One facet which always fascinated me was the dispersion of trading ideas, including the code behind algorithms and any sort of research. Successful ideas are constantly being updated, adapted, and often times stolen. Traders are generally hired for the trading strategies they have been exposed to and the potential value within. There are very few individuals who create new and successful ideas. The rest are just copying what they have been exposed to and hoping that it sticks when they throw it all the wall, which eventually runs each successful idea into the ground as the value being captured disappears quickly.
Either way, it was a great school for learning how to program and use statistics effectively.
As my interviewer at Ronin told me after a I failed the interview (we both knew it): "This is all a game, you just need to learn the rules"
Really, I found it to be long on words and almost completely devoid of any content what so ever.
I mean this in all seriousness, What specifically can one point to in this article that has any actual content and isnt' just a collection of links to other sites for common definitions.
At no point did the article actually say how HFT firms design their systems or even how their algorithms might work.
> t hits on all the points I consider to be important (having worked in HFT for over six years)
I too am in the industry:)
> Really, I found it to be long on words and almost completely devoid of any content what so ever.
But I don't work in the financial industry. Still, the article offered nothing new to me
It's not a perception though. Short-term trading opportunities are zero-sum. To win trades you either must undercut your competitor by trading for less edge, or beat him to realizing the opportunity by either predicting better or getting faster, usually some combination of all those. All of that means effectively working your ass off to take food off another man's table before he takes it from yours. That probably happened less in the pit days because there was a camaraderie between the locals facing off against paper. Nowadays I never see the guy I'm trying to beat into the queue. We aren't going out for beers. It's just business.
I'd say being successful in this business feels less like war and more like riding a bear. You never get to rest and there's a constant fear that someone, somewhere is hungrier and smarter than you are, plus the bear might snap and eat you.
>Traders are generally hired for the trading strategies they have been exposed to and the potential value within. There are very few individuals who create new and successful ideas.
The better firms tend to hire people out of school and train them up so they can do novel research. It's a smarter long-term play. I agree that few people are up to the task, even the best and brightest. It does amuse me that some guy a couple blocks away probably runs a super similar model with a different cool code-name and we battle each other for years in Sisyphean fashion. I'll never even know his name. A zipless fuck.
I don't like the author's characterization of HFTs as "parasites." Someone can be a middle-man and still add value. Market users don't need to trade with HFT dealers. They can easily work their own orders or wait around in a block trading facility hoping to find a natural match instead. For most of them, it's a bad trade-off. Even though the HFTs make money on average, trading with them costs less than becoming an expert in market microstructure, finding good hedges, facing non-execution risk, etc. CarMax makes money when they buy/sell your car in the same way, but it's usually more convenient or cheaper than doing it yourself.
In a way, HFT is like insurance in that they only provide a valuable service when they lose, but overall people prefer paying for certainty. Almost every winning trade I make is one where two natural counter parties could have found one another had they waited a short period of time or were in the right place/product, but I lose on a huge % of trades as well. If HFTs weren't in a competitive environment or if one firm had a clairvoyant pricing model, this would be problematic but unfortunately for me, that's not the case.
I completely agree with you there. There are a handful of firms that do this consistently and they are leading the pack.
> I don't like the author's characterization of HFTs as "parasites."
Also agree. I think it's a bit harsh.
On the other hand, at least in theory, the rest of the market benefits from smaller spread (a lot), and faster execution time (a bit).
It's a shame about the sup-penny rule. (https://www.chrisstucchio.com/blog/2012/hft_whats_broken.htm...) Without it, we'd get more of the former and less of the latter.
I agree the rule isn't sensible though. Much of the fragmentation in the US is driven by exchanges with inverted rebate structures (maker pays, taker gets paid to hit/take) + midpoint trading that are effectively a back-door way to quote sub-penny in stocks where the true competitive spread should be less than 1c.
So exactly like Silicon Valley?
Basically, is there a slice of the pie in trading much faster than humans, but much slower than HST?
It's an academic exercise, but one I've been toying with.
One thing to keep in mind is that the higher your trading frequency, the smaller the price moves you can hope to capture, which limits how much capital you can deploy in your models. This is why HFT models are usually small in size but have high Sharpe ratios. As you reduce your trading frequency, you can expect to capture larger price movements and deploy more capital but you’ll also be exposed to more of the vicissitudes of the general market, so your Sharpe ratio will decline. Market participants usually carve themselves a happy spot on this frequency spectrum and stay there. I don’t know of any firm who is successful at every spot.
All the inputs to their pricing change rapidly, so their order prices must change quickly as well, but they can end up carrying risk for long periods of time. The Australian regulator looked at HFT activity in their markets, mind you probably less sophisticated than US stocks, and found the average holding period was 42 minutes: http://tabbforum.com/opinions/hft-concerns-are-overstated
Not HFT by any definition (unless your definition of HFT is on the order of minutes), but purely algorithmic and data-driven. You can backtest your algorithms with up to 13 years of historical data, live trade your algorithm with paper money, and even link your algorithm to a broker and trade your algorithms with real money.
It's the single most disruptive financial service I know of, and I've had tremendous success with it, even without linking a brokerage account (just checking it daily for trade signals in my super-low-frequency algorithm on paper money).
For the "faster than a human, slower than HST" niche all I can think of is the traders who automatically react to press releases, twitter and the like. If you're getting data that no-one else has and it affects the price, it doesn't matter whether you're as fast as HST. (Of course if you get competitors who are doing the same thing you still have to be faster than them).
Beyond that most stuff happens at human speed - which doesn't mean you can't do market analysis with algorithms, competing with humans. But speed is always going to be a factor - even if we're talking about e.g. a multi-month analyst investigation that figures out that company X is really a massive fraud (there are trading firms who make their business figuring this stuff out), that still becomes worthless if your competitor finishes their investigation a day earlier than yours.
God what a quote. I'm stealing this and using it everywhere I can. It basically sums up my entire attitude toward humanity.
In the spirit of the article's talk about financialization, I wonder if there's yet a way to buy the author virtual beer options?
I don't pursue it because I came to regard the practice as unethical.
Aside from stating your own skills, employability, and high standard of ethics, your post is lacking useful info about HFT.
I resigned in protest from an HMI/SCADA vendor because of the poor code quality of their product.
From time to time I toy with the idea of suing that joker for libel, but the reason I don't is that I support the notion that the best response to hate speech is more speech.
They didn't convince me at all. The gist of what they were saying is that they're merely making the market more efficient. That's such bullshit. The money they're making is surely coming from someone's pocket, and that probably means the middle class day-trader rather than the NYC firms with billions to spend on diversification. Later on in their presentation their tone made me feel that they were so extremely proud of what they were doing. It really irked me.
The impatient spread-crosser is happy to be filled and move on to doing whatever it is they do for a living rather than playing trader. You can send a marketable order for a liquid ETF to any exchange in the US and at worst you'll be a tick away from the NAV. You don't have to compute the basket value. You don't have to watch the order books for 500 stocks on 10 exchanges. You don't have to monitor the futures markets or trade in them. One click and someone else does all that work for a penny. How is that not valuable?
What specifically did you find unethical about them?
First of all there just aren't that many middle class day-traders, and they don't trade in very large size. If they were the targets of HFT, the industry would be absolutely tiny.
Second, the small day traders just don't have enough volume to cause significant price impact. They just can't move the market enough for the HFTs to profit off of it.
Third, you'd be surprised at how unsophisticated and careless many huge institutional investors are. And sometimes they're just willing to pay extra to get in or out very quickly.