
High Frequency Trading Strategies - chollida1
http://jonathankinlay.com/index.php/2015/05/high-frequency-trading-strategies/
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noname123
Quick question, I don't work in the HFT field (I trade only options for fun on
the side) but would anyone in the field care to comment whether a startup fund
say, with a back-tested strategy would still be able to compete with the likes
of HFT firms, provided that they have (1) sufficient capital, >$500K, (2)
sponsored access/co-location to markets by proxy, e.g., Lightspeed, Lime
Brokerage that provides the lower fee-structure plus the rented rack-space on
the exchange data-centers, (3) historical and realtime quote feeds for forward
and back-testing.

I imagine HFT entities who are broker-dealer agencies have even lowered fee
structure; but it sounds like simple market-making on equities is no longer an
easy business to be in due to the lowered spreads and crowded competitors.

So I'm wondering if a startup funds with the rented access could compete with
the big boys in the options, futures, other derivatives and even bonds space
where the latency still haven't caught with the equity market yet.

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fixxer
HFT represents a spectrum of strategies when described in the news. For the
most part, I would argue you are describing a "quant trading shop" and would
avoid the HFT label since it doesn't apply (HFT really means that you're
gaming Reg NMS).

The type of shop you're describing might be able to compete, assuming you've
identified a niche product with a margin that will still exist in 6 months.
Backtesting is useful, but it is so bloody hard to accurately incorporate
liquidity that I place little value on simulated results when it comes to
short duration trades. You really have to jump in and test live, which
represents the largest barrier to entry: established shops have the
infrastructure & capital to try new ideas. When I was trading, we tested half
a dozen new ideas every month in addition to "production trades".

High frequency, IMO, should really be used to identify hardware intensive
strategies co-located at the exchanges and utilizing telecommunications
strategies not readily available to the market. For example, FPGA and
dedicated microwave towers.

Lime is excellent, btw, but you really need some volume to justify them. For
options at your level of capital, Interactive Brokers and long gamma trades
look more attractive to me. Many would disagree and people do starve waiting
for long gamma, but my memory is biased after seeing the little group next to
me lose $40m in a week on a stupid short gamma "sure thing" based on back
tests and other such nonsense. Oh, what a fun time that was.

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tptacek
When you say "HFT really means that you're gaming Reg NMS", are you saying
that true HFT strategies all rely on multi-venue arbitrage?

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lorenzhs
Reg NMS requires that brokers fulfill orders at the lowest possible rate
first. So if an HFT shop sets a trap for you on one exchange (offering 100
stocks a tiny bit cheaper), your broker would have to trade in that first. The
HFT would then front-run you to the other exchanges, buy up what it can, and
sell it back to you a bit higher. They can do this because they have lower
latency. Add dark pools to the mix and the opportunities become even bigger.

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tptacek
Sure. But, after interviewing a bunch of HFT developers over the last 6 months
(because: reasons), the understanding I've developed is that "latency
arbitrage" \--- which is what you seem to be describing --- is no longer
particularly profitable, or the focus of what most "HFT firms" do. Is my
understanding broken?

(I am not a trader or an HFT dev.)

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fixxer
No, the market evolved as it always does. But, so much of the "HFT is evil"
belief stemmed from the subprime era and with respect to fair play at the
time, you can't ignore the impact of NMS. I went back to grad school in 2010
and had to be careful to whom I told my background, else I'd get roped into
some morality debate with a 26 year old Occupy activist who didn't know what a
market order was.

Nowadays, I really don't see much edge in trading at all.

I would love to know what those traders you've spoken with think _is_
profitable. I see my old bosses at Rom near the CME almost every Friday and I
haven't heard a positive line from them in 5+ years.

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foobarqux
Two Sigma Compass (systematic equity) seems to be doing alright (up 30% last
year). DE Shaw's main fund is pretty consistently 8%/year.

~~~
fixxer
If that impresses you, you should definitely go into trading. ;) (How much is
the S&P up?)

~~~
foobarqux
Volatility matters.

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functional_test
Take what Jonathan Kinlay says about HFT with a grain of salt. He worked at a
friend's firm briefly before leaving without making a single profitable
strategy (although his excel models were profitable of course). While what he
says in this article is in the ballpark of correct, he is not the best source
of information on modern HFT.

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dataker
Any recommendations for a good blog on modern HFT?

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exelius
No; HFT is effectively a zero sum game, so trading strategies are usually kept
proprietary.

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exelius
I'm actually serious about this -- read anything on HFT strategies online with
a grain of salt, because you are the type of person HFT firms are looking to
exploit. In HFT it can be very hard to know if you're the hunter or the prey.

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CyberDildonics
Unless you take home a profit every day, then you know which side you are on.

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tcbawo
Some strategies that involve complex positions might post small daily returns.
Then, an event can come along and wipe out a month of profit, or more. It's a
shark eat shark world.

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exelius
Right. HFT relies on finding arbitrage opportunities, which are limited and
temporary. Unless you're building AI that will adjust to other players'
strategies in real-time, you're behind the game.

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rmxt
Google Cache link:
[https://webcache.googleusercontent.com/search?q=cache:NePDgA...](https://webcache.googleusercontent.com/search?q=cache:NePDgAXuTa8J:jonathankinlay.com/index.php/2015/05/high-
frequency-trading-strategies/+&cd=1&hl=en&ct=clnk&gl=us)

~~~
yelnatz
Mirror. Thanks.

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arbitrage314
From someone who works in/near the industry, I can tell you without a doubt
that the best HFT strategies are the ones you never hear about.

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chollida1
As always, if anyone has any questions, please feel free to reach out, my
email is in my profile.

I'm here to teach and I love consuming coffee:)

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stevewepay
One question I have is, when do you know to abandon a trading strategy that
used to be profitable, but has not been profitable over the past N number of
days. At what point do you throw in the towel and move onto another strategy?

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harmegido
You have to find out why it stopped working. Was it an aggressive strategy
that used to have a 100% fill rate, but now is only getting filled on 30% of
the orders it sends out? Chances are that you've just become too slow for that
trade. The only fills you are getting now are the bad ones. Time to move on or
speed up.

Let's say the fill % stays the same though. Has volatility in your market
dropped off a cliff the past few weeks? Perhaps your strategy is highly
dependent on volatility. It'd be good to keep this one running, as it's likely
volatility will return at some point. You want to diversify though and have
other strategies that perform well in such a low vol regime, so you're not
dependent on high vol.

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RomanPushkin
The article is so unprofessional. I can give you unlimited number of
strategies based on historic data. And they won't work in the real world.

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lordnacho
So what's this strategy that makes money even if you only get filled 20% of
the time?

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harmegido
This would be an "aggressive" strategy. You get a signal from some source
(looks like the author worked in news events, but the signal could be
anything). If the signal indicates, via your model, that the product you are
trading will go up through the best offer, you send an aggressive buy into
that offer.

If all works out well, you get filled for a buy and the old offer (which you
bought at) is now at least the best bid. Do this hundreds of times a day and
you're starting to talk about real money, especially since you can scale (to a
point) by upping your quantity.

Sometimes you aren't fast enough though. That buy you sent into the best offer
is too slow - it merely appears as a buy at what is now the best bid (or
doesn't at all if you use an IOC - immediate or cancel), and you get no trade.
Even if you only get filled on 20% of the signals, if they are on average
good, then you still make money.

This is just one type of strategy though. Not all HFT strategies rely on
aggressive signals, though a lot do.

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esaym
I tried this with bitcoins and that didn't work out so well. All your math
formulas can be pointing up, but you never know what the human element will
do...

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known
Insider trading + Front running = HFT

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curiously
Isn't HFT pretty much limited to those with deep pockets?

~~~
kasey_junk
Depends on what your definition of HFT is. But for every definition of it,
deep pockets are relative & HFT is not any more capital intensive than lots of
other industries & much less than most.

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ksk
Disregarding the "cool" technical challenges, what are some of the positive
contributions to society that only HFTs could bring about?

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kasey_junk
"that only HFTs could bring about"

That is a very high bar to get over for any industry. For instance you could
say the exact same thing about the internet generally and not come up with too
many answers.

Another way to reason about it is A) how does HFT compare to the system it
replaced? and B) what would we need to give up to not have HFT (if we decided
for some reason we didn't want HFT, though I'd love to hear someone enumerate
why we wouldn't want it).

A is trivial to answer. It is much, much cheaper for nearly everyone to trade
with HFT than it was in the world of specialist market makers or pit traders.
In the modern world there are much less middle men for every trade and they
take a dramatically lower percentage of the value than the system they
replaced. This is the obvious and expected outcome of replacing expensive
humans with cheap computers.

B is also pretty trivial to answer. We would have to go to a monopoly exchange
with no electronic communications into or out of it. I hope the downsides of
that are obvious.

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anilgulecha
I'll take this on.

HFT replaces "expensive humans" with specialist computers that try to site
right next to the trading servers, so they can take advantage of the speed of
light.

So may I suggest a simpler alternative: Run a trading system with three chunks
of time: "get orders", "serve orders", "rest". These intervals could he an
hour or 15 seconds. But these way a phone on the otherside of the planet could
put in a trade along with the speed of light computers, and not be at a
disadvantage.

All HFT is doing is licking the cream off the top of the market -- and not
providing any value that a more fair computerized trading system would
provide.

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chrisdew
Everyone will wait until just before the closing of the window, before
submitting their orders, so that they trade with the most information
available.

Those with fast connections will have more market information at the point
that they place their order.

e.g. I phone in an order to buy gold at $1,200 one minute before the window
close. The gold price rises to $1,300. A fast-connection trader then offers
$1,201 and buys all the cheap gold, leaving my order unfilled.

~~~
anilgulecha
I thought it was implicit -- the orders are secret.

