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Barbarians at the Gateways: High-frequency Trading and Exchange Technology

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Re: Barbarians at the Gateways: High-frequency Trading and Exchange Technology

#91

Post by dasil003 »

pdovy wrote: post #59
cs702 wrote: post #27

So much talent... focused on the buying and selling of securities , instead of creating new things that will make the world better in a directly measurable manner. Virtually all trading volume today consists of buying and selling old securities -- essentially, legal claims on existing assets. The sale of new securities issued to finance the creation of new products and services -- for example, a company selling new s…

Virtually all trading volume today consists of buying and selling old securities -- essentially, legal claims on existing assets. The sale of new securities issued to finance the creation of new products and services -- for example, a company selling new shares via an IPO -- represents only a minuscule portion of total trading volume. -- Leaving aside for a moment the question of the value of HFT, this is a skewed vi…

Markets are hugely important. The problem is the size of the investment banks who neither supply the capital nor the equities, but due to proximity of the transaction are able to skim more and more cream out of the transactions and devote more and more brainpower to increasing that arbitrage. They have become so instrumental to the lives of the rich and powerful that they can completely destroy economies and be bailed out by tax payers the majority of whom have absolutely no interest in the solvency of said banks other than some extremely urgent, hand-wavy and fundamentally interest-conflicted warning of economic cataclysm.

Obviously regulation doesn't seem to do much good because it just changes the rules which sends the investments games scrambling for new arbitrage opportunities which no regulatory agency has the resources to keep up with until its too late. Given the lack of political fortitude to combat moral hazard by forcing financial institutions to take their own losses on the chin, I think perhaps widespread and rabid investment banker hate could be the best societal medicine we have against the brain-drain to finance.

Re: Barbarians at the Gateways: High-frequency Trading and Exchange Technology

#92

Post by gd1 »

001sky wrote: post #89
gd1 wrote: post #88

Earlier quoted context omitted.

You'd best look up the definition of "front-running". Reacting to an event the fastest makes you the quickest behind-runner, but you're still behind. Not front-running at all. Where did you even learn this term? Are you just regurgitating something you've heard elsewhere?

Try looking up the definition of 'arbitrage'

Wtf? An example of latency arbitrage is say, two identical fungible securities listed on different exchanges. An order arrives causing the price on one exchange (A) to spike up (the event), you react after that event and buy the security on the other exchange (B). You reacted fastest to public knowledge.

Front running would be if you were say sitting on a broker desk and one of your clients rang up and said to buy lots of A. Then you put in your own buy order before the clients one hits the market. That is front-running. You got in before that knowledge become public. Do you see the difference?

Re: Barbarians at the Gateways: High-frequency Trading and Exchange Technology

#93

Post by AndrewBissell »

beagle3 wrote: post #19
kasey_junk wrote: post #10

Earlier quoted context omitted.

Liquidity has certainly gone up. Also, it is hard to prove a causal relationship, but with the rise of electronic trading and HFT, price spreads and fees have come down. I can't prove it, but I believe that insider trading is also much less rampant in modern electronic systems than it was in the older pit based markets.

Re: spreads & fees: Price spreads and fees have come down as a result of electronic trading being open to everyone, and is probably independent of HFT (at least, modern HFT): E.g., The decreased spreads and fees were happening in europe in the early 2000s, when fastest updates were at 1/4 second, and slower updates were at 2 seconds. The nanosecond scale was not the reason for this. Re liquidity: it depends how you d…

> If you define it as "the probability that a large order can complete", then liquidity has NOT gone up.

People seem to have this idea that back in the days of floor-based trading you could just call up the NYSE and say, "sell 1 million shares of Citigroup!" and the market makers would just kindly oblige you, without widening their spreads or trying to eke out a bigger gain from a transaction which inherently carries significant risk for them.

It's possible that the situation for executing giant orders in one fell swoop hasn't gotten any better under HFT, but it hardly seems to have made it worse. And as the large flow traders become more sophisticated and start to implement algos of their own, they'll get better at moving volume at a fairer average price.

> With HFT, it's the same 100 shares/futures changing hands thousands of times per day, and they disappear often in times of uncertainty.

I don't know about "often," unless you're talking about trading individual issues where news events introduce a high degree of uncertainty. There's really only been one case of a market-wide drying up of liquidity, which lasted for about 15 minutes during the flash crash.

There's also nothing new about market-maker liquidity drying up in times of uncertainty or severe volatility. Plenty of stocks went "no bid" during the 1929 crash. Floor-based market makers are no more interested in standing in front of freight trains than algos are. If you're looking for someone/something to blame when markets crash and there are no bids to be found, focus on the Fed and its attempts to manipulate the credit cycle, which periodically fail in spectacular fashion.

Re: Barbarians at the Gateways: High-frequency Trading and Exchange Technology

#94

Post by AndrewBissell »

lolcraft wrote: post #33
chollida1 wrote: post #21

Earlier quoted context omitted.

> I'm wondering if someone here can explain to me the value in HFT for anyone other than the people doing the trading. Well I guess I'm very biased but here's my stab at it. High Frequency trading is at the for front of alot of technology such as ASIC's, Infiniband networking gear,and low latency OS and networking stacks. You could argue that they help push these technologies forward by providing the first customer f…

High Frequency trading is at the for front of alot of technology such as ASIC's, Infiniband networking gear,and low latency OS and networking stacks. That's not an argument for HFT. If HFT is useless, then it has divested a great amount of research into technologies that no one really wanted otherwise, i. e., that the social cost of HFT is greater . Standard microeconomics. The question is, what's HFT good for? Do it…

What good, I ask you, has Reuter's telegram company done for the world? Aside from getting some information to a few London banks and trading houses, we've seen no other applications made of this infrastructure, and should therefore assume none will ever exist.

-lolcraft, 1852

Re: Barbarians at the Gateways: High-frequency Trading and Exchange Technology

#95

Post by AndrewBissell »

tucson wrote: post #22

""It's legalized front-running. I think it is basically evil and I don't think it should have ever been allowed to reach the size that it did," he said. "Why should all of us pay a little group of people to engage in legalized front-running of our orders?"" Charlie Munger, http://www.cnbc.com/id/100705820

Charlie's just upset that some of his bridge partners aren't scalping what they used to with their floor-based market making businesses.

Re: Barbarians at the Gateways: High-frequency Trading and Exchange Technology

#96

Post by 001sky »

gd1 wrote: post #92
001sky wrote: post #89

Earlier quoted context omitted.

Try looking up the definition of 'arbitrage'

Wtf? An example of latency arbitrage is say, two identical fungible securities listed on different exchanges. An order arrives causing the price on one exchange (A) to spike up (the event), you react after that event and buy the security on the other exchange (B). You reacted fastest to public knowledge. Front running would be if you were say sitting on a broker desk and one of your clients rang up and said to buy lo…

An example of latency arbitrage is...

Arbitrage requires that you cross the trade. You've merely described a following Algorithm. One that leaves open long positions.

Re: Barbarians at the Gateways: High-frequency Trading and Exchange Technology

#97

Post by a_c_s »

fin101 wrote: post #67
cs702 wrote: post #27

So much talent... focused on the buying and selling of securities , instead of creating new things that will make the world better in a directly measurable manner. Virtually all trading volume today consists of buying and selling old securities -- essentially, legal claims on existing assets. The sale of new securities issued to finance the creation of new products and services -- for example, a company selling new s…

Company MakeWorldABetterPlace.com creates new thing and makes us all feel better in a directly measurable way. They decide to create an even better new thing that has heavy capital requirements so they issue stock. Even better new thing is not as great as we all thought, so stock goes out of favor as market participants channel capital to new and more promising tech companies. Years down the road, MakeWorldABetterPla…

There more liquidity there is, the less marginal value additional liquidity has.

Re: Barbarians at the Gateways: High-frequency Trading and Exchange Technology

#98

Post by kasey_junk »

unabridged wrote: post #82

Would there be any loss of liquidity if trades were matched in 1 or 2 second intervals? This would eliminate all front running and colocation bias.

This doesn't solve the problem in anyway. The issue is what if you have a different amount of buy to sell qty. Who gets their order filled? This is called matching and each market matches in different ways.

The typical way (and one of the leading drivers of latency races) is first in/first match. If you continue to FIFO match on your intervals there is still a tremendous advantage to being first into the interval.

If you aren't going to FIFO match that is fine, you just need to determine (and publish) your matching routine.

Re: Barbarians at the Gateways: High-frequency Trading and Exchange Technology

#99

Post by xixi77 »

lolcraft wrote: post #33
chollida1 wrote: post #21

Earlier quoted context omitted.

> I'm wondering if someone here can explain to me the value in HFT for anyone other than the people doing the trading. Well I guess I'm very biased but here's my stab at it. High Frequency trading is at the for front of alot of technology such as ASIC's, Infiniband networking gear,and low latency OS and networking stacks. You could argue that they help push these technologies forward by providing the first customer f…

High Frequency trading is at the for front of alot of technology such as ASIC's, Infiniband networking gear,and low latency OS and networking stacks. That's not an argument for HFT. If HFT is useless, then it has divested a great amount of research into technologies that no one really wanted otherwise, i. e., that the social cost of HFT is greater . Standard microeconomics. The question is, what's HFT good for? Do it…

All intermediaries -- be it floor traders, or HFT's -- earn money from the same source: the difference between prices that actual investors buy and sell stocks at (lower difference is also referred to as higher liquidity).

Now, the resources that were going to traditional specialists and a subset of the professional traders, are going to HFT's, with some of that returning to investors in form of lower trading costs (if we buy the argument that liquidity has indeed improved, of course. Most of what I've seen indicates that it has.) As a side effect, we have technology improvement, useful for other things.

Now, there can be an argument made against HFT's, and in favor of more traditional traders, related to a potential decline in market depth. So far, I have not seen any convincing proof of this being the case, but I am open to it.

However, I think a lot of people arguing against HFT's do not quite understand that their position is literally that we need to enact legislation in order to protect Wall Street from competition :)

Re: Barbarians at the Gateways: High-frequency Trading and Exchange Technology

#100

Post by pasbesoin »

theorique wrote: post #90
pasbesoin wrote: post #61

I'm going to say this again: Exchanges should be put on a stepped clock. I'd suggest a one minute interval. Orders pile up during that interval, and then they're processed in random order. If things start to go really, State-concerning hinky, then authorities "pull the plug" before the next interval is up. Anything less, to my mind, serves point-shaving and profiteers, rather than real investment. Then, all the "gear…

Because of course "real investment" is saintly like the Dalai Lama, and is certainly not looking for a profit.

I take your point, and I didn't downvote you. From my perspective, there is an important difference between taking a position in / with respect to a product (or its organization) and taking a position for the position's sake.

Perhaps it is something of a continuum, not a strict either/or. If so, I find that currently we've gone too far towards the latter.

I'm also concerned that current constructs exhibit chaotic tendencies that put real people and essential systems at risk. I view stepped trading intervals as a potential damper to some of these negative and out-of-control tendencies.

Ultimately, I view investment as backing and furthering production. And I don't see how micro-second based investment appreciatively, substantially furthers this.

P.S. Admittedly, it has been an important factor in pushing computer and network systems development, which may well have had knock-on effects. E.g. is one substantially aiding the other, or the other way around: Trading versus CERN data processing and distribution?

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