High frequency trading

Voltex

Hi,

Just wondering what peoples thoughts are on HFTs. Does it hurt markets (as in the flash crash 2010) or is it a natural evolution of how markets will operate?

mono627

I say fair play to them. Nothing wrong with using your brain to take advantage of a flawed system.

There has always been some sort of intermediary that has taken advantage of the system since inception and in some way I think there always will be.

I think algorithmic trading is a natural evolution of how markets operate and as such there is always the risk that they can get caught in a feedback loop and spark a massive market spike, be it up or down. So yes you could argue algorithmic trading can hurt the markets but is not inherently bad.

Will this happen again? Absolutely.

simongurnick

At it's best it provides liquidity. The spreads in the market are tighter than they have ever been. Orders for your joe blow retail trader execute within a second...a few years ago 10 seconds was a common fill time.
At it's worst, you have dark pools with no transparency and they basically scalp the market making micro-pennies in micro-seconds.
A lot of misinformation and hysteria in the Lewis book.

Static M.e.

simongurnick wrote: »

A lot of misinformation and hysteria in the Lewis book.

Not arguing (just to clarify) but could you be more specific please? I've just finished the book (Sunday) and I'm very interested in learning more about it.

simongurnick

Static M.e. wrote: »

Not arguing (just to clarify) but could you be more specific please? I've just finished the book (Sunday) and I'm very interested in learning more about it.

Some of the stuff about IEX. He alludes that it is a safer "exchange". It's not an exchange, it's a dark pool itself. It may have different rules to the other pools but it still doesn't display orders publicly.
The piece on payment for order flow. It's a common practice for years used by most discount brokers and is actually more transparent than an internal trading desk, such as goldman.The sources he uses from said discount brokers are mainly disgruntled ex employees with either a cross to burn or another agenda.

Scott Paterson's book Dark Pools is a very good read and probably a lot more factual. His other book "The Quants" is worth a read too.

Static M.e.

Thanks Simongurnick, I've just started into Dark Pools over the weekend. He does a much better job of explaining everything (Dark vs. Lit pools etc.) and I like the way he was given a much better history so I can see why things were setup the way they were.

Apart from the algo's themselves I think I can now see how everything works, technically. Very interesting stuff.

I think I'll start on The Quants after unless I find more HFT\Dark Pools books. If you come across any more books or resources please let me know. I'm loving reading about it.

Bateman

Timing advantage has been around since time immemorial. The other thing that strikes you is why aren’t the institutional sector up in arms over HFT if it is so harmful? I got through the book on holidays a couple of weeks ago and felt it didn’t do a good enough job explaining that.

Voltex

But would anyone think that HFT reinforces the concept of the Efficient Market Hypothesis?

simongurnick

Voltex wrote: »

But would anyone think that HFT reinforces the concept of the Efficient Market Hypothesis?

That's an interesting question. I suppose by design, it would to a degree. But, I wouldn't be a proponent of that theory, so in reality, would say no.

arrowloopboy

Not sure what it indicates,but I read recently on IC that Virtu had 1 loosing day in the past 5 years,i know what that indicates :pac:,I also believe that HFT is going to be highly scrutinised and regulated going forward .

Static M.e.

I don't mind the high frequency trading or computerised, electronic, trading but some of it just seems to be plain wrong. I find it difficult to understand how someone can be allowed to place hidden bids or that there can be in the system hidden \ unknown order types in what should be a very open public system. Computerised systems should allow all information to be freely available to everyone, at the same time, for free. Anything else is simply a way for someone to make $$.

I don't think that people who front run the orders are offering any value to the market in itself either. Its seems to be just a very smart way to scalp people. Surely, there should be Risk in the market for anyone who buys or sells?

At the end of the day its the smaller type investors (us) and the pension funds getting eaten alive by others.

Voltex

I saw an interesting program where the main HF trading banks have their servers all set up within a special room within the NYSE. All the servers have exactly the same length of wiring to the market (believe it or not even at the speed of light, information traveling down a 5 metre length of fibre optic cable will take longer to reach its destination than information traveling down 4 metres of cable and give advantage to the guys using shorter cables).

It was also claimed that over 70% of all the trades on Capital markets in London, NY, Chicago and Tokyo are HFT's. Would that be accurate?

Static M.e.

It wouldn't surprise me. For HFTs co-location would mean quicker access times and whoever has the shortest time would definitely have an edge over everyone else, all other things being equal.

According to "The Flash Boys" the IEX Group's exchange has put in a black box (long roll of cable) so that all orders to and from other exchanges as well as from HFT firms must wait exactly the same amount of time. This removes the need for colocation, which the HFT firms pay for, and makes it much fairer system for everyone.

odd1

Static M.e. wrote: »

It wouldn't surprise me. For HFTs co-location would mean quicker access times and whoever has the shortest time would definitely have an edge over everyone else, all other things being equal.

According to "The Flash Boys" the IEX Group's exchange has put in a black box (long roll of cable) so that all orders to and from other exchanges as well as from HFT firms must wait exactly the same amount of time. This removes the need for colocation, which the HFT firms pay for, and makes it much fairer system for everyone.

It would certainly make it a bit easier for someone with balls and money thinking of setting up a prop shop. Great OPPORTUNITY me thinks.


I have the balls, anyone got the money?

simongurnick

The other side of the coin though are the tighter spreads nowadays. Most securities trade within pennies between the spreads which makes it fairer for the retail investor.
So, HFT can be a positive by providing liquidity to the market.
The dodgiest practice I think they engage in is flooding the market with orders which drive the market in a certain direction by tiny amounts, they then cancel the orders and scalp the price on the other side of the market. A suggested regulation to combat this would be to place a fee on cancelled orders.

Creeby

I agree. As long as they are not artificially manipulating the prices I am fine with it

mono627

simongurnick wrote: »

The other side of the coin though are the tighter spreads nowadays. Most securities trade within pennies between the spreads which makes it fairer for the retail investor.
So, HFT can be a positive by providing liquidity to the market.
The dodgiest practice I think they engage in is flooding the market with orders which drive the market in a certain direction by tiny amounts, they then cancel the orders and scalp the price on the other side of the market. A suggested regulation to combat this would be to place a fee on cancelled orders.

Paying a fee for cancelling an order is ridiculous.

Excessive cancelling of orders is a different story, but then again there is already fines in place for excessive cancelling of orders.

Static M.e.

I don't agree or maybe I do but that depends on how excessive is defined.

If computers are spamming thousands of orders and then just cancelling within a second or a milliseconds I don't see how this makes the market better. Put a $/€1 cents fee on every cancelled order, which is tiny for anyone who is genuinely makes a mistake, but yet would drain the profits of anyone spamming the systems with orders.

They are now talking about people\computers doing transactions in nanoseconds, 1 billionth of a second...so whoever has the fastest computer wins the race. I now don't think that volume of trades = liquidity any more when the volume is based on spamming the system with false\hollow trades - trades with no one behind them.

At the end of the day the market is there for buyers and sellers to trade directly at a fair price. HFT's just seems to be another layer which isn't necessary..

simongurnick

mono627 wrote: »

Paying a fee for cancelling an order is ridiculous.

Excessive cancelling of orders is a different story, but then again there is already fines in place for excessive cancelling of orders.

Obviously not individual cancellations, but multiples. I'm not aware of any fines for excessive cancelling?

simongurnick

Static M.e. wrote: »

I don't agree or maybe I do but that depends on how excessive is defined.

If computers are spamming thousands of orders and then just cancelling within a second or a milliseconds I don't see how this makes the market better. Put a $/€1 cents fee on every cancelled order, which is tiny for anyone who is genuinely makes a mistake, but yet would drain the profits of anyone spamming the systems with orders.

They are now talking about people\computers doing transactions in nanoseconds, 1 billionth of a second...so whoever has the fastest computer wins the race. I now don't think that volume of trades = liquidity any more when the volume is based on spamming the system with false\hollow trades - trades with no one behind them.

At the end of the day the market is there for buyers and sellers to trade directly at a fair price. HFT's just seems to be another layer which isn't necessary..

I'd agree with the above, but again, HFT, has become a catch all phrase with varying definitions. There is legitimate high frequency trading which creates a more efficient market, but there is also the trading you reference above that provides no benefit to the overall market structure, IMO.

Static M.e.

Yes, HFT seems to be a catch all phrase which should really be broken out

Static M.e.

Found this today non the Verge. It will be interesting to see what, if anything, happens..

http://www.theverge.com/2014/6/5/5782990/sec-proposes-stricter-regulations-high-frequency-trading-hft

This is the link to the SEC news post

AngleseaStBull

Voltex wrote: »

Hi,

Just wondering what peoples thoughts are on HFTs. Does it hurt markets (as in the flash crash 2010) or is it a natural evolution of how markets will operate?

It won't hurt your investments if you buy and hold decent investments. If you're trying to buy and sell constantly like a day trader then your probably piddling in the wind, the institutions have too much of a head start.