
Algorithmic surrealism: A slow-motion guide to high-frequency trading - Gigamouse
http://suitpossum.blogspot.com/2015/06/high-frequency-trading-guide.html
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washedup
This is one of the better overviews of HFT I have come across. It hits on all
the points I consider to be important (having worked in HFT for over six
years); especially the Techno-Leviathan, trader psyche, and the perception of
constant "war". I interviewed at Ronin once, and at the time I was super
impressed by the beauty of their offices. Reading this helped me realize what
a fucking circus it really is.

One facet which always fascinated me was the dispersion of trading ideas,
including the code behind algorithms and any sort of research. Successful
ideas are constantly being updated, adapted, and often times stolen. Traders
are generally hired for the trading strategies they have been exposed to and
the potential value within. There are very few individuals who create new and
successful ideas. The rest are just copying what they have been exposed to and
hoping that it sticks when they throw it all the wall, which eventually runs
each successful idea into the ground as the value being captured disappears
quickly.

Either way, it was a great school for learning how to program and use
statistics effectively.

As my interviewer at Ronin told me after a I failed the interview (we both
knew it): "This is all a game, you just need to learn the rules"

~~~
chollida1
> This is one of the better overviews of HFT I have come across.

Really, I found it to be long on words and almost completely devoid of any
content what so ever.

I mean this in all seriousness, What specifically can one point to in this
article that has any actual content and isnt' just a collection of links to
other sites for common definitions.

At no point did the article actually say how HFT firms design their systems or
even how their algorithms might work.

> t hits on all the points I consider to be important (having worked in HFT
> for over six years)

I too am in the industry:)

~~~
dragontamer
I concur with this sentiment. Especially:

> Really, I found it to be long on words and almost completely devoid of any
> content what so ever.

But I don't work in the financial industry. Still, the article offered nothing
new to me

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themartorana
Having zero real knowledge of trading in any fashion at all, recently I've
been wondering if there was a niche for "medium-speed trading." I know I can't
get close to the exchanges, and I don't have the capital to hire experienced
trader/engineers to develop the latest algorithms.

Basically, is there a slice of the pie in trading much faster than humans, but
much slower than HST?

It's an academic exercise, but one I've been toying with.

~~~
kvcc01
Yes, there’s a "frequency spectrum" of sorts and HFT is at the short end of
it. Here, your models monitor and react to trading tick-by-tick, and execution
speed is paramount. It’s also where you have the fiercest arms race for the
fastest systems, colocation, FPGAs, etc. Next up comes what’s often called
“statistical arbitrage,” where you have models that no longer look at tick-by-
tick trading but may look at what happens at 30-second, 1-minute, or 5-minute
windows. Here you have more interesting relations emerge between stocks and
the market, e.g., what does IBM do relative to the tech index, or relative to
MSFT, etc. (Such cross sectional relationships don’t seem to matter as much in
HFT.) Actually stat-arb was the domain where the earliest statistical
approaches such as "pairs trading" emerged. Next up come models that trade
daily (or less frequently), and here you begin to see the long-short market-
neutral relative-value type of approaches, where some quantitative [mutual]
funds may operate. Next up will be the traditional mutual funds, and beyond
that you have your Warren Buffett’s, etc.

One thing to keep in mind is that the higher your trading frequency, the
smaller the price moves you can hope to capture, which limits how much capital
you can deploy in your models. This is why HFT models are usually small in
size but have high Sharpe ratios. As you reduce your trading frequency, you
can expect to capture larger price movements and deploy more capital but
you’ll also be exposed to more of the vicissitudes of the general market, so
your Sharpe ratio will decline. Market participants usually carve themselves a
happy spot on this frequency spectrum and stay there. I don’t know of any firm
who is successful at every spot.

~~~
mrchicity
I think you are misconstruing holding period or predictive horizon with
latency sensitivity. Many HFTs are looking at statistical relationships like
the ones you mention to compute a fair price for making markets. The only
trades where HFTs hold positions sub-second on average are pure arbitrages.
Like you mention, there simply isn't enough price movement within that
timeframe to generate a profit.

All the inputs to their pricing change rapidly, so their order prices must
change quickly as well, but they can end up carrying risk for long periods of
time. The Australian regulator looked at HFT activity in their markets, mind
you probably less sophisticated than US stocks, and found the average holding
period was 42 _minutes_ : [http://tabbforum.com/opinions/hft-concerns-are-
overstated](http://tabbforum.com/opinions/hft-concerns-are-overstated)

~~~
mathgenius
I'm not sure the average holding period is a useful thing to measure. For
eXample, if you are trading a spread it's how quickly you put on the second
leg that matters, and who cares how long you hold the pair for. So, 42 minutes
has nothing to do with it.

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Xcelerate
> "People are routinely worried about harmless things, and routinely
> completely unworried about incredibly harmful things."

God what a quote. I'm stealing this and using it everywhere I can. It
basically sums up my entire attitude toward humanity.

~~~
washedup
Bad quote, I agree, but it does express how risk management in the HFT world
is often short sighted.

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Natsu
> if you'd like to support my ongoing Creative Commons writing, please
> consider buying me a virtual beer.

In the spirit of the article's talk about financialization, I wonder if
there's yet a way to buy the author virtual beer options?

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brentis
It's only going to get worse (or better) depending on how you look at it. So
many behavioral factors will be included to shake stops and squeeze shorts at
just the right time to make huge profits from the bounce. It's part of the
reason as a trader I'm now just chasing Momentum, ignoring most other signals
as noise. So much so, I'm building an app that supports discovering these
momentum breakouts. In the unlikely event anyone is interested -
www.mometic.com

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MichaelCrawford
I have some experience with quantitative investment coding and so am
frequently asked to apply for HFT jobs.

I don't pursue it because I came to regard the practice as unethical.

~~~
nickysielicki
last semester a chicago HFT group came to my school (Wisconsin-Madison) and
spent a short time trying to tell us why they weren't unethical.

They didn't convince me at all. The gist of what they were saying is that
they're merely making the market more efficient. That's such bullshit. The
money they're making is surely coming from someone's pocket, and that probably
means the middle class day-trader rather than the NYC firms with billions to
spend on diversification. Later on in their presentation their tone made me
feel that they were so extremely proud of what they were doing. It really
irked me.

~~~
mpu
That's their typical and only way to justify it, indeed. I also feel like they
are clueless idiots fighting for small profits and serving a made up ideal of
free market. This free market cannot exist because, when left to itself, it
collapses. To remedy that, it's government funded and the money that goes into
those Wall Street's geniuses is simply taxpayers'.

~~~
mrchicity
Aside from firms that have payment for order flow relationships, the US stock
markets are basically the pure capitalism you read about in an economics
textbook: Low barriers to entry, undifferentiated product (my quote is as good
as anyone else's = best price wins), fierce competition.

~~~
mpu
Maybe it is today, but as soon as it starts to collapse (subprimes and
friends), the textbook model has to be saved by external interventions. And so
on and so forth. Long term, I doubt pure liberal free markets take us
anywhere.

