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A High Frequency Trader's Apology, Pt 2

chrisstucchio.com

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Re: A High Frequency Trader's Apology, Pt 2

#81

Post by gaius »

SkyMarshal wrote: post #35

One of the biggest justifications for HFT that I see is that it increases liquidity. However, did major markets ever really have a huge problem with lack of liquidity, 20 or 30 years ago before HFT? I can't help but wonder if this level of liquidity is only really useful to HFT, if it is something that HFT is both the primary provider and beneficiary of, and if they're sort of using their existence to justify their e…

I thought you wrote mom and prop trader which would be a great way to describe a small fund.

Re: A High Frequency Trader's Apology, Pt 2

#82

Post by RickHull »

tptacek wrote: post #67
kylemaxwell wrote: post #62

Earlier quoted context omitted.

Mostly, insight into the technical underpinnings. I had absolutely no concept of the existence of this world before that talk. In terms of take-home value, not much more than I got from your talk at BH last year, though largely because of the fire-hose effect there. :)

If you're looking for good talks on the security or technical implications of trading markets, look for microstructure details. Any talk that has a diagram of "orders" going to a "trading engine" is addressing itself at a higher level than you're interested in. Just the order entry side of a real firm OMS is too complicated to get one bubble in a diagram. Again: strongly recommend _Trading & Exchanges_ by Harris. The…

Funny, I just bought this on Kindle a week ago. While not exactly a page turner, it is indeed supremely readable. I'm about halfway through and remain fascinated.

Re: A High Frequency Trader's Apology, Pt 2

#83

Post by unabridged »

fr0sty wrote: post #10
arjunnarayan wrote: post #7

One point that is bothering me is this: how much of the existence of HFTs is an artifact of the rules of the exchange? In particular, the rule that the first bid gets priority in executing the trade. It strikes me that the entire existence of HFTs seems to be taking advantage of this failure of mechanism design.

There was an extensive discussion on this point in the previous HN thread: http://news.ycombinator.com/item?id=3855610 The short summary is no one can come up with something better than price-time priority for matching orders.

I still think discretizing the exchange (bucketing all orders every N milliseconds) is the best way to go, no one in that thread was able to show why it would be worse than our current method. All we lose is the ability for entities to change prices during the round, and we level the playing field for traders who cannot afford colocation with the exchange.

Re: A High Frequency Trader's Apology, Pt 2

#84

Post by fr0sty »

SkyMarshal wrote: post #35

One of the biggest justifications for HFT that I see is that it increases liquidity. However, did major markets ever really have a huge problem with lack of liquidity, 20 or 30 years ago before HFT? I can't help but wonder if this level of liquidity is only really useful to HFT, if it is something that HFT is both the primary provider and beneficiary of, and if they're sort of using their existence to justify their e…

> did major markets ever really have a huge problem with lack of liquidity, 20 or 30 years ago before HFT?

Yes. huge problems. 20 years ago (1992) stocks were traded in 1/8ths or 1/4s (minimum spreads of (12.5 or 25 cents) often more than one tick wide. By the turn of the century stocks had all been decimalized (traded in pennies) but spreads were still wide.

This article: page 25 of this paper[1] shows the average stock spread of S&P500 stocks being squished from 8cents in 1997 to less than 2cents in 2010.

[1] www.kellogg.northwestern.edu/faculty/...d/murphy_kim_spread.pdf

Re: A High Frequency Trader's Apology, Pt 2

#85

Post by btilly »

alphaBetaGamma wrote: post #52
btilly wrote: post #49

Earlier quoted context omitted.

I still like my suggestion at http://news.ycombinator.com/item?id=3855846 . True, the HFT folks would still try to provide liquidity by maintaining a bid/ask spread. But every trade that executes because someone wanted to trade while the price was somewhere between the bid and the ask would cut the HFT folks out of the loop to the benefit of everyone else. And scary anomalies like the flash crash would be impossible.…

As far as I understand your suggestion, it exactly describes the way current markets work.

Then you did not understand the suggestion. :-(

The key point of what I suggested is that the price drifts slowly, and orders can only execute at the current price. In today's market the price can move instantaneously.

That's a pretty big difference.

Re: A High Frequency Trader's Apology, Pt 2

#86

Post by harryh »

Additional evidence that HFTers are not stealing from speculative investors:

Anyone can start a market. If HFTers were stealing pennies someone would have come along and started a market that banned HFTers (or changed the rules to otherwise get rid of them). Then all of the speculative investors would use this market instead since they could be assured that no one was siphoning off pennies on every trade. Eventually markets with HFTers would shut down due to a lack of customers.

The fact that this hasn't happened has to be considered evidence that the HFTers are, in fact, providing value to speculative investors not the other way around.

Re: A High Frequency Trader's Apology, Pt 2

#87

Post by tptacek »

fr0sty wrote: post #84
SkyMarshal wrote: post #35

One of the biggest justifications for HFT that I see is that it increases liquidity. However, did major markets ever really have a huge problem with lack of liquidity, 20 or 30 years ago before HFT? I can't help but wonder if this level of liquidity is only really useful to HFT, if it is something that HFT is both the primary provider and beneficiary of, and if they're sort of using their existence to justify their e…

> did major markets ever really have a huge problem with lack of liquidity, 20 or 30 years ago before HFT? Yes. huge problems. 20 years ago (1992) stocks were traded in 1/8ths or 1/4s (minimum spreads of (12.5 or 25 cents) often more than one tick wide. By the turn of the century stocks had all been decimalized (traded in pennies) but spreads were still wide. This article: page 25 of this paper[1] shows the average s…

When you read this comment, keep in the front of your mind that the "width of the spread" is marketspeak for "the fee paid by normal people who want to buy and sell long-term positions to have market professionals execute their trades for them". You want spreads as thin as possible.

Re: A High Frequency Trader's Apology, Pt 2

#88

Post by rdlowrey »

rscale wrote: post #41

I have no objection to the provision of liquidity. That said, the flash crash seems to me to be a perfect example of a danger created when liquidity is provided largely by algorithms. We ran into a situation where the market was already volatile, and a bad trade exacerbated the issue by causing a number of HFTs to take unexpected losses and withdraw from their markets, consuming further liquidity while driving prices…

I can appreciate your reasoning. I know you aren't suggesting this, but the popular blanket conclusion that HFT is bad because anomalies like "flash-crashes" sometimes occur is misguided. It's equivalent to saying we should outlaw highways because of an occasional traffic-jam or 12-car-pileup. On the whole, the benefits to the economy (and therefore, individuals) resulting from HFT far outweigh the costs. It's never a good idea to throw out the baby with the bath water and I've yet to encounter a nuanced mathematical argument (backed by concrete data) to demonstrate how the economy is harmed by more efficient markets.

Re: A High Frequency Trader's Apology, Pt 2

#89

Post by sailfrog »

DannoHung wrote: post #40

Why not explain what's going on here and how it's not defrauding markets: http://www.zerohedge.com/news/step-right-its-hft-whack-mole-...

Zerohedge can be entertaining but the objectivity of it' conclusions is dubious at best. As already stated in the OP, HFT firms place and cancel orders quickly. These charts show this. How exactly is that defrauding anyone? Aside from stating that it does, the article does not explain how. Let's also keep in mind that pretty charts insinuating wrongdoing with a catchy title on a highly trafficked website like ZH is pretty sweet marketing for a company who sells market data products.

Re: A High Frequency Trader's Apology, Pt 2

#90

Post by jcampbell1 »

tptacek wrote: post #65
jcampbell1 wrote: post #55

Earlier quoted context omitted.

Isn't more shares available on the books the goal? You are describing an arms race that would be beneficial. Pro-rata based on order size, or a weighted lottery will work out the same over time, except a random lottery doesn't have the problem of clearing tons of tiny trades. Now since speed is no longer a barrier to entry, the spoils will go to the people willing to provide the most liquidity.

The books don't hold "shares", they hold "orders". The spoils are supposed to go to the people willing to provide the most liquidity; the "spoils" you're referring to are "the expense involved in executing orders".

"orders" contain the price and the number of shares. Let's not split hairs here. No one cares about the absolute number of orders, but rather the total number of shares/contracts/etc available at each price.

By spoils, I mean the returns to market making. Right now market makers are largely rewarded for being the fastest and beating out other market makers rather than for providing the most liquidity to speculators/investors.

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