble getting out of a stock, maybe they will think twice about getting into it.

Of course, an HFT practitioner doesn't need to prove to anyone why their activity is beneficial to society. The burden of proof is on the critics to show why this activity is harmful.

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