

What's the Secret Sauce for an HFT firm? - lesterfremn
http://piecesthatmatter.wordpress.com/2011/03/18/how-we-got-here/

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egiva
No, I think HFT is a natural progression. HFT was popular among Hedge Funds at
least starting in 2004. An acquaintance who ended up working as a tech-related
VP at a smaller fund would tell me that the number one problem they had was
mitigating (spending or finding an outlet for) the massive amounts of money
they generated on around $30 billion of daily trading (buys+sells). Honestly,
hyper liquidity has its problems too when you generate too much excess cash
and can't spend it due to tax implications, so they would invest massive
amounts of capital in their servers (buying the best), in their software
(hiring the best programmers), etc. In that hyper-liquid cash-rich work
environment, it seems to me that investing in your infrastructure (enabling
HFT) was a natural progression. Where else do you spend the money? PS - wish I
had these problems too! (I don't) haha

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deathflute
Sorry, that doesn't make sense. HFT is actually not at all capital intensive
compared to some other strategies that hedge funds run. The whole point of HFT
is to produce high sharpe returns on a small capital base. These strategies do
not scale.

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jayruy
I think you're saying the same thing, but I agree deathflute has stated the
problem more clearly from a business perspective: the strategies do not scale,
yet they need to reinvest proceeds into the business to remain competitive.
the result is more technology to execute the same strategies faster, rather
than mitigating risk by diversifying into new strategies. this is why people
call HFT an arms race.

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egiva
Exactly - thank you for clarifying my original post - I agree it was poorly
presented, but I do think we were both elaborating the same point. HFT IS an
arms race as you point out, and the details I find interesting have to do with
infrastructure changes - i.e. relocating server farms to Siberia to gain a few
fractions of a second in transmission time, etc.

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deathflute
It is quite puzzling why all of a sudden there is a rush to write about hft.
Historically, systematic trading has been very secretive and quite
understandably so. And now all of a sudden you can read about building hft
systems on wordpress blogs. Either returns have virtually diminished from such
strategies or in the view of recent popular backlash, there is a concerted
drive to talk about it.

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yummyfajitas
There is a third explanation - barriers to entry have come way down, so lots
of amateurs have gotten into the business. Some of these amateurs are now
talking about it.

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dedward
Is that really HFT though?

It is my understanding that High-frequency trading takes advantage of
milliseconds (or less) of latency and extreme closeness to the markets
network-wise, and exploits that advantage to the trader's benefit.

It's a subset of algorithmic trading, and one that's contentious and starting
to be widely considered an unfair market practice, as it leverages the actual
mechanism of the market itself rather than just the market.

Are we really talking about HFT here or just algorithmic trading?

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yummyfajitas
There is no clear dividing line between HFT and algorithmic trading.

Some amateurs do latency arbitrage proper, though that is more the province of
big shops. Some are very short term (500ms-1000 second time horizon)
speculators. Some do a combination of both - use HFT techniques to shave off
pennies on longer duration positions.

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grandalf
I get the impression that it's mostly the arrangement with the electronic
exchange and the kickbacks that can be negotiated in exchange for providing
liquidity.

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mmcconnell1618
HFT = High Frequency Trading for those that don't know from the title.

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crikli
Thank you. All I could come up with was "Hot For Teacher," which doesn't make
for much of a business model.

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rudiger
I can think of at least one business model for that.

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known
<http://en.wikipedia.org/wiki/High-frequency_trading>

