
A New Breed of Trader on Wall Street: Coders with a Ph.D - hvo
http://www.nytimes.com/2016/02/23/business/dealbook/a-new-breed-of-trader-on-wall-street-coders-with-a-phd.html?src=busln
======
ska
Lot's of "nothing new" comments here, but I think that may be missing the
point.

Wall Street has been hiring physics & math graduates for a good while now, but
typically as quants, not traders. Those were (are?) hugely different
positions, in terms of responsibility and dollars realized.

Not my area, so I may just be missing something too. But when I had
acquaintances going into this sort of things, they weren't getting anywhere
near a trading desk. At least, not for a while.

~~~
kasey_junk
The line between trader and quant in electronic trading scenarios is pretty
vague and has been for some time.

~~~
jorgecurio
One gets you fired when you lose money and the other gets you a speaking
opportunities at universities where kids are discovering Gordon Gekko.

~~~
mrchicity
You want it to be that way, but it's the other way.

If you're just a "cog in the machine" doing research or writing software for a
trader, and he ends up sucking, the firm will probably shuffle you around to
work under someone else. You have generally useful technical skills, cost less
than the trader, and recruiting good technical people is expensive.

If you're a supposedly brilliant trader but cost the firm money taking stupid
risk or fail to make any profit to justify your inflated salary and bonus,
there's not really much they can do with you.

~~~
lintiness
.... like john merriweather or victor niederhoffer for instance. two guys
who've blown up the world multiple times but still manage to find capital and
manage huge funds.

------
6stringmerc
Wait, the article cites Knight Capital with a straight face and doesn't bring
up the whole "Whoops we lost $440 million due to bad software" [1] as a
significant caveat to putting so much emphasis on the role of technology? That
doesn't seem very contextually fair. Programmers, no matter how great, can
still make costly mistakes.

[1] [http://www.bloomberg.com/news/articles/2012-10-17/knight-
cap...](http://www.bloomberg.com/news/articles/2012-10-17/knight-capital-
reports-net-loss-as-software-error-takes-toll-1-)

~~~
kasey_junk
The Knight Capital responsible for the Knightpocalypse basically went out of
business due to it, and was bought by Getco a different trading firm. Getco
switched names because in some places the The Knight brand was stronger than
the Getco one.

~~~
solaarphunk
They actually did this to reverse-IPO, giving all of the PE firms and partners
a way to get liquidity since KCG was already public.

~~~
kasey_junk
Do you know how they ended up splitting up the ownership stakes? I've been
curious but never tracked it down?

------
mathgenius
I've been in and out of coding for finance at a few different shops for about
10 years now, and recently have been working more on the front-lines: coming
up with my own trades and the software to do those. I can tell you from
personal experience that this is a _completely_ different experience than
writing code for someone else (a trader) who then is responsible for
making/losing the money.

Imagine this for a daily routine: 1) oh shit this is awesome: x times $1000000
means i'm going to be so fucking rich! 2) run code live on the XYZ market,
trying not to shit bricks 3) hang-on i found a bug in my analysis/data-
preprocessing/ML pipeline and i'm not going to be rich. 4) spend hours (or
days) fixing bug & re-running analysis 5) go back to 1).

After a few months of this one gets seriously fragged.

~~~
esaym
ha ha, I did that basically with bitcoin.

------
andy_ppp
I occasionally meet bankers here in London and I can't help but think to
myself what a waste of time and effort when there are actual problems to
solve. Bit rude I guess but a whole generation of bright people reducing the
latency of trades or compliance software or a new trading algorithm does not
move us from zero to one, maybe more zero to -0.3 or something.

How people can claim the market allocates money correctly I do not know, it
doesn't seem possible with the rigging and illegal activity that's been going
on.

~~~
vostok
I think it is odd to conflate "bright people reducing the latency of trades"
with "rigging and illegal activity". It seems to me that the former are rarely
involved in the latter. One only needs to look at the libor cases, the FX
fixing cases, or the gold fixing case.

I actually have a pet conspiracy theory that the articles about HFT are the
result of lobbying on the part of banks. When I worked at a bank, I did see
articles that were heavily influenced by employees of the bank. This influence
was never nefarious, but I can see how a traditional trader's biases may have
lead to some of these HFT articles.

I rarely see articles about the evils of internalization, something that I
strongly believe brings great harm to the markets. At the same time, I often
see articles about how HFT takes advantage of the market and brings little
benefit when I've made internal measurements that show just the opposite.

Of course none of the above is any sort of advice, and it's probably
appropriate for me to note that I've worked as trader at a bank and currently
work as a trader at an HFT firm.

~~~
topbanana
> I rarely see articles about the evils of internalization, something that I
> strongly believe brings great harm to the markets

How?

~~~
vostok
Internalization disincetivizes people from making tight markets in lit venues
because you will only get filled when an internalizer thought the flow was
toxic. This in turn means that markets are wider for all participants.

------
crb002
What's new is that they are using FP instead of C++ to deliver results quickly
and more reliably.

These aren't the quants from the 90s that were Physics PhDs applying the
latest and greatest in differential equations and whatnot. These are
programmers who know how to make the complier do more work for them so they
achieve results faster.

~~~
hackercomplex
Fast execution with very terse code, and also the code that is produced by a
diciplined OCaml programmer can be easier to grok in many situations because
it may read close to what the math formulas look like on paper relative to
other languages.

To be honest this is the same argument people make for Haskell and I'm only
assuming the argument applies to OCaml equally well.

------
masudhossain
Trader+coder here.

This article is missing something very important, the fact that coding doesn't
mean you're going to trade better.

A coder doesn't know how to trade right off the bat, they'll only know how to
code in a specific trading rubric (most trading algos aren't even good unless
we're talking HFT) that has been told to them from someone that already knows
how to trade successfully.

Anyone that's a real trader and has managed clients money will instantly be
able to tell you that this is articles title is misleading.

~~~
lintiness
a "real trader" manages his / her own money, not that of clients.

~~~
princeb
the street doesn't make that distinction

------
hackercomplex
I wonder if their recruiting tactics are as aggressive as some of the firms
I've seen portreyed in film..

MARCY DAWSON: I admit we've been too aggressive. But all I ask is that you
give me five minutes. As a token, accept this.

MAX: I don't want your money

MARCY DAWSON: The suitcase isn't filled with dollars, or gold, or diamonds.
Just silicon. A Ming Mecca chip.

MAX: Ming Mecca? They're not even de-classified yet.

MARCY DAWSON: You're right, they're not. But Lancet-Percy has many friends.
Beautiful, isn't it? Do you know how rare these are?

MAX: What do you...?

MARCY DAWSON: Mr Cohen?

 _MAX RUNS DOWN INTO A SUBWAY_

(taken from π screenplay by Darren Aronofsky)

~~~
remyp
I don't deal with petty materialists like you!

One of my favorite movies.

------
lindbergh
I'm currently enrolled in a MSc program with a thesis on portfolio
optimization using statistical learning. It might even lead to a publication!
But now, the question is, should I go onto a PhD in stats or CS or just settle
with it. I know I probably have the chops to complete it, it's just that 4 or
5 five more years in school is somewhat risky. Sometimes it's hard to assert
your worth on such a competitive market.

On a side note: omg janestreet is such my dream job. Writing functional code,
working on immensely interesting problems (what is the market distribution?)
and being paid for it.

~~~
hackuser
I'm not sure I understand these jobs in an economic sense and I still am not
sure of the value they provide to society. Does solving liquidity or arbitrage
issues a few microseconds, or even seconds, faster than someone else improve
productivity? Or when it doesn't depend on speed but on seeing some tiny
market inefficiency, how much does that help the world? (And I'm sure I'm
overlooking other economic activities in these firms - what are they?)

There's the economic question of why the market rewards them so well (not
that, in the real world, the reward is usually proportional to the value, but
it's something to think about). Is it essentially the equivalent of rent-
seeking - that is, they get their hands on the resource first and then sell it
to others? Or perhaps it's simply the free market, but working on a timescale
of microseconds, where efficieny does't really benefit a society of humans
that live on timescales orders of magnitude larger.

Finally, there's the concentration of wealth that results from these
activities, which is a serious concern.

(I'm not saying everything everyone does must contribute to society, or that
I'm a saint who lives on nuts and berries and tends to lepers, but it's a
consideration.)

~~~
tryitnow
This is the crux of the matter. No, there's no evidence that these activities
produce economic value of a magnitude that justifies their compensation.

A certain number of "speculators" are needed to provide liquidity to capital
markets. It's unclear what that number is, but it is most likely nowhere near
the level we currently see.

In essence, it is gambling. These funds are supported on an ongoing basis by
asset management fees. This provides a nice living for the fund managers and
employees. They are structured so that the players experience all upside and
no downside. If they lose millions of dollars it's not like the employees and
managers are responsible for making it up (although sometimes there are
clawback provisions, but not nearly as often as you would want). But if they
make millions they take a cut of their gains.

This most likely leads to unnecessary risk-taking. (unnecessary in the sense
that there's no net economic benefit from it).

So if this is largely a zero-sum game, who are the losers and why don't they
do anything about it? Good question. Most directly it is the institutions and
wealthy individuals who invest with hedge funds.

These institutions/individuals do it because as a species we have a flawed
reasoning capacity and overestimate our ability to exercise good judgment.

~~~
logicchains
>No, there's no evidence that these activities produce economic value of a
magnitude that justifies their compensation.

The evidence of economic value is the fact that these activities are so
lucrative. If they weren't producing a lot of value somehow, be it directly or
indirectly, they wouldn't receive such high compensation in the market.
Economic value is essentially a measure of what people are willing to pay for
things (revealed preference), under the assumption that people paying for
something, absent any cooercion or market distortion, means they value it.

~~~
hackuser
How much did Albert Einstein make compared to Babe Ruth? Why is the highest
paid employee at most large public universities not the Nobel Prize winning
scientist, but the football coach?

Even in theory, many conditions are required for free markets to function
efficiently. Regardless, we don't live in a free market, and many other
factors determine income.

~~~
logicchains
There were far fewer people willing to pay to see Einstein do what he did than
to see Babe Ruth did what he did. Millions of people got regular satisfaction
from watching Babe Ruth, which suggests more people valued what he did than
they valued what Einstein did. Economically speaking the value an average
person places on something is no less valid than the value an intellectual
places on something, and there are a lot more average people than
intellectuals.

------
madengr
Title mentions PhD yet only 1 of the 6 guys in the article has one.

------
crnt2
The first three comments were all variations on "this isn't new" so let's take
that point for granted, and see what else this article gives us.

It's not new that Wall Street is hiring Ph.D scientists and mathematicians
(that's been happening since the 80s) but what's changing is the _kind_ of
role they are getting hired for.

From the 1980s up until 2005 or perhaps even later, most Ph.Ds were hired in
"quant" roles, that is, to build mathematical models that could price and
manage the risk of derivatives. They were generally not in trading roles.

More recently (i.e. in the last decade) it's common to hire Ph.Ds as traders -
that is, to write algorithms that are used to make trading decisions. This
requires a rather different set of skills - instead of being skilled in
stochastic calculus, partial differential equations and numerical methods, the
quant trader is skilled in statistics, data analysis, optimisation and machine
learning.

It's true that Wall Street has Ph.Ds hired to build trading models for many
years (e.g. Renaissance) but the change is that this is no longer an esoteric
fringe pursuit. It is seen as standard that trading desks at investment banks
will have a large number of quant traders. Large European investment banks
have heads of trading who are quants. Quantitative hedge funds are no longer
mysterious and exciting - many of them use well understood models that have
been widely replicated across the industry.

To be honest, I am surprised that it has taken this long. Finance is so
obviously suited to these kinds of quantitative methods that only an
aggressive rearguard action by voice traders has been able to keep them at
bay. The question is no longer whether quantitative traders and their
algorithms will largely replace voice traders, but how long the voice traders
will manage to hold out.

Jane Street is an interesting special case. From my (somewhat limited)
interactions with them, they are neither wholly voice traders nor wholly
algorithmic. Instead, their researchers and traders build algorithmic trading
systems which can be "driven "by humans. For example, the system will
continually calculate a set of useful metrics that a human trader uses to make
a final buy/sell decision, and trade is then immediately executed by high
frequency execution algorithms. Or the human trader decides to make a
complicated spread bet (e.g. long an ETF vs. a cost-optimized basket of the
underlying stocks) and the algorithm goes out to execute the basket as
effectively as possible.

I think there's an interesting parallel to "Centaur chess" [0] where the
combination of a computer and a human is much more powerful than either of
them acting alone.

[0]
[https://en.wikipedia.org/wiki/Advanced_Chess](https://en.wikipedia.org/wiki/Advanced_Chess)

~~~
Futurebot
That's the essence of complementarity. Cowen's "Average is Over" talks about
it a lot, and uses many chess examples specifically to back it up.
Recommended.

~~~
aswanson
I thought the book was alright but spent way, waaaaay too much time on chess.

------
_lpa_
I'm coming to the end of my PhD, and have been contacted by a few recruiters
for various hedge funds. It seems like a shame to leave academia.
Realistically though, most people will be stuck in a series of ~18 month
postdoc contracts, with little prospect of getting tenure. Add to this the
poor pay, and hedge funds start to seem pretty attractive!

------
zump
This industry irks me.

What's the point of doing engineering anywhere if you don't get paid as much
as these guys to shift money around?

~~~
minimax
The pay in these sorts of articles is always overhyped. As with any business,
the people making the most money at these kinds of firms are the owners of the
firms. Consider this line

 _“As a trader, if you do well, you will retire before you turn 30,” said one
employee on an industry message board._

That is basically 100% unattributed, unconfirmed bullshit.

~~~
mrchicity
Yeah that sounds like complete bullshit to me. I know some top quant traders
who make high-six/low-seven figure comp consistently at that point in their
careers, but they're nowhere near able to retire with a comfortable lifestyle,
and that's an extremely biased sample. For every person like them, 100 others
fail early on, 10 stick around making a nice but not much higher than Google
salary, and 5 have a couple busy high comp years then get pushed out by greedy
management, have their edge eaten by competitors, or quit when the markets
slow down.

Getting to that level is like making partner in a law firm. You have to do
much better than "well" and anyone who gets there would be a fool to retire
and likely wouldn't want to anyway due to the personality traits/defects
required to get there in the first place.

------
keyle
Interested to find out why OCaml. Not that it's wrong in my view, but why,
next to so many choices.

~~~
KMag
I imagine it's because until about 5 years ago, there weren't many choices
that were significantly safer than Java (no null references, failing to
account for all cases in a match statement is a compile error, etc.) and
generally within a factor of 2 of C's speed. Haskell's laziness by default can
mean less predictable performance, or at least fatter tails on the performance
distribution.

~~~
thecage411
What would be the choices now? Most references to alternatives suggest
Haskell.

------
bluishgreen
This seems to be the wall street equivalent of transitioning sysadmin roles
into devops.

------
melling
"Writing computer code, or at the least being conversant in the firm’s program
of choice, OCaml, is a requisite for all traders. Indeed, new traders must
complete a monthlong OCaml boot camp before they start trading."

------
mrdrozdov
Reads like a recruitment piece for programmers, or maybe that's how I read too
many articles being programmer. I was a little confused by this:

> For example, Jane Street, which is privately held, has increased its
> shareholder’s equity, or net worth, to more than $1 billion today from $228
> million in 2007.

Is this supposed to be an impressive stat? ZocDoc has become about $2 billion
company in basically the same time frame, which seems more impressive given
that ZocDoc didn't start from that $228M handicap. My perception is that it's
also much more expensive to run a company like Jane Street.

~~~
jakarta
you are confusing valuation with shareholder's equity

~~~
mrdrozdov
Okay. Thank you. This is probably the source of the confusion. Would a company
like ZocDoc even have shareholder's equity?

~~~
dharmon
Of course, shareholder equity is just assets - liabilities.

Granted, it's probably significantly smaller than the $2B figure you cited.

------
erubin
If there's one place where just about everyone I know has done job interviews,
it's jane street. They cast a very wide net.

~~~
dmix
I see their advertisements everywhere. Probably because I searched OCaml at
some point.

------
narrowrail
As a swing trader, this interests me. The volatility of the market presents
opportunities I don't think would otherwise be possible. Certain news items
will push a stock significantly below market value, as determined by 10-Qs
overtime (and _some_ knowledge of a given industry). I happen to believe the
current AI-led trading induces extra volatility in the market that is
eventually corrected for which ultimately leads to swing trades.

------
Amorymeltzer
Not new. A high school (early 2000s) physics teacher told us all that if we
wanted to make money with physics, we should:

1\. Get a physics PhD with

2\. Some experience in computer modeling

3\. Get hired by Wall Street

Even with the downturn in '08, I've seen no indication he was wrong.

~~~
adwf
Yeah, half my friends from university graduated straight out of their Physics
degree and went straight into finance. Didn't even bother with the Masters or
PhD.

------
JackFr
To all the "Nothing new here" people - really?

Yes there is nothing new, in that you physically cannot write the words "Jane
Street Capital" without subsequently writing the the word "OCaml". But
seriously, an OCaml reference in the _New York Times_. Someone must be
celebrating.

------
jorgecurio
1986,87 also saw a boom in quants, mainly engineers, even nobel prize
laureates. They put them in one room, come up with ways to make money using
quantitative models. There was a lot of buzz for decades until the collapse of
LTCM.

Peter Thiel said MBAs flocking to certain tech as warning signs of a peak,
likewise wall streets have had PHDs flocking as a measure of it's peak.

I fear that with a double whammy of low oil prices and low commodity prices,
it will spark a long period of economic stagnation in the near future, as more
jobs disappear in increasing numbers and social benefit falls and governments
around the world struggle to monetize their aging populations.

The countries with young and increasing birth rate will feel the impact the
worst, and we are already seeing such demographic in Europe packing up their
bags and joining jihadi movements.

~~~
zzleeper
> I fear that with a double whammy of low oil prices and low commodity prices,
> it will spark a long period of economic stagnation in the near future, as
> more jobs disappear

So if commodity prices go up, it's bad because Europe can't afford those
commodities. But then if they go down it's also but because...?

Heck, it's not a double whammy, it's good news for most countries in the
world. A different story might be _why_ are these commodities going down
(because China's demand has been drying up), and that might actually be bad
news, but it's another argument.

------
samfisher83
I think wall street has been hiring PhDs to code for a long time. I don't
think this is a new phenomenon.

~~~
zitterbewegung
Yea isn't the old joke that quants are composed of Physics PHD dropouts ?

~~~
Bill_Dimm
Here is the breakdown for the quants at the bank I worked for in 1995-1999 (I
may have forgotten a few people):

Cornell physics PhDs: 3

Harvard physics PhDs: 2

Princeton physics PhDs: 2

Univ of Penn physics PhD: 1

Other physics PhDs: 2

Cornell applied math PhD: 1

Other applied math PhD: 1

Cornell mechanical engineering PhD: 1

Univ of Chicago finance PhD: 1

So, if by "dropout" you mean that they didn't complete their PhDs, then no,
that's wrong. If by "dropout" you mean people leaving physics, then yes, it's
very common (especially for theorists -- all physicists on the list above
where theorists except maybe one or two).

~~~
lvs
On the assumption that their dissertations were not on relevant topics, I
can't help but feel this is such a terrible waste of highly specialized
education resources.

~~~
robotresearcher
Are there lots of unfilled physicist jobs where you are?

~~~
lvs
Yes, very snarky, but I can promise you that science faculty do not consider
it a good use of their efforts and resources to train students for jobs moving
money around in circles.

~~~
robotresearcher
We get to train them, not choose what they do afterwards.

~~~
lvs
That's not in dispute. I'm saying it's a waste, not that I know how to fix it.
More relevant jobs is obviously a part-answer.

------
whatok
Nothing remotely new

------
toephu2
How are people bypassing NYT and WSJ paywalls these days? The Innocuous Chrome
Extension posted a few days ago on HN no longer works, and coming from Google
isn't working for me either.

~~~
noobermin
This may surprise you, but some of us actually have subscriptions. I don't
have one to the WSJ but I have one to nyt.

~~~
Nicholas_C
What made you subscribe to the Times versus other newspapers? I've been
debating a Times vs. WSJ subscription.

~~~
hackuser
Some differences, from someone who knows far more about news and the news
industry than they should (and I'm not in the industry):

* Very generally, the Times focuses more on investigative journalism and non-business news; the WSJ's priority is business news. But they both cover plenty in all fields.

* The Times is generally a little more prominent, the leading newspaper (and news source) in the world and the "Newspaper of Record"[1] for the U.S., but I'm not sure how that reputation benefits you, the reader.

* The Times' arts coverage is unquestionably the best and most sophisticated of any newspaper, if that matters to you, from film to theater to music to exhibitions to other 'fine' arts. However, it is somewhat New York-centric (it is the _New York_ Times, after all, and NY is the center of the U.S. and global art world).

* Editorial: Even the best newspapers' standards of accuracy on their editorial pages are far below those of their journalism; they often are happy to print outright lies and propaganda either to push a political issue or because it's influential. IIRC, maybe a decade ago the Times decided they would raise the standards somewhat on their editorial page. Regardless, I find the Times publishes less outright bullsh-t; they have a politically diverse roster of columnists but the unsigned editorials are definitely liberal. The WSJ regularly pushes things like climate denial and other bizarre ideas (that serve the conservative, wealthy busiess elite) such as this one:[2] Personally, I don't read any editorials in any paper - they are so regularly ignorant of or lying about the facts and full of propaganda (that word again) that I never know if I'm becoming more misinformed by reading them.

* Other options: Also, I'd consider the Financial Times, the leading international competitor to the WSJ, which I think is just as good as the other two and provides a more diverse perspective coming from the UK. Certainly there is more overlap in coverage between the NYT and WSJ than between either and the FT - check out their site and you'll see many important stories you'd oterwise miss. The Washington Post also is excellent. I can't think of another source of serious news, in English, in the class of those four.

* IMHO: The WSJ is owned by News Corp (Rupert Murdoch), the same company that owns Fox News. Their demonstrated willingness to lie and push propaganda at Fox News, as well as openly use it to control the political process, makes me doubt that the same owners would have more integrity at WSJ. Their editorial page confirms my doubts to a degree. I don't trust it, though many others do. I don't completely trust the NY Times either, of course, but much more than their Manhatten neighbor.

I hope that helps.

\-----

[1]
[https://en.wikipedia.org/wiki/Paper_of_record](https://en.wikipedia.org/wiki/Paper_of_record)
\- don't believe some Wikipedia editor's attempt to equate the LA Times and
Washington Post with the Times. If any challenges its position, it's the WSJ.

[2] [http://www.huffingtonpost.com/2014/01/30/wsj-defends-
kristal...](http://www.huffingtonpost.com/2014/01/30/wsj-defends-
kristallnacht_n_4694727.html) \- It describes and links to the original, which
is behind a paywall.

~~~
scott_s
I would also add that the NYT simply has the best _online_ newspaper. The site
itself is beautiful, and I am continually impressed with their innovation in
interactive features and design.

~~~
hackuser
> I would also add that the NYT simply has the best online newspaper. The site
> itself is beautiful, and I am continually impressed with their innovation in
> interactive features and design.

Interesting. I would disagree, or at least I think being the "best online
newspaper" is sort of like being the best WAP web browser. I think many
bloggers do better.

Note that we call it an 'online newspaper' \- often you can instantly identify
news websites are made by former newspapers as opposed to other news sources,
as if the UI of their website should depend on the archaic medium they once
used.

~~~
scott_s
What are you thinking of that has both the scope and depth of content of the
NYT, and the innovation in design? Or did you just mean one of those two
criteria?

~~~
hackuser
They're content is unmatched (except arguably by one of the three I mentioned
above), I was just talking about design.

As a user, I don't find the innovations very useful and the design functions
poorly. For example:

1) Most of their content is hard to discover; the front page must have 100
links to stories, some old and some new, and much more is buried elsewhere -
if I wanted to see every story of interest to me, I'm not sure if or how I
could do that starting from the home page. I also read it via RSS and it's a
whole different news source, with far more coverage. People reading on the web
miss a lot.

2) Updates to news stories: If a story has been updated, how do you know? You
have to look around the home page for the words 'updated xx:yy' \- not really
a great method of notification. And if I click the updated story there is no
way find out what's changed without reading the whole story again, looking for
things that don't seem familiar.

3) Their inability to integrate multimedia in story-telling: A movie review
never says, 'watch the clip below; see how the colors ...' <video> 'also note
how the actors ...'. They have images and video, but they are decorations
stapled onto the real story in text and not an integral part of it - or even a
more dramatic example, the videos with hard news are completely segregated
from the text story. They still are a news _paper_ , stuck in the limitations
of the old medium where text was the only realistic option, with a few images
added on.

Note that bloggers handle many of these issues efficiently. The NYT is still a
news _paper_ on the web.

~~~
scott_s
These are fair comments, but the NYT also frequently has interactive, data-
based visualizations that are among the best in class.

------
sjg007
This is because of the shift to HFT.

~~~
gnaritas
It's really not, HFT doesn't require quants, it's all about latency arbitrage,
not about predicting future prices with quantitative analysis.

It is all about the shift to algorithmic trading, of which HFT is only a small
sub-category.

~~~
mrchicity
Nonsense. Most HFTs are market-makers, either official or unofficial and have
to predict price movements to quote competitively. If you only make quotes
where you have an immediate arb in another product/exchange, you won't get
many trades:
[https://ptportal.kcg.com/kresearch/do/research/getDownload?a...](https://ptportal.kcg.com/kresearch/do/research/getDownload?attachmentId=4003&username=8FEW5ecT13JTdHAY7Qm0TA==)

~~~
gnaritas
HFT market makers aren't doing complex quantative analysis in microseconds it
takes to do trades, and latency arb isn't "an immediate arb in another
product/exchange", that's just normal arb. Quants are used for longer term
stuff, not microsecond level stuff. HTF's are doing order book stuff and
flipping the spread, nothing hugely complex, just fast.

~~~
mrchicity
What is "latency arb" then? To "flip the spread" you need to predict where the
market will go after your order gets elected. The market is pretty efficient.
The average limit order loses the spread and rebates after execution. You
can't make money just being on the bid and offer with the crowd without a
directional prediction.

You are right that the actual execution algorithms aren't doing super complex
analysis in real-time. Usually that is done offline through simulation to
generate rule sets, decision trees or factor weightings. That work is
definitely quantitative. Aside from pure arbitrage, most HFT strategies have a
statistical edge, not a mechanical one.

~~~
gnaritas
Latency arb is taking advantage of people with slower connections by being
able to place/cancel orders faster than them. As most exchanges are price,
time priority, unless someone beats your price, first in line gets filled
first.

> To "flip the spread" you need to predict where the market will go after your
> order gets elected.

Lets talk abstractly for a moment, that sentence is exactly wrong. The whole
point of flipping the spread is that you can immediately sell what you just
bought and make the spread risk free. That's what market making is, providing
liquidity for the spread as profit. Now, pragmatically, of course the market
doesn't sit still for long and the price may change between your buy and sell
so of course it's good to predict the market direction to reduce the risk of
being on the wrong side of a move. But HFT is trading at the microsecond
scale, prices aren't moving much at that scale in that short a period of time
and you only need to know where the market is going for say the next second to
be in an out of a slew of trades.

> The market is pretty efficient.

Agreed.

> The average limit order loses the spread and rebates after execution.

I don't believe that. That would mean that slippage exceeds the spread and
more on most orders and unless you're trading a very illiquid market there's
no way that can be true unless you're trading very large, large enough to move
the market alone.

> You are right that the actual execution algorithms aren't doing super
> complex analysis in real-time.

That's my main point.

> Usually that is done offline through simulation to generate rule sets,
> decision trees or factor weightings. That work is definitely quantitative.

I agree with that as well, but that's not HFT trading, that's market analysis
and mostly I believe, though I admit I could be totally wrong here, that
analysis is mostly used for slower algorithmic trading, not HFT. In HFT, it's
better to be faster than smarter, especially with the sub-penny rule imposed
by Dodd-Frank.

~~~
mrchicity
[http://www.tradeworx.com/media/pdf/TWX-
SEC-2010.pdf](http://www.tradeworx.com/media/pdf/TWX-SEC-2010.pdf) (p.13) and
[https://mechanicalmarkets.files.wordpress.com/2015/01/toa-
ex...](https://mechanicalmarkets.files.wordpress.com/2015/01/toa-
exchangesummary-13661.png) back up my claim that limit orders lose the spread
on average net of costs. In a competitive equilibrium, this has to be the
case. If the average limit order lost less than the spread and rebate, it
would be profitable to mechanically copy every limit order with an
infinitesimally small limit order placed right behind it. If the average limit
order lost more, it would be profitable to copy every marketable order trading
to remove any residual liquidity on the book at that price. Of course HFTs
limit orders perform better than average or they'd be out of business (and
many do go out of business).

FWIW, every successful HFT trader I know does this type of "market analysis"
driven trading backed by very fast execution. Speed alone is no longer an edge
in most markets. Most are holding risk for more than microseconds or single
seconds. Trade direction is auto-correlated in short timescales so even being
front of the line you are unlikely to buy and sell to earn the spread so
quickly.

~~~
gnaritas
I don't think those don't back up your claim, those numbers are specifically
pre-rebate and are being shown there to justify the fairness of rebates as a
useful market feature by showing that without them the expected returns would
be negative and thus discourage trading. You claimed the average was
unprofitable post rebate, showing pre-rebate numbers has no bearing on your
claim.

> In a competitive equilibrium, this has to be the case.

I don't agree, the spread exists for a reason, it is quite literally the
minimum cost of doing business for selling liquidity. If selling liquidity
were not profitable, no one would do it.

> If the average limit order lost less than the spread and rebate, it would be
> profitable to mechanically copy every limit order with an infinitesimally
> small limit order placed right behind it.

That doesn't follow. You have no idea how much liquidity is sitting at that
price so even posting at the same price wouldn't guarantee execution let alone
posting behind it. Limit orders are profitable because they are inherently
offering a service that the market is willing to pay for, liquidity, that's
it.

> If the average limit order lost more, it would be profitable to copy every
> marketable order trading to remove any residual liquidity on the book at
> that price.

If the average limit order lost, it'd be called a market order because market
orders lose the spread and limit orders make the spread, that's how it works.
That is the equilibrium, market orders buy liquidity from limit orders for the
price of the spread.

> Of course HFTs limit orders perform better than average or they'd be out of
> business (and many do go out of business).

Yes, exactly, and they perform better due to latency putting them first in the
queue, that's rather the whole point of HFT, being first in line.

> Speed alone is no longer an edge in most markets.

Incorrect, speed is always an edge for the fastest trader; it's simply no
longer easy to compete on speed for most firms. Dodd Frank has devastated HFT
with the sub-penny rule making latency even more important and driving most
out of business.

> Most are holding risk for more than microseconds or single seconds.

Yes, because they can't be the fastest, they have to start speculating a bit.
This is because the hay day of HFT is over; they're being forced into
speculation by the inability to compete on price due to the sub-penny rule and
the inability to compete on speed due to the massive costs of doing so. But
once you start speculating for longer than a few seconds, you're no longer a
HFT trader, you're just an algorithmic trader. HFT is market making, if you're
speculating on direction and holding for expected moves, you're not a HFT,
you're an algo trader.

------
bitmadness
"Writing computer code, or at the least being conversant in the firm’s program
of choice, OCaml, is a requisite for all traders."

nytimes... why u so noob?

------
tetraverse
Seriously, are you serious, these are the people who bankrupted an entire
generation.

------
runn1ng
Every time I hear about algorithmic trading, I keep thinking back about Enron.

