

New Revealing paper on High Frequency Trading - d4ft
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1641387

======
Eliezer
Scientific papers about politically controversial topics that involve billions
of dollars of money flowing around in firms that can potentially hire the
author later, need to be taken with a grain of salt. A large grain of salt.
Sad but true. You can't trust science papers about politically controversial,
money-impregnated topics the way you can almost sorta sometimes trust science
papers about completely noncontroversial topics.

I have no particular reason to distrust the author or the paper. Only general
reasons to distrust the topic.

~~~
lzw
These conclusions, however, are also consistent with about 70 or more years of
economics investigation by members of the austrian school. In fact, is whole
economic cycle, that ended in 2008 was predicted by austrians in specific in
2001 and in general as far back as the 1920s.

So, this isn't just some single paper with an unexpected conclusion. It is
important also because it supports an understanding of economics that is under
constant political attack in our society.

~~~
yummyfajitas
_...is whole economic cycle, that ended in 2008 was predicted by austrians in
specific in 2001..._

[Citation needed.]

~~~
sigil
I'm not sure what 2001 prediction lzw could be referring to, but the Austrian
school definitely sounded an early warning on the housing bubble. See this
article from 2004 for instance: <http://mises.org/daily/1533>

Or, Ron Paul addressing the House in July 2002:
[http://www.ronpaul.com/2008-09-26/ron-paul-on-the-housing-
bu...](http://www.ronpaul.com/2008-09-26/ron-paul-on-the-housing-bubble-
july-2002/)

------
jayro
Based on my experience building HFT systems and communicating with others
doing HFT, the results of this study sound about right. HFT traders are
essentially just market makers, meaning that they generally place orders on
both sides of the market in an attempt to profit from short-term mean
reversion.

~~~
cturner

        HFT traders are essentially just market makers
    

The systems you worked on may have fitted into both groups, but your grouping
isn't quite right.

High frequency trading is a broad term that encompasses anything that involves
computerised algorithms interacting with a market, and with short position
holding periods.

MM is a set of strategies which generally requires HFT if you're to be
competitive with it on electronic markets.

------
elecengin
The author makes use of a dataset of trades from major exchanges annotated
with which parties were "HFT". Besides the definition of "HFT" being very
unclear, deciding if a trade was executed by an HFT firm (even by what he
defines as a HFT trader) is very hard to determine.

The author utilizes the Market Participant ID (MPID) to try to determine the
underlying firm for a trade, but this is not reliable. It is very common for
many many firms to share a single MPID for "tier aggregation" since fees are
calculated by MPID and the fees exchanges charge improve with higher volume.
This means that many firms (HFT and not) can share a single identifier. Also,
many large banks have a single MPID for all their flow, which may include HFT
proprietary trading as well as non-HFT flow. He notes these flaws, but I am
not sure he realizes how pervasive these arrangements are in the marketplace.

Even if he was able to determine the underlying firm for each trade, there is
no rolodex of HFT traders. The author makes a valiant attempt using firm
websites and such, but this process is somewhat error prone.

------
vide0star
There's a lot of FUD surrounding the topic of high frequency trading
(lowercase). Much more important to stability and sanctity of markets is
transparency and effective regulation. Traders by design are trained to find
inefficiencies to exploit -- that's how they make money. If some traders have
discovered that by having computers trade really quickly, they can get an edge
- well, that's kind of the point of trading. I think this paper is right to
point out that high frequency trading has little to no impact on the overall
marketplace.

------
RiderOfGiraffes

      The only function of economic forecasting
      is to make astrology look respectable.
    
        -- J K Galbraith:

~~~
yummyfajitas
What is the relevance of the quote? Near as I can tell, the article is not
engaging in economic forecasting, they are simply looking at historical data.

(Note: I haven't read all of the paper, so please correct me if the details
involve forecasting.)

~~~
RiderOfGiraffes
Part of the point is that it is looking at historical data, and that most
academic economics results look at historical data, and historical data does
not, for example (as I understand it), enable predictions of the crashes of
1929 or 2008.

This paper is fundamentally talking about "normal" trading conditions, and the
continuing danger is that results like this will be used to bolster the
contention that HFT is in fact a good thing, whereas when the market crashes
it might be an incredibly bad thing.

I'm not saying it is or it isn't, I'm just saying that there seem to be a lot
of assumptions that aren't being made explicit, those assumptions might not be
valid, and when they're not valid, all predictions go out the window.

Hence the quotation.

I should add that perhaps this is no surprise. A claim I've seen made is that
the information economists need to be accurate is fundamentally
undiscoverable. Hence the article I lunk to earlier:

<http://news.ycombinator.com/item?id=1686077>

------
msy
At least in the abstract this study doesn't seem to differentiate between
market making and more agressive HTF strategies, furthermore the firms
involved and strategies they are running aren't listed. The potential bias in
both these factors is enormous. Given there is significant empirical evidence
that at least some HFT strategies have involved market manipulation and in one
notable example, the temporary total destabilisation of the entire market I'm
extremely dubious as to the origins and motivations behind this paper and the
data used.

That the author appears to run a high-freq quant fund hardly helps:
<http://www.linkedin.com/pub/jonathan-brogaard/22/b04/b60>

~~~
yummyfajitas
_Given there is significant empirical evidence that at least some HFT
strategies have involved market manipulation and in one notable example, the
temporary total destabilisation of the entire market..._

[citation (or even a few google keywords) needed]

~~~
jbarham
Try these keywords: "flash crash" HFT

~~~
yummyfajitas
The first page of google results provides no _empirical evidence_ that either
HFT involves market manipulation or that HFT caused the flash crash. All it
provides is speculation.

~~~
msy
Ask and ye shall receive. [http://www.zerohedge.com/article/its-not-market-
its-hft-crop...](http://www.zerohedge.com/article/its-not-market-its-hft-crop-
circle-crime-scene-further-evidence-quote-stuffing-manipulation-)

If detailed, fully sourced graphs, demonstrating deliberate use of quote
stuffing to essentially jam markets isn't good enough for you I suggest you
consider carefully your own bias.

~~~
yummyfajitas
How do the graphs demonstrate _deliberate_ use of quote stuffing, let alone
market manipulation or a link between HFT and the flash crash?

Rather than repeating myself, I'll link to my own comment on that exact
article explaining why I'm almost certain those graphs are not deliberate.

<http://news.ycombinator.com/item?id=1564445>

Also from your FT article: _Regulators such as the SEC are still puzzling over
exactly what caused the flash crash._

(Full disclosure: I work in HFT.)

~~~
msy
Are you kidding me? Are you honestly denying there's no connection between the
stuffing of the order book with hundreds of thousands of orders and the crash?
Please. As for whether it's deliberate - I think you're right in the sense
that something acted in a way which its creators did not intend if you think
quote stuffing is a legitimate trading strategy we're clearly poles apart in
what purpose we believe markets are meant to serve. I hear a lot of about how
HFT creates liquidity and reduces volatility without much reference to quite
what time periods they're talking about, what you don't hear them say is what
it does to liquidity volatility, particularly in nervous markets and around
announcements. I've done HFT too, I understand the game, the difference is I
realise it's at best an illegitimate quirk of technology and at worst
legalised front-running and the turning of the execution environment into a
trading weapon.

~~~
yummyfajitas
_Are you honestly denying there's no connection between the stuffing of the
order book with hundreds of thousands of orders and the crash?_

Perhaps you missed it, but most of the graphs in your link are from July. The
flash crash was May 6. So unless you want to assert that the flash crash
caused the weird graphs, no, I don't see the connection. That's not to say you
couldn't find similar graphs on May 6 - I guarantee that you could. In fact,
you can find graphs like this almost every day (pre and post crash) if you
look hard enough. And yet, we don't have flash crashes every day. We've only
had two (the first was in 1962
[http://online.wsj.com/article/SB1000142405274870395760457527...](http://online.wsj.com/article/SB10001424052748703957604575272791511469272.html)
).

So yeah, I do expect you to do more than point out an everyday occurrence and
then assert that it (and not thousands of other things, including things which
don't happen every day) caused a once-in-a-lifetime event. I expect, I dunno,
correlations at the very least. Maybe even a mechanism, rather than just a
theory that "I don't understand everyday event A or once in a lifetime event
B, they must be related."

~~~
msy
I didn't think you were abtuse enough not to read what I linked to. But then
it is hard to get someone to understand something when it's not in their
interest to do so.
[http://www.nanex.net/20100506/FlashCrashAnalysis_Part4-1.htm...](http://www.nanex.net/20100506/FlashCrashAnalysis_Part4-1.html)

Detailed analysis of the precise trading events that led to the crash. With
data.

~~~
yummyfajitas
Your first link had graphs from July. Your new link has similar graphs from
May 6. Also note that your new link agrees with what I said:

"Quote stuffing is also not a rare occurrence and these sequences are seen
frequently on a daily basis; they are easy to find once you know what to look
for."

Compare that to what I said: "That's not to say you couldn't find similar
graphs on May 6 - I guarantee that you could. In fact, you can find graphs
like this almost every day (pre and post crash) if you look hard enough."

I've seen Nanex's graphs. I don't see how they come even remotely close to
explaining why crop circles (which occur everyday) caused the flash crash.
Again, what is the mechanism? A DOS attack? If so, then how come we don't have
a flash crash every day?

------
VengefulCynic
Let's assume for a second that the author is correct and that correctly-
executed HFT systems are generally a non-issue. Even with that core
assumption, there is still the significant question as to what happens HFT
systems misbehave (either due to suboptimal algorithms, bugs or a lack of
adhering to stock trading good practices), which is the allegation that NANEX
makes (<http://www.nanex.net/20100506/FlashCrashAnalysis_Intro.html>).

Obviously, that isn't the subject matter that this paper is covering, but it
definitely seems to be making an attempt to paint HFT as a Force for Good in
the marketplace (or at least dispel attempts to paint it as a Bad Thing), and
in my mind as a software developer, even more than impacts when things are
Working As Intended, the bugs are what scare me.

------
aresant
Three most salient points of the paper offer an almost direct counter to HFT’s
biggest critics:

\- HFT activity has no impact on market volatility and may event decrease it.

\- The authors find that there is no evidence of abusive front running.

\- HFT plays an important role in price efficiency and the price discovery
process.

------
known

       Trading = Zero sum
       Investing != Zero sum

