8 ms·

High Frequency Trading Defined

68 points by fixxer 11y ago

al451 11y ago
I have defined HFT to be evil, therefore HFT is evil. Brilliant.
- harry-wood 11y ago
  Well this article says at the top "In simple terms, electronic trading brought down costs, while High Frequency Trading brought down ethics." ...but it doesn't really go on to explain that. It's just a fairly dry bullet pointed definition of different types of High Frequency Trading. It's a shame it doesn't explain, because high frequency trading is evil, and a really depressing waste of talent.
  - omellet 11y ago
    I agree that it's a waste of talent and money, but how is it evil?
    - Frondo 11y ago
      It's an excellent example of the middleman that only extracts money from a system, that adds no value to the system. They insert themselves into the transactions where they can siphon off very small amounts of money over a very large number of transactions. Nobody benefits but them from what they're doing, no one walks away with something in their hands or brains by their actions. It's legal, but it isn't right or a good thing.
      - __d 11y ago
        The counter argument is that they do provide a benefit, by providing liquidity and/or making price discovery more efficient. Whether it's "good" liquidity or not, and whether the discovered prices actually reflect true value or not, is a discussion that seems to fairly rapidly head down an acrimonious rathole.
        Marazan 11y ago
        They cannot add liquidity. They HFT can only make money when there are slower traders willing to buy and sell. Thus, by definition the liquidity already has to exist (market participants wanting to buy and sell) for HFT's to profit.
        vasilipupkin 11y ago
        this is incorrect. HFT can make money adding liquidity to a market that erroneously is lacking in liquidity ( mispricing )
        tptacek 11y ago
        Look at a market without market-makers. Housing is a good one. Houses sell only when there are "slow" traders willing to buy and sell. Have you ever bought or sold a house? Would you like the financial markets to be more like real estate?
        Frondo 11y ago
        The alternative to HFT is not the real estate market. The alternative to HFT is how the markets operated for decades prior to HFT companies vacuuming money out of the system--that is, quite well, and with adequate liquidity, and with lots of money still being made.
        tptacek 11y ago
        The markets in the decades before HFT were crooked like a bucket of fish hooks! They were NOTORIOUSLY corrupt. Everyone was scamming everyone else. The entire market was a giant grift. Are you really sticking up for 1980s trading? Or have you just not done much research about how it worked?
        Frondo 11y ago
        Really? And now, with HFT, they're no longer crooked? If I remember right, in the 2000s we've seen a ton of crooked market scandals (fraudulently rated securities, LIBOR, etc etc). I don't see this relationship you're positing between HFTs and a non-corrupt trading market at all.
      - kasey_junk 11y ago
        > They insert themselves into the transactions Be very clear what you mean when you say this. Because the vast majority of the time when people talk about HFT, the only way the "insert themselves" into transactions is by acting as the counter party to one side of the transaction. In this context they add a lot of value to the system, they smooth the demand curves in time and take on some of the risks of warehousing supply.
        ConfuciusSay 11y ago
        The big claim with HFT is they "add liquidity", but there's evidence that shows the opposite. Indeed it seems like HFT's only add liquidity when it's already plentiful, but reduces liquidity when it's really needed. The Fed has said as much recently.
        kasey_junk 11y ago
        > The big claim with HFT is they "add liquidity" I'm not sure who is making that claim, but I think what they are implying is that HFT "provides liquidity cheaper than the previous system of pit traders" or even "fragmentation of exchanges has dramatically brought down exchange fees at the cost of added complexity for liquidity providers (and possibly liquidity consumers). Only HFT systems could have cheaply dealt with this new complexity". In any case, I'd sum it up as "it is cheaper to trade now after the rise of HFT than at any other time, at least some of that is because they can market make more efficiently than a dude in a vest". Vanguard for one agrees with me (http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-frequency-trading-firms.html http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-f...). What many critics have claimed is that this has come at the cost of an increase in volatility, especially in the form of flash crashes and it is unclear as of yet if that is better/worse than the traditional liquidity crunches we saw under the previous regime and still see in markets not dominated by HFT. The Fed was specifically talking about this in the context of treasury bond (and futures) volatility and a skeptic might wonder which is more likely to have caused volatility in the treasury markets, HFT or unprecedented fed monetary policy. None of which is germane to the question of what the OP meant when he said that HFT insert themselves into transactions.
    - jegutman 11y ago
      Also the waste of talent argument is a red herring. People who say that assume the alternative is no financial system in their heads. It takes many fewer people to run many HFT firms than to run one JPM prop trading floor which is the actual alternative.
- JonnieCache 11y ago
  I found it a bit odd too. Isn't nanex a highly respected financial research firm of some kind?
  - phyalow 11y ago
    No, just a fringe blog....
  - brobinson 11y ago
    >highly respected I'd say "highly alarmist" based on what I've read from them over the years. They're pushing people to use their product, so it makes sense for them to publish alarmist stuff which segues into their product offerings.
    - genericacct 11y ago
      I concur. Had a brief exchange with one of them last night and he was all too eager to bend the truth to fit his message.
  - __d 11y ago
    I used to respect them -- they do (or perhaps did) visualize events of interest in the markets in a useful way. Their recent crusading against HFT however has moved outside the bounds of logic, as evidenced by this "definition" of HFT, which is just silly (as others here have pointed out).
  - bobcostas55 11y ago
    About as respected as ZH (i.e. not at all).
  - kasey_junk 11y ago
    Nanex sells market data and tools for analyzing market data. Historically (I haven't looked in a long time) their market data was inappropriate for HFT usages as it was not at the fidelity required for those applications, but it was very cheap in comparison to other market data providers. This led to a natural segmentation of their market such that most of their clients are people who are a) interested in market structure but b) not interested in high fidelity market structure information and who aren't interested enough to spend more on other options. That frequently is large block traders (hedge funds) who have a natural opposition to HFT market makers. Whether that is the only factor in their strident anti-HFT position or if they have other personal moral reasons for it as well, they also publish a highly biased blog railing against HFT, but that is not their business. In the industry, I never encountered them in the context of "highly respected financial research firm" and only in the context of "dirt cheap market data archive".
phyalow 11y ago
I still dont get what the issue is with any of this... For a trade there has to be two counterparties with firm instructions on the ELOB to be lifted or filled at a certain level. If you dont want to transact at that price dont have an order in the market...
msravi 11y ago
Hmm... so by this definition, all arbitrage, irrespective of its frequency, is defined as HFT?
- zhte415 11y ago
  No. HFT, when it is done at milliseconds of latency between exchanges to trick an order into executing at a 'fair price' because the order was sent to one exchange and HFT 'arbitragers', decide to manipulate the price at other exchanges due to latency for the same stock buy/sell. It is arbitrage free, riskkless arbitrage that adds no value to a market, as it creates none but destroys it. Arbitrage adds value to a market by offering something cheaper; HFT removes the cheaper for the more expensive.
  - kasey_junk 11y ago
    > decide to manipulate the price at other exchanges due to latency for the same stock buy/sell Be clear what you are saying. They are "manipulating the price at other exchanges" by changing the prices they themselves set on their own inventory. It is not arbitrage, it is price discovery and it is not without risk.
    - zhte415 11y ago
      > Be clear what you are saying. They are "manipulating the price at other exchanges" by changing the prices they themselves set on their own inventory. Which will be sold instantly, as they have 'discovered' the price on the other exchanges were lower than where the initial order went to, bought that, and then instantly, give or take a few milliseconds, resell. It is not price discovery, it is price manipulation. HFTs have no inventory, they are perfectly lean, they throw hot potatoes across different exchanges. Not that this is not interesting technology. It is, but it is also manipulative. I exclude prop trading from the above, obviously, because it is different, and does hold inventory.
bachback 11y ago
The HFT debate is bound to be misunderstood... It rose to prominence last year with the book by Michael Lewis "Flash boys". A discussion between two exchange operators Bats and the new IEX: https://www.youtube.com/watch?v=RcpmHyPD_PY https://www.youtube.com/watch?v=RcpmHyPD_PY This issue is not about frequency per se at all. Its about who has access to what information at what price. For instance one thing that happened was that data providers (e.g. Reuters) sold information to a group of traders, before it was available to the public. The question is not at all whether software should be used to trade (we're not going back to pen & paper / pit trading). Rather the question is how software should be used in financial markets. HFT is not evil, it's a difficult problem to be solved.
- fixxer 11y ago
  I think your viewpoint is fair. The aspects with hft that strike me as unfair are generally the result of bad exchange practices, such as lack of transparency in customer segmentation on their platforms. If it was all out in the open with price tags on display, I think the problems would fade away. Instead, the exchanges are running their businesses with about as much integrity as a bucket shop.
  - patio11 11y ago
    Can you identify a particular way in which an actual US exchange implements "customer segmentation on their platform" in a way which is tradable? This is not me trolling, this is a sincere question. If that actually exists I want to make a level in a trading simulation where the playing programmer would have to abuse that.
    - minimax 11y ago
      I think he is lumping dark pools in with exchanges. Technically there are only 11 registered US equity exchanges and any displayed quote has to be accessible to all market participants under nondiscriminatory terms. Dark pools OTOH tend to have all sorts of gimmicks with respect to whose orders are allowed to match against other orders and under what circumstances. E.g. if I connect to a bank-run dark pool, I may be able to opt out of matching against principal flow from any of the bank's prop desks. The matching rules should be described in a dark pool's "form ATS" which some dark pools publish (and some don't).
blazespin 11y ago
They're saying that low latency / lack of fundamentals (versus 'market events') marks HFT. Unfortunately, at the end of the day, even if you are only about 'fundamentals' (whatever that means) you're obviously going to want to trade FIRST on those fundamentals .. right? Cause whoever does is going to win the day. Ok, so low latency is necessary for normal electronic trading. Ok, now market events versus fundamentals. Seriously? At what point are 'market events' not fundamentals? The definition is all arbitrary. If there is a change in some correlating index, isn't that a 'market event'? But isn't it also rather fundamental (say, that correlating index is interest rates futures)? At what point does that change in the correlating index no long qualify as a 'fundamental event'? When Nanex says it doesn't? Nanex simply wants to have its cake and doesn't want to be marked as "HFT". All electronic trading, at its heart, is going to be HFT at some point. The only way to keep that from happening is just come up with really arbitrary definitions marking the line you can't cross. Likely those definitions will be used to help whoever is paying Hillary Clinton/Bush/Trump/etc the most money. Let's not bother with these shenanigans just put a transactional tax on everything and be done with it. Let's stop spending all our time and our brain power creating software to do trading and start getting back to actually researching /innovating / building things.
- vasilipupkin 11y ago
  the problem with transaction taxes is, if they are high, they reduce trading and liquidity. When you go to buy and sell stocks, or futures or govt bonds, what do you think is the process that keeps the difference between bid ( buy ) price and ask ( sell price ) relatively narrow ? it's the frequent trading process that does it
  - tomchristie 11y ago
    Does anyone know if regulations on minimum terms for holding period for stock ever been used/considered in modern markets? (eg. day/week/month?) I realize that it'd effect liquidity in a similar way to transactional taxes (portion of portfolio tied up in term at any given point) but could it also reduce volatility and ensure trading against long term value rather than short term artifacts?
patio11 11y ago
This defines market making as HFT, and while many HFTs make markets not all market makers are HFT. You can, using absolutely no knowledge of an underlying stock and the mathematical skills of a bright ten year old, make markets manually. In 2015, if you do it in a highly-traded U.S. equity, you probably will not have a great risk-adjusted return because your bright ten year old is in all ways worse at this task than a computer is, but it is very doable. To the extent that HFT is more meaningful than Big Data ("trading that I don't like and data I think is valuable, respectively!"), it had to include some element of Very Frequent, Very Fast. How fast? Like "the speed of light is literally a logistical challenge fast." If you see an order in Chicago and make an order in Tokyo a second later, no matter what your rationale is, you are not doing HFT. That's just T. Got a model of the mind of your counterparty? Oh, welcome to T. Observed a correlation in an ETF and its underlying stocks and using it to trade with 1,000 times a minute? Wow, such impressive T!
- conistonwater 11y ago
  I don't disagree with you here, but, on the other hand, parasitic trading [1] is a concept that's existed in market microstructure books for ages, since before HFT. It is not clear to me why this happens, but the concepts of parasitic trading and high-frequency trading seem to be mixed up quite often, even though they are strictly speaking orthogonal to each other. It should still be possible to argue against parasitic trading that also happens to be high-frequency. [1] https://books.google.ca/books?id=Rd9hDRR1Yx4C&pg=PA195 https://books.google.ca/books?id=Rd9hDRR1Yx4C&pg=PA195
andy_ppp 11y ago
So are there systems out there making trades designed to confuse and make HFT systems do the wrong things? Could you make some move then others? Can you run game theory stuff to constantly move the market in certain ways? Is this really the most efficient way to allocate resources...?
- tptacek 11y ago
  Yes. For instance: all the recent drama about "layering" and "spoofing" fraud is about small (and surprisingly dumb) pieces of code that exist to trick electronic trading systems into trading against their owners interests. As for efficiency: it is sure as shit more efficient than when stocks were quoted in eighths, and market makers had a collusive agreement to not to quote odd eighths so they could pocket extra money.
- kasey_junk 11y ago
  Yes, absolutely there are many HFT systems trying to game other HFT systems. Some of them are using perfectly legal means and others are doing things that are less clearly legal. > Is this really the most efficient way to allocate resources...? A - Yes as far as we can tell. All the other options haven't worked nearly as well. B - Be very careful when assuming that the markets are about "allocating resources". That is a by-product of the markets. Their main purpose is about risk management.

68 points by fixxer 11y ago

al451 11y ago

I have defined HFT to be evil, therefore HFT is evil. Brilliant.

harry-wood 11y ago
Well this article says at the top "In simple terms, electronic trading brought down costs, while High Frequency Trading brought down ethics." ...but it doesn't really go on to explain that. It's just a fairly dry bullet pointed definition of different types of High Frequency Trading. It's a shame it doesn't explain, because high frequency trading is evil, and a really depressing waste of talent.
- omellet 11y ago
  I agree that it's a waste of talent and money, but how is it evil?
  - Frondo 11y ago
    It's an excellent example of the middleman that only extracts money from a system, that adds no value to the system. They insert themselves into the transactions where they can siphon off very small amounts of money over a very large number of transactions. Nobody benefits but them from what they're doing, no one walks away with something in their hands or brains by their actions. It's legal, but it isn't right or a good thing.
    - __d 11y ago
      The counter argument is that they do provide a benefit, by providing liquidity and/or making price discovery more efficient. Whether it's "good" liquidity or not, and whether the discovered prices actually reflect true value or not, is a discussion that seems to fairly rapidly head down an acrimonious rathole.
      - Marazan 11y ago
        They cannot add liquidity. They HFT can only make money when there are slower traders willing to buy and sell. Thus, by definition the liquidity already has to exist (market participants wanting to buy and sell) for HFT's to profit.
        vasilipupkin 11y ago
        this is incorrect. HFT can make money adding liquidity to a market that erroneously is lacking in liquidity ( mispricing )
        tptacek 11y ago
        Look at a market without market-makers. Housing is a good one. Houses sell only when there are "slow" traders willing to buy and sell. Have you ever bought or sold a house? Would you like the financial markets to be more like real estate?
        Frondo 11y ago
        The alternative to HFT is not the real estate market. The alternative to HFT is how the markets operated for decades prior to HFT companies vacuuming money out of the system--that is, quite well, and with adequate liquidity, and with lots of money still being made.
        tptacek 11y ago
        The markets in the decades before HFT were crooked like a bucket of fish hooks! They were NOTORIOUSLY corrupt. Everyone was scamming everyone else. The entire market was a giant grift. Are you really sticking up for 1980s trading? Or have you just not done much research about how it worked?
        Frondo 11y ago
        Really? And now, with HFT, they're no longer crooked? If I remember right, in the 2000s we've seen a ton of crooked market scandals (fraudulently rated securities, LIBOR, etc etc). I don't see this relationship you're positing between HFTs and a non-corrupt trading market at all.
    - kasey_junk 11y ago
      > They insert themselves into the transactions Be very clear what you mean when you say this. Because the vast majority of the time when people talk about HFT, the only way the "insert themselves" into transactions is by acting as the counter party to one side of the transaction. In this context they add a lot of value to the system, they smooth the demand curves in time and take on some of the risks of warehousing supply.
      - ConfuciusSay 11y ago
        The big claim with HFT is they "add liquidity", but there's evidence that shows the opposite. Indeed it seems like HFT's only add liquidity when it's already plentiful, but reduces liquidity when it's really needed. The Fed has said as much recently.
        kasey_junk 11y ago
        > The big claim with HFT is they "add liquidity" I'm not sure who is making that claim, but I think what they are implying is that HFT "provides liquidity cheaper than the previous system of pit traders" or even "fragmentation of exchanges has dramatically brought down exchange fees at the cost of added complexity for liquidity providers (and possibly liquidity consumers). Only HFT systems could have cheaply dealt with this new complexity". In any case, I'd sum it up as "it is cheaper to trade now after the rise of HFT than at any other time, at least some of that is because they can market make more efficiently than a dude in a vest". Vanguard for one agrees with me (http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-frequency-trading-firms.html http://www.cnbc.com/2014/04/25/vanguard-chief-defends-high-f...). What many critics have claimed is that this has come at the cost of an increase in volatility, especially in the form of flash crashes and it is unclear as of yet if that is better/worse than the traditional liquidity crunches we saw under the previous regime and still see in markets not dominated by HFT. The Fed was specifically talking about this in the context of treasury bond (and futures) volatility and a skeptic might wonder which is more likely to have caused volatility in the treasury markets, HFT or unprecedented fed monetary policy. None of which is germane to the question of what the OP meant when he said that HFT insert themselves into transactions.
  - jegutman 11y ago
    Also the waste of talent argument is a red herring. People who say that assume the alternative is no financial system in their heads. It takes many fewer people to run many HFT firms than to run one JPM prop trading floor which is the actual alternative.
JonnieCache 11y ago
I found it a bit odd too. Isn't nanex a highly respected financial research firm of some kind?
- phyalow 11y ago
  No, just a fringe blog....
- brobinson 11y ago
  >highly respected I'd say "highly alarmist" based on what I've read from them over the years. They're pushing people to use their product, so it makes sense for them to publish alarmist stuff which segues into their product offerings.
  - genericacct 11y ago
    I concur. Had a brief exchange with one of them last night and he was all too eager to bend the truth to fit his message.
- __d 11y ago
  I used to respect them -- they do (or perhaps did) visualize events of interest in the markets in a useful way. Their recent crusading against HFT however has moved outside the bounds of logic, as evidenced by this "definition" of HFT, which is just silly (as others here have pointed out).
- bobcostas55 11y ago
  About as respected as ZH (i.e. not at all).
- kasey_junk 11y ago
  Nanex sells market data and tools for analyzing market data. Historically (I haven't looked in a long time) their market data was inappropriate for HFT usages as it was not at the fidelity required for those applications, but it was very cheap in comparison to other market data providers. This led to a natural segmentation of their market such that most of their clients are people who are a) interested in market structure but b) not interested in high fidelity market structure information and who aren't interested enough to spend more on other options. That frequently is large block traders (hedge funds) who have a natural opposition to HFT market makers. Whether that is the only factor in their strident anti-HFT position or if they have other personal moral reasons for it as well, they also publish a highly biased blog railing against HFT, but that is not their business. In the industry, I never encountered them in the context of "highly respected financial research firm" and only in the context of "dirt cheap market data archive".

phyalow 11y ago

I still dont get what the issue is with any of this... For a trade there has to be two counterparties with firm instructions on the ELOB to be lifted or filled at a certain level. If you dont want to transact at that price dont have an order in the market...

msravi 11y ago

Hmm... so by this definition, all arbitrage, irrespective of its frequency, is defined as HFT?

zhte415 11y ago
No. HFT, when it is done at milliseconds of latency between exchanges to trick an order into executing at a 'fair price' because the order was sent to one exchange and HFT 'arbitragers', decide to manipulate the price at other exchanges due to latency for the same stock buy/sell. It is arbitrage free, riskkless arbitrage that adds no value to a market, as it creates none but destroys it. Arbitrage adds value to a market by offering something cheaper; HFT removes the cheaper for the more expensive.
- kasey_junk 11y ago
  > decide to manipulate the price at other exchanges due to latency for the same stock buy/sell Be clear what you are saying. They are "manipulating the price at other exchanges" by changing the prices they themselves set on their own inventory. It is not arbitrage, it is price discovery and it is not without risk.
  - zhte415 11y ago
    > Be clear what you are saying. They are "manipulating the price at other exchanges" by changing the prices they themselves set on their own inventory. Which will be sold instantly, as they have 'discovered' the price on the other exchanges were lower than where the initial order went to, bought that, and then instantly, give or take a few milliseconds, resell. It is not price discovery, it is price manipulation. HFTs have no inventory, they are perfectly lean, they throw hot potatoes across different exchanges. Not that this is not interesting technology. It is, but it is also manipulative. I exclude prop trading from the above, obviously, because it is different, and does hold inventory.

bachback 11y ago

The HFT debate is bound to be misunderstood... It rose to prominence last year with the book by Michael Lewis "Flash boys". A discussion between two exchange operators Bats and the new IEX: https://www.youtube.com/watch?v=RcpmHyPD_PY https://www.youtube.com/watch?v=RcpmHyPD_PY This issue is not about frequency per se at all. Its about who has access to what information at what price. For instance one thing that happened was that data providers (e.g. Reuters) sold information to a group of traders, before it was available to the public. The question is not at all whether software should be used to trade (we're not going back to pen & paper / pit trading). Rather the question is how software should be used in financial markets. HFT is not evil, it's a difficult problem to be solved.

fixxer 11y ago
I think your viewpoint is fair. The aspects with hft that strike me as unfair are generally the result of bad exchange practices, such as lack of transparency in customer segmentation on their platforms. If it was all out in the open with price tags on display, I think the problems would fade away. Instead, the exchanges are running their businesses with about as much integrity as a bucket shop.
- patio11 11y ago
  Can you identify a particular way in which an actual US exchange implements "customer segmentation on their platform" in a way which is tradable? This is not me trolling, this is a sincere question. If that actually exists I want to make a level in a trading simulation where the playing programmer would have to abuse that.
  - minimax 11y ago
    I think he is lumping dark pools in with exchanges. Technically there are only 11 registered US equity exchanges and any displayed quote has to be accessible to all market participants under nondiscriminatory terms. Dark pools OTOH tend to have all sorts of gimmicks with respect to whose orders are allowed to match against other orders and under what circumstances. E.g. if I connect to a bank-run dark pool, I may be able to opt out of matching against principal flow from any of the bank's prop desks. The matching rules should be described in a dark pool's "form ATS" which some dark pools publish (and some don't).

blazespin 11y ago

They're saying that low latency / lack of fundamentals (versus 'market events') marks HFT. Unfortunately, at the end of the day, even if you are only about 'fundamentals' (whatever that means) you're obviously going to want to trade FIRST on those fundamentals .. right? Cause whoever does is going to win the day. Ok, so low latency is necessary for normal electronic trading. Ok, now market events versus fundamentals. Seriously? At what point are 'market events' not fundamentals? The definition is all arbitrary. If there is a change in some correlating index, isn't that a 'market event'? But isn't it also rather fundamental (say, that correlating index is interest rates futures)? At what point does that change in the correlating index no long qualify as a 'fundamental event'? When Nanex says it doesn't? Nanex simply wants to have its cake and doesn't want to be marked as "HFT". All electronic trading, at its heart, is going to be HFT at some point. The only way to keep that from happening is just come up with really arbitrary definitions marking the line you can't cross. Likely those definitions will be used to help whoever is paying Hillary Clinton/Bush/Trump/etc the most money. Let's not bother with these shenanigans just put a transactional tax on everything and be done with it. Let's stop spending all our time and our brain power creating software to do trading and start getting back to actually researching /innovating / building things.

vasilipupkin 11y ago
the problem with transaction taxes is, if they are high, they reduce trading and liquidity. When you go to buy and sell stocks, or futures or govt bonds, what do you think is the process that keeps the difference between bid ( buy ) price and ask ( sell price ) relatively narrow ? it's the frequent trading process that does it
- tomchristie 11y ago
  Does anyone know if regulations on minimum terms for holding period for stock ever been used/considered in modern markets? (eg. day/week/month?) I realize that it'd effect liquidity in a similar way to transactional taxes (portion of portfolio tied up in term at any given point) but could it also reduce volatility and ensure trading against long term value rather than short term artifacts?

patio11 11y ago

This defines market making as HFT, and while many HFTs make markets not all market makers are HFT. You can, using absolutely no knowledge of an underlying stock and the mathematical skills of a bright ten year old, make markets manually. In 2015, if you do it in a highly-traded U.S. equity, you probably will not have a great risk-adjusted return because your bright ten year old is in all ways worse at this task than a computer is, but it is very doable. To the extent that HFT is more meaningful than Big Data ("trading that I don't like and data I think is valuable, respectively!"), it had to include some element of Very Frequent, Very Fast. How fast? Like "the speed of light is literally a logistical challenge fast." If you see an order in Chicago and make an order in Tokyo a second later, no matter what your rationale is, you are not doing HFT. That's just T. Got a model of the mind of your counterparty? Oh, welcome to T. Observed a correlation in an ETF and its underlying stocks and using it to trade with 1,000 times a minute? Wow, such impressive T!

conistonwater 11y ago
I don't disagree with you here, but, on the other hand, parasitic trading [1] is a concept that's existed in market microstructure books for ages, since before HFT. It is not clear to me why this happens, but the concepts of parasitic trading and high-frequency trading seem to be mixed up quite often, even though they are strictly speaking orthogonal to each other. It should still be possible to argue against parasitic trading that also happens to be high-frequency. [1] https://books.google.ca/books?id=Rd9hDRR1Yx4C&pg=PA195 https://books.google.ca/books?id=Rd9hDRR1Yx4C&pg=PA195

andy_ppp 11y ago

So are there systems out there making trades designed to confuse and make HFT systems do the wrong things? Could you make some move then others? Can you run game theory stuff to constantly move the market in certain ways? Is this really the most efficient way to allocate resources...?

tptacek 11y ago
Yes. For instance: all the recent drama about "layering" and "spoofing" fraud is about small (and surprisingly dumb) pieces of code that exist to trick electronic trading systems into trading against their owners interests. As for efficiency: it is sure as shit more efficient than when stocks were quoted in eighths, and market makers had a collusive agreement to not to quote odd eighths so they could pocket extra money.
kasey_junk 11y ago
Yes, absolutely there are many HFT systems trying to game other HFT systems. Some of them are using perfectly legal means and others are doing things that are less clearly legal. > Is this really the most efficient way to allocate resources...? A - Yes as far as we can tell. All the other options haven't worked nearly as well. B - Be very careful when assuming that the markets are about "allocating resources". That is a by-product of the markets. Their main purpose is about risk management.