
Arms Race in Quantitative Trading? - cellis
http://spokutta.wordpress.com/2009/09/01/arms-race-in-quantitative-trading-or-not/
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Maro
"An easy example illustrating this point is maybe the following. Consider the
sequence 'MDMD' and suppose that you can only store, say these 4 letters. A
4-letter-strategy might predict something like 'MD' for the next two letters.
If those letters though represent the initial of the weekdays, the next 3
letters will be 'FSS'. It is impossible though to predict this sequence solely
using information about the past on the last 4 letters. The situation changes
if we can store up to 7 letters 'FSSMDMD'. Then a prediction is possible."

I was confused for a while, then I realized the guy is german.

Montag (Monday) Dienstag Mittwoch Donnerstag Freitag Samstag Sonntag (Sunday)

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ig1
I disagree, those milliseconds are important as the market is continuously
moving. From the time a trade enters your system until it's booked and
executed you're carrying the risk that a deal you think you've done might not
have been done. When you're processing thousands of trades a second that's not
a small risk.

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ggruschow
Although that's true, it's an unnecessary problem they've created for
themselves through their now over-simplified trade matching and naive
insistence on time-priority right down to time-frames so small that nobody
could possibly care outside of the lame system.

Think about it - even if you got the news the president was shot, or even if
the unemployment numbers are significantly off, you'll only be able to take
small bets initially due to the lack of confidence in the news until further
confirmation.. And confirmation can only come from reading or hearing words,
which even if a computer does that, somebody has to type or say them... which
means seconds, not milliseconds, much less microseconds.

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andrew1
The 'news' events they're reacting to are financial events at the level of
price changes, order book depths etc. They don't react to things like the
president being shot, and I'd imagine that if that did happen then at least
some of those traders would be switching their models off - the markets could
well go crazy at that point and a model won't have been back-tested in those
conditions, hence you have no idea what will happen.

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ggruschow
I think we agree on what you said, but I take it further and claim it's
evidence that the common trade matching rules are badly flawed.

As a simple example, consider that common limit order matching rules often let
time take priority over anything else (price, quantity, market maker status).
That fails their stated goals. They've got concurrency bugs. It initially came
from naive implementations of pit trading rules, but it's now often touted as
a feature.

As a result, customers often get screwed into trades they didn't want, or get
worse prices than what's fair. PLUS as a result of all the jockeying, they pay
higher fees to support the escalating infrastructure costs.

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andrew1
I don't see what's so unfair about effectively a first-come first-served
system, or to put it another way, how a fairer system could work.

Perhaps more to the point, exchanges compete for business, if the rules used
in an exchange aren't what customers want then customers will move to other
exchanges. And obviously the more financial clout you have as a customer the
more an exchange is going to care about your opinion of how things should
work. So if the banks and hedge funds and the other big players are happy with
the status quo, then that's the way it will probably stay.

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ggruschow
First-come first-served is fine when there's consensus about the price. A lot
of, if not most of, trading comes from people disagreeing about what a fair
price is though - the buyer thinks it's worth more, the seller thinks it's
worth less.

Consider 3 orders: Bob bids $9, Sam offers $8, and Sara offers $5. If they're
entered about the same time, you may end up with a matched price of $5, $8, or
$9 with either Sam or Sara getting to sell - all depending on which order the
match engine processes them in.

Same orders, same time, huge variation in what is determined to be a fair
price with no good reason. All those prices are wrong too. You can debate
about what'd be right, but eBay's pricing system is at least an improvement
here (one minimum price increment past the next-best order).

It gets worse - consider if one of them entered their order well ahead of
time, it probably gave them the worst price - penalizing them for exactly what
people want - a quote to see and trade against.

There's tons more examples, but they can get pretty complicated.. email me if
you want to talk about it more.

If you're still having trouble imagining a fairer way, work out what would've
happened with these three traders on the old NYSE floor system.

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1gor
I wonder why the term 'market efficiency' crops up over and over again in the
discussions like this?

In 1986 Andy Lo and Craig MacKinlay performed a rigorous statistical test of
Efficient Market Hypothesis and decisively rejected it, simultaneously
supporting previous findings by Benoit Mandelbrot. Unlike Mandelbrot’s their
work has been broadly discussed and accepted by the scientific community.

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anonymous
I remember talking to a guy working in this field when I was job hunting
earlier. For all the talk of CPU speed, there seemed to be little interest in
nontraditional architectures (e.g., FPGAs, etc), for the reason that their
incoming data rate was the primary bottleneck.

Then again, I may have been talking to the wrong one. E.g., maybe a few've
gotten some of those fpga ethernet boards? Still, I'd expect a little more
VHDL demand than I'm seeing.

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known
HFT = <http://en.wikipedia.org/wiki/Algorithmic_trading> \+
<http://en.wikipedia.org/wiki/Complex_Event_Processing>

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w1ntermute
Is there anyone on HN who works as a programmer in this field who would be
willing to share some of their experiences?

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ig1
What sort of stuff do you want to know ?

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rw
I want to know what the ratio of "junior developers" to "MIT PhDs" is. As an
economics+machine-learning+software-engineering autodidact, I firmly believe
that I am qualified to provide insights in high-frequency trading; but, the
impression I get is that, since it's such a cool and profitable field, the
firms have their pick of the elite-of-the-elite.

~~~
gaius
When I worked in the field (not HFT, but automated trading nonetheless), I was
the only one in my cluster of desks with a lowly MSc. Even the QA girl was a
maths PhD. It was funny, all the alpha-PhD male programmers were always
competing over who was the second-smartest... The smartest guy was _light
years_ ahead of anyone else (and the nicest bloke you could hope to meet). I
always used to say, the rest of them should pick up his laundry and wash his
car so he could concentrate more (they _really_ liked that, HAHA).

I didn't do anything beyond the simplest algorithms, most of my work was on
interfaces between our code and other stuff (like databases, data feeds, etc).
Just grunt work really. Someone's got to do it tho'...

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SandB0x
A touch off topic, but is anyone else dismayed at seeing so many bright
friends disappear into banking as soon as they graduate? Nothing wrong with
making money, but I just wonder how many inventions and discoveries are lost
this way.

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andrew1
I suppose maybe the counter-argument to that is that the technological
advancements that come about as a result of finance pushing for them,
propagate out to the wider world and can help speed up the rate of discoveries
as new technologies become available.

I also have the feeling that quite often discoveries and advances are not
really to do with the discoverer but to do with the fact that an idea's 'time
has come'. Take Google for example, they revolutionized search, but supposing
the founders had headed off to Goldman Sachs rather than doing their PhDs,
what would have filled the gap? I think that the stage was set for new things
to happen in the search area and that other researchers would have come up
with similar ideas.

I wouldn't want to say that the inventor is completely incidental to the
discovery; I appreciate that there are brilliant people out there, and moments
of inspiration, I just think that the world will steam-roller on with or
without a particular person and we'll often end up at roughly the same place.

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speek
Anybody have any pointers/books about into getting into Quantitative
analysis/trading?

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SandB0x
All these people hang out at: <http://www.wilmott.com/>

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known
I think SEC must confine HFT between 9am - 10am

