
High Frequency Trading Defined - fixxer
http://www.nanex.net/aqck2/4691.html
======
blazespin
They're saying that low latency / lack of fundamentals (versus 'market
events') marks HFT.

Unfortunately, at the end of the day, even if you are only about
'fundamentals' (whatever that means) you're obviously going to want to trade
FIRST on those fundamentals .. right? Cause whoever does is going to win the
day. Ok, so low latency is necessary for normal electronic trading.

Ok, now market events versus fundamentals. Seriously? At what point are
'market events' not fundamentals? The definition is all arbitrary. If there is
a change in some correlating index, isn't that a 'market event'? But isn't it
also rather fundamental (say, that correlating index is interest rates
futures)? At what point does that change in the correlating index no long
qualify as a 'fundamental event'? When Nanex says it doesn't?

Nanex simply wants to have its cake and doesn't want to be marked as "HFT".
All electronic trading, at its heart, is going to be HFT at some point. The
only way to keep that from happening is just come up with really arbitrary
definitions marking the line you can't cross. Likely those definitions will be
used to help whoever is paying Hillary Clinton/Bush/Trump/etc the most money.

Let's not bother with these shenanigans just put a transactional tax on
everything and be done with it. Let's stop spending all our time and our brain
power creating software to do trading and start getting back to actually
researching /innovating / building things.

~~~
tomchristie
> you're obviously going to want to trade FIRST on those fundamentals ..
> right? Cause whoever does is going to win the day

If you're only trading long term, then sub-second differences are essentially
irrelevant.

I think there's a perfectly reasonable point here. Fundamentals as "trading
against the future profit of the company". HFT as "trading against the
system".

~~~
JesperRavn
But people who trade against fundamentals aren't trading _directly_ against
future profits, they are just betting on long term price movements. HFT
traders are betting on (very) short term price movements.

According to the theory that stock prices are a martingale (which is well
established), there is no qualitative difference between long and short run
price movements. In particular, there is no reversion to the mean in stock
prices [0].

[0] Of course, there are going to be literally hundreds of papers exhibiting
some reversion to the mean effect. But this effect is always tiny.

~~~
cynicalkane
"In particular, there is no reversion to the mean... there are going to be
literally hundreds of papers exhibiting some reversion to the mean effect."

Okay.

I also think you don't know what a martingale is. It is impossible to make any
expected value betting on martingale movements, by definition. If you believe
traders are purely "betting on price movements" of martingales then profit is
impossible. So either prices aren't martingales or trading is not purely a
process of betting on the movements of market-clearing prices. Actually, both
assumptions are false.

~~~
JesperRavn
If _you_ knew anything about academia, or if you even bothered to carefully
read my post instead of nitpicking, you would understand that just because
something is in general true, doesn't mean that there won't be hundreds of
papers showing how this thing fails to be true in special cases, or to a very
small extent.

Regarding martingales, a martingale is defined relative to an information set
( _you_ know what a martingale is so you already knew that, right?). Saying
that there is no reversion to the mean implies being a martingale with respect
to the weakest possible information set (the history of prices). Traders,
whether high frequency or others, may have extra information outside this
information set.

In short, stop nitpicking and revise your understanding of what a martingale
is.

------
patio11
This defines market making as HFT, and while many HFTs make markets not all
market makers are HFT. You can, using absolutely no knowledge of an underlying
stock and the mathematical skills of a bright ten year old, make markets
manually.

In 2015, if you do it in a highly-traded U.S. equity, you probably will not
have a great risk-adjusted return because your bright ten year old is in all
ways worse at this task than a computer is, but it is very doable.

To the extent that HFT is more meaningful than Big Data ("trading that I don't
like and data I think is valuable, respectively!"), it had to include some
element of Very Frequent, Very Fast. How fast? Like "the speed of light is
_literally a logistical challenge_ fast." If you see an order in Chicago and
make an order in Tokyo a second later, no matter what your rationale is, you
are not doing HFT. That's just T. Got a model of the mind of your
counterparty? Oh, welcome to T. Observed a correlation in an ETF and its
underlying stocks and using it to trade with 1,000 times a minute? Wow, such
impressive T!

~~~
conistonwater
I don't disagree with you here, but, on the other hand, parasitic trading [1]
is a concept that's existed in market microstructure books for ages, since
before HFT. It is not clear to me why this happens, but the concepts of
parasitic trading and high-frequency trading seem to be mixed up quite often,
even though they are strictly speaking orthogonal to each other. It should
still be possible to argue against parasitic trading that also happens to be
high-frequency.

[1]
[https://books.google.ca/books?id=Rd9hDRR1Yx4C&pg=PA195](https://books.google.ca/books?id=Rd9hDRR1Yx4C&pg=PA195)

------
bachback
The HFT debate is bound to be misunderstood... It rose to prominence last year
with the book by Michael Lewis "Flash boys". A discussion between two exchange
operators Bats and the new IEX:
[https://www.youtube.com/watch?v=RcpmHyPD_PY](https://www.youtube.com/watch?v=RcpmHyPD_PY)

This issue is not about frequency per se at all. Its about who has access to
what information at what price. For instance one thing that happened was that
data providers (e.g. Reuters) sold information to a group of traders, before
it was available to the public.

The question is not at all whether software should be used to trade (we're not
going back to pen & paper / pit trading). Rather the question is how software
should be used in financial markets. HFT is not evil, it's a difficult problem
to be solved.

~~~
fixxer
I think your viewpoint is fair. The aspects with hft that strike me as unfair
are generally the result of bad exchange practices, such as lack of
transparency in customer segmentation on their platforms. If it was all out in
the open with price tags on display, I think the problems would fade away.
Instead, the exchanges are running their businesses with about as much
integrity as a bucket shop.

~~~
patio11
Can you identify a particular way in which an actual US exchange implements
"customer segmentation on their platform" in a way which is tradable? This is
not me trolling, this is a sincere question. If that actually exists I want to
make a level in a trading simulation where the playing programmer would have
to abuse that.

~~~
__d
One of the things that gets some of the anti-HFT types going is that it's
possible to subscribe to direct exchange data feeds.

All exchanges are obliged to contribute to the SIP, which offers a market-wide
view of quotes (prices) and historical trades. However, because the SIP must
aggregate data feeds from all exchanges and then republish this information,
it's possible to "predict the future" if you subscribe to the direct exchanges
feeds (which are more-or-less what they send to the SIP) and avoid the added
latency of a hop via the SIP's aggregator and redistribution.

These direct exchange feeds are expensive, and getting more so (ie. NYSE
UltraBook is $11,000/month for the data, plus port fees, plus connectivity).
The argument is that this segments the customers such that unfair advantage is
available to those who can afford to subscribe to the direct feeds.

More recently (last two? years) it's been possible to get a microwave
transmission of the data, rather than fiber, which is both lower-latency and
more expensive again.

~~~
vasilipupkin
Direct feeds are available to all market participants. Expensive really sounds
like an excuse. It costs what it costs, it's not clear why it should cost any
less than it does.

~~~
__d
Right. If a direct feed is too expensive, then a SIP feed being more than the
end-of-day prices in the newspaper could fall foul of the same argument.

------
phyalow
I still dont get what the issue is with any of this... For a trade there has
to be two counterparties with firm instructions on the ELOB to be lifted or
filled at a certain level. If you dont want to transact at that price dont
have an order in the market...

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msravi
Hmm... so by this definition, all arbitrage, irrespective of its frequency, is
defined as HFT?

~~~
zhte415
No.

HFT, when it is done at milliseconds of latency between exchanges to trick an
order into executing at a 'fair price' because the order was sent to one
exchange and HFT 'arbitragers', decide to manipulate the price at other
exchanges due to latency for the same stock buy/sell.

It is arbitrage free, riskkless arbitrage that adds no value to a market, as
it creates none but destroys it. Arbitrage adds value to a market by offering
something cheaper; HFT removes the cheaper for the more expensive.

~~~
kasey_junk
> decide to manipulate the price at other exchanges due to latency for the
> same stock buy/sell

Be clear what you are saying. They are "manipulating the price at other
exchanges" by changing the prices they themselves set on their own inventory.

It is not arbitrage, it is price discovery and it is not without risk.

~~~
zhte415
> Be clear what you are saying. They are "manipulating the price at other
> exchanges" by changing the prices they themselves set on their own
> inventory.

Which will be sold instantly, as they have 'discovered' the price on the other
exchanges were lower than where the initial order went to, bought that, and
then instantly, give or take a few milliseconds, resell.

It is not price discovery, it is price manipulation. HFTs have no inventory,
they are perfectly lean, they throw hot potatoes across different exchanges.

Not that this is not interesting technology. It is, but it is also
manipulative.

I exclude prop trading from the above, obviously, because it is different, and
does hold inventory.

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al451
I have defined HFT to be evil, therefore HFT is evil. Brilliant.

~~~
JonnieCache
I found it a bit odd too. Isn't nanex a highly respected financial research
firm of some kind?

~~~
brobinson
>highly respected

I'd say "highly alarmist" based on what I've read from them over the years.
They're pushing people to use their product, so it makes sense for them to
publish alarmist stuff which segues into their product offerings.

~~~
genericacct
I concur. Had a brief exchange with one of them last night and he was all too
eager to bend the truth to fit his message.

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andy_ppp
So are there systems out there making trades designed to confuse and make HFT
systems do the wrong things? Could you make some move then others? Can you run
game theory stuff to constantly move the market in certain ways?

Is this really the most efficient way to allocate resources...?

~~~
kasey_junk
Yes, absolutely there are many HFT systems trying to game other HFT systems.
Some of them are using perfectly legal means and others are doing things that
are less clearly legal.

> Is this really the most efficient way to allocate resources...?

A - Yes as far as we can tell. All the other options haven't worked nearly as
well.

B - Be very careful when assuming that the markets are about "allocating
resources". That is a by-product of the markets. Their main purpose is about
risk management.

