
The advantage high-frequency trading firms have over everyone else - chollida1
http://www.marketwatch.com/story/heres-the-advantage-high-frequency-trading-firms-have-over-everyone-else-2015-08-13?link=MW_home_latest_news
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chollida1
I thought I'd submit this as it lays out in great detail just how badly the
direct feed that the markets supply beat the SIP that is used to price the
NBBO(National Best Bid/Offer).

The reason this can be a problem is that many of the 40+ trading venues in the
US are notified of changes from other venues via the SIP. That means there is
a latency arb opportunity when a trade happens at one venue.

This is especially an issue in dark pools who perform the bulk of their trades
at the mid point. If you are a retail trader, I'll state with about 99%
certainty that your trade is being filled in someone's dark pool.

As a counter point to Nanex, check out Cliff Asness' notes.

He founded AQR inside of Goldman Sachs and it became one of the first real
power house quant funds. His writings are awesome!

Or just read "The Quants" [http://www.amazon.ca/The-Quants-Whizzes-Conquered-
Destroyed/...](http://www.amazon.ca/The-Quants-Whizzes-Conquered-
Destroyed/dp/0307453383) as he's featured prominently in it.

[https://www.aqr.com/cliffs-perspective/](https://www.aqr.com/cliffs-
perspective/)

~~~
vasilipupkin
the direct feeds from exchanges are available to everyone not just HFT firms,
so this is a misleading headline

~~~
beagle3
Indeed, but they are incredibly expensive; as in tens of thousands of dollars
per exchange per month.

I think that the outrage against HFTs is basically that they've raised to bar
- if you want to have a chance of getting the good fills, you have to spends
hundreds of thousands of dollars per month.

Personally, I think that this outrage is misplaced. Playing field was never
fair. The costs of playing are just clearer now. (And higher, thanks to HFT,
yes - but they weren't low before HFTs; just opaque)

~~~
vasilipupkin
costs are lot lower than ever. Think about what you had to do before direct
feeds and colocation. You had to have guys on the floor of the exchange. If
you think paying them was cheaper than a direct feed, then you are wrong.
Direct feeds cost money because....everything costs money. Exchanges are
businesses, why should they give away their data for free ?

~~~
beagle3
> costs are lot lower than ever.

Depends on your time frame. Back in 2005 or so (until NASDAQ bought INET), you
could get everything INET for ~$1000/month, and be on par with the big guys
(as far as INET was concerned). And practically overnight after NASDAQ bought
them, the price went up to ~$6000 (for exactly the same service).

And HFTs are (at least partially) to blame - they all used INET, raising the
volume there significantly, which got NASDAQ scared, rushed to buy INET, and
jack up the price to pay for it (and because now, monopolizing the nasdaq
trades again, they could).

Also back in 2005, Eurex did NOT have a fast feed, only a slow one (updating
twice a second, if memory serves me right, and fitting on a 512Kb line). And
it cost just a couple of hundred dollars to get above infrastructure costs
(dedicated line, data providers, trading systems, etc). Then the fast feed
came, and it costs thousands of dollars per month (in addition to
infrastructure). And it came because of the HFTs.

Costs are lower than ever in the sense that slow data is cheaper than it was,
and fast data is cheaper than it was. However, costs are not at all lower than
ever in the sense that in 2000 to ~2006, you could be on par with the most
sophisticated players for much cheaper than you can today.

> You had to have guys on the floor of the exchange. If you think paying them
> was cheaper than a direct feed, then you are wrong.

Although the floors still dominated in the early 2000s, you only needed to
trade them if you traded huge blocks. Smaller blocks worked perfectly well
(and more efficiently, and with much better price discovery) on the electronic
exchanges. How far back are you thinking of?

> Direct feeds cost money because....everything costs money. Exchanges are
> businesses, why should they give away their data for free ?

They shouldn't. Some people (me not among them) think it's unfair that to get
that data completely and timely is so expensive.

Personally, I think the unfairness runs so much deeper that it makes no
difference. And I also think that expectations of fairness are also misguided.
As you mentioned, the exchanges are businesses - they are in business of
making money, not of being fair. Unfortunately, most people are blind to that.

~~~
shalmanese
It's like the fast pass system at Disneyland. In the beginning, there were no
fast passes so everyone was equally miserable. Then Disney introduced fast
passes and the people who spent the money on them got a significantly better
experience. As more and more people bought fast passes, the wait times for
fast passes began to resemble the pre-fast pass experience. Nowadays, it's
pretty much mandatory to get a fast pass if you want any sort of reasonable
experience in the park at all.

People are still equally as miserable but Disney is now making a lot more
money.

------
liamconnell
Traders in general dont proved any service to the market except liquidity, so
I never pay attention the old guard whine about HFT stealing their profit.

Markets don't owe traders anything. A futures commodity market (very highly
traded) really exists so that companies can hedge risk. Its why Burger King
can survive beef price jumps. They dont care about HFT, they just are happy
that their orders get filled when they place them.

So we have to tolerate someone providing liquidity in the market. And in order
to do that we have to allow leveraging and margin trading so that its worth it
for those traders. Old style trading, or anything that's not high frequency is
too crude to make profits without making extremely leveraged bets and thats
bad for the market in general.

What happens when markets start to look unsettled and everyone is leveraged?
Margins (amount on money needed to hold position) go up. Firms realize that
they cant put down money for margins so they try to dump their positions. But
everyone is doing that so the bottom falls out of the market and margins go up
even higher.

And this is caused by everyday hedgefunds on the SIP, since in order to be
profitable with their rather crude tools they have to leverage more.

So I'm not defending HFT, I just think that everyone wants to see them as the
bad guy, but its not like traders themselves are heroes. We just need to see
the problem as "who can provide liquidity and stability to a market" rather
than "who has an unfair advantage"

~~~
oojgaoj
> We just need to see the problem as "who can provide liquidity and stability
> to a market" rather than "who has an unfair advantage"

And essentially every single analysis of THAT problem says that HFTs consume
liquidity in times of instability, and "provide" liquidity in times of
stability.

As such, HFT destroys the value that people actually care about.

Anyway... no point in arguing about this; the sociopathic assholes who run HFT
aren't going to stop, the exchanges aren't going to fire their best customers,
and the regulators are all bought and paid for. The only good news about HFT,
at all, is that because it's a completely commoditized playing field, their
margins tend to get compressed over time, so at least they're screwing us
slightly less every year.

------
javajosh
It's Friday, so I'd like to float a stupid idea: can't we trade through the
day in blocks of like 10 minutes? That is the market takes all information for
the last 10 minutes (kept in secret) and then integrates it using a public
match-making algorithm, and publishes the result. You might even get a little
fancy and specify that you want your order to get into the next bin, not this
one.

The idea is that markets are for humans to allocate capital to other humans,
usually in businesses that cater to the needs of humans. If that is the
purpose of a market, then I don't see why we can't limit ourselves to 6
integrations an hour, or something like 40 per day. (Heck, I'm personally in
favor of having _one integration per hour_ \- limiting the allocation
decisions to like 8 per day. How can even a professional investor make more
than 8 allocation decisions a day if he's investing on fundamentals?)

~~~
ThrustVectoring
That's pretty close to a much better idea - trading through the day in blocks
of one second. At a human-level scale, it makes basically zero difference
whether a market is continuous or updates every second, but it completely
removes latency arbitrage.

~~~
harmegido
I disagree. Let's say that over the course of 1 second, there accumulate 100
lots to buy at 10 and 80 lots to sell at 10. Of those 100, who gets filled?

There are several different algorithms for determining this in practice today,
of which pro-rata and fifo are the primary ones. Each has their own
disadvantages and most give some preference to being there first, which
reintroduces latency into the game.

I've seen some people speculate about a random allocation. I think this
essentially boils down to pro-rata though, as you could game this by sending n
1-lots instead of 1 n-lot.

------
mperham
Can someone explain what value HFT actually provides to society at large? Why
not add a one cent tax to every trade and wipe out HFT completely?

~~~
wdewind
Sure: basically when large institutional investors go to sell shares they sell
them in blocks. There are not a ton of people who can afford to buy these
entire blocks, though they may want to buy some portion of them. HFTs add
value by buying these large blocks, and then breaking them up and selling them
in smaller chunks. This is called "market making." This added liquidity makes
it far easier for _both_ the institutional investor to sell their shares as
well as for the final buyer to purchase them. So the value they provide is
increased liquidity to the market.

Edit: Whoops, I'm incorrect. This is a description of market making in
general, but not how HFTs do it (which have a variety of strategies). But the
general premise is that the value provided is still increased liquidity. That
being said, not all HFTs employ a market making strategy.

~~~
oojgaoj
This isn't what HFTs do.

One common HFT trick is exactly the opposite of what you wrote: they'll
attempt to identify probable sellers of large blocks who are disguising their
actions by using smaller blocks (they can identify this by measuring latency
orders arrive at different exchanges), and then using knowledge of the order
books at different exchanges to buy the large block at 10.00 from the seller
who was already committed to sell and then sell it at 10.02 to the buyer who
was already committed to buying.

They can do this because the institutional seller is using the NBBO based on
the SIP, and they're watching 200micros ahead using direct feeds.

~~~
wdewind
Please correct me, happy to learn.

Edit: Ah you added an explanation, thanks.

------
noname123
I trade options spreads on orders of 2-week to month holding periods. So HFT
isn't my specialty. But I'm trying to understand how latency arbitrage work,
please let me know if this sounds about right.

(assuming all quotes at top of book is 100-lot).

at t = 0 ns

IWM quotes with NBBO of 120.10/120.15

BATS quotes IWM at spread of 120.10/120.15

ARCA quotes IWM at spread of 120.10/120.16

at t = 1 ns

Someone lowers their offer on ARCA, improving the spread on ARCA to
120.10/120.12*

Someone hikes their bid on BATS, improving the spread on BATS to
120.13*/120.16

Now according RegNMS, that improved ARCA offer should cross with the improved
BATS bid and make a trade at 100 lot of IWM at 120.13. However, SIP lags by X
ns; so either ARCA nor BATS route their customer's order externally for best
price before X ns.

at t = a ns where a < X (where x is the SIP latency)

HFT co-located to BATS and ARCA detects this improved in price.

HFT bot takes the BATS bid, short IWM at 120.13, (position: -100 IWM; acct-
cash: $12013)

HFT bot takes the ARCA offer, buys back IWM at 120.12, (position: 0 IWM; acct-
cash: $1)

$1 revenue, and you do this a much of times a day and profit?

~~~
crazypyro
I believe they also front-run (I think this is the correct term) big orders.
So if HFT bot at BATS sees someone buying all of the lower priced shares of
IWM, the HFT bot tries to buy the shares of IWM at other exchanges that are
less than the shares left at BATS and before the other exchanges can update
prices from the BATS sale. They have this information about the large order
microseconds before the non-HFT firms.

~~~
kasey_junk
This is completely incorrect on at least 2 counts. First of they did that it
wouldn't be front running, which requires both seeing your order before it
hits the exchange and a fiduciary duty to you. Second the hft doesn't buy up
existing shares from someone else on the other exchange they change the price
of (or cancel entirely) the shares they themselves are offering on the other
exchange.

------
bko
I'm awaiting an article titled "The advantage tall people have over other
basketball players"

In all seriousness, the faster people learn that investing in the stock market
is not a game, the better. There is a whole industry built around perpetrating
the myth that individual investors can pick stocks and somehow "beat the
market".

Don't actively manage your portfolio. The only person who is going to win are
the middle-men charging you for trades or advice. Rebalance periodically based
on your risk profile. There are no secrets.

------
jkot
At least HFT pushes technical boundaries and gives in something back.

~~~
harmegido
Haha you can say that about war too.

