3 ms·

It's really not, HFT doesn't require quants, it's all about latency arbitrage, not about predicting future prices with quantitative analysis. It is all about t

It's really not, HFT doesn't require quants, it's all about latency arbitrage, not about predicting future prices with quantitative analysis. It is all about the shift to algorithmic trading, of which HFT is only a small sub-category.

makeset 11y ago
The total size of the HFT pie is indeed minuscule, considering the amount of hype it gets. Past the high infrastructural barrier to entry, and assuming they can stay ahead of the competition, the consistency of returns does seem lucrative, but the actual magnitudes of the opportunities are hard-limited by the nature of the time scales. You can't move any significant amount of capital in milliseconds and expect to profit. Compared to the average hedge fund, they are playing with pennies.
mrchicity 11y ago
Nonsense. Most HFTs are market-makers, either official or unofficial and have to predict price movements to quote competitively. If you only make quotes where you have an immediate arb in another product/exchange, you won't get many trades: https://ptportal.kcg.com/kresearch/do/research/getDownload?attachmentId=4003&username=8FEW5ecT13JTdHAY7Qm0TA== https://ptportal.kcg.com/kresearch/do/research/getDownload?a...
- gnaritas 11y ago
  HFT market makers aren't doing complex quantative analysis in microseconds it takes to do trades, and latency arb isn't "an immediate arb in another product/exchange", that's just normal arb. Quants are used for longer term stuff, not microsecond level stuff. HTF's are doing order book stuff and flipping the spread, nothing hugely complex, just fast.
  - mrchicity 11y ago
    What is "latency arb" then? To "flip the spread" you need to predict where the market will go after your order gets elected. The market is pretty efficient. The average limit order loses the spread and rebates after execution. You can't make money just being on the bid and offer with the crowd without a directional prediction. You are right that the actual execution algorithms aren't doing super complex analysis in real-time. Usually that is done offline through simulation to generate rule sets, decision trees or factor weightings. That work is definitely quantitative. Aside from pure arbitrage, most HFT strategies have a statistical edge, not a mechanical one.
    - gnaritas 11y ago
      Latency arb is taking advantage of people with slower connections by being able to place/cancel orders faster than them. As most exchanges are price, time priority, unless someone beats your price, first in line gets filled first. > To "flip the spread" you need to predict where the market will go after your order gets elected. Lets talk abstractly for a moment, that sentence is exactly wrong. The whole point of flipping the spread is that you can immediately sell what you just bought and make the spread risk free. That's what market making is, providing liquidity for the spread as profit. Now, pragmatically, of course the market doesn't sit still for long and the price may change between your buy and sell so of course it's good to predict the market direction to reduce the risk of being on the wrong side of a move. But HFT is trading at the microsecond scale, prices aren't moving much at that scale in that short a period of time and you only need to know where the market is going for say the next second to be in an out of a slew of trades. > The market is pretty efficient. Agreed. > The average limit order loses the spread and rebates after execution. I don't believe that. That would mean that slippage exceeds the spread and more on most orders and unless you're trading a very illiquid market there's no way that can be true unless you're trading very large, large enough to move the market alone. > You are right that the actual execution algorithms aren't doing super complex analysis in real-time. That's my main point. > Usually that is done offline through simulation to generate rule sets, decision trees or factor weightings. That work is definitely quantitative. I agree with that as well, but that's not HFT trading, that's market analysis and mostly I believe, though I admit I could be totally wrong here, that analysis is mostly used for slower algorithmic trading, not HFT. In HFT, it's better to be faster than smarter, especially with the sub-penny rule imposed by Dodd-Frank.
      - mrchicity 11y ago
        http://www.tradeworx.com/media/pdf/TWX-SEC-2010.pdf http://www.tradeworx.com/media/pdf/TWX-SEC-2010.pdf (p.13) and https://mechanicalmarkets.files.wordpress.com/2015/01/toa-exchangesummary-13661.png https://mechanicalmarkets.files.wordpress.com/2015/01/toa-ex... back up my claim that limit orders lose the spread on average net of costs. In a competitive equilibrium, this has to be the case. If the average limit order lost less than the spread and rebate, it would be profitable to mechanically copy every limit order with an infinitesimally small limit order placed right behind it. If the average limit order lost more, it would be profitable to copy every marketable order trading to remove any residual liquidity on the book at that price. Of course HFTs limit orders perform better than average or they'd be out of business (and many do go out of business). FWIW, every successful HFT trader I know does this type of "market analysis" driven trading backed by very fast execution. Speed alone is no longer an edge in most markets. Most are holding risk for more than microseconds or single seconds. Trade direction is auto-correlated in short timescales so even being front of the line you are unlikely to buy and sell to earn the spread so quickly.

makeset 11y ago

The total size of the HFT pie is indeed minuscule, considering the amount of hype it gets. Past the high infrastructural barrier to entry, and assuming they can stay ahead of the competition, the consistency of returns does seem lucrative, but the actual magnitudes of the opportunities are hard-limited by the nature of the time scales. You can't move any significant amount of capital in milliseconds and expect to profit. Compared to the average hedge fund, they are playing with pennies.

mrchicity 11y ago

Nonsense. Most HFTs are market-makers, either official or unofficial and have to predict price movements to quote competitively. If you only make quotes where you have an immediate arb in another product/exchange, you won't get many trades: https://ptportal.kcg.com/kresearch/do/research/getDownload?attachmentId=4003&username=8FEW5ecT13JTdHAY7Qm0TA== https://ptportal.kcg.com/kresearch/do/research/getDownload?a...

gnaritas 11y ago
HFT market makers aren't doing complex quantative analysis in microseconds it takes to do trades, and latency arb isn't "an immediate arb in another product/exchange", that's just normal arb. Quants are used for longer term stuff, not microsecond level stuff. HTF's are doing order book stuff and flipping the spread, nothing hugely complex, just fast.
- mrchicity 11y ago
  What is "latency arb" then? To "flip the spread" you need to predict where the market will go after your order gets elected. The market is pretty efficient. The average limit order loses the spread and rebates after execution. You can't make money just being on the bid and offer with the crowd without a directional prediction. You are right that the actual execution algorithms aren't doing super complex analysis in real-time. Usually that is done offline through simulation to generate rule sets, decision trees or factor weightings. That work is definitely quantitative. Aside from pure arbitrage, most HFT strategies have a statistical edge, not a mechanical one.
  - gnaritas 11y ago
    Latency arb is taking advantage of people with slower connections by being able to place/cancel orders faster than them. As most exchanges are price, time priority, unless someone beats your price, first in line gets filled first. > To "flip the spread" you need to predict where the market will go after your order gets elected. Lets talk abstractly for a moment, that sentence is exactly wrong. The whole point of flipping the spread is that you can immediately sell what you just bought and make the spread risk free. That's what market making is, providing liquidity for the spread as profit. Now, pragmatically, of course the market doesn't sit still for long and the price may change between your buy and sell so of course it's good to predict the market direction to reduce the risk of being on the wrong side of a move. But HFT is trading at the microsecond scale, prices aren't moving much at that scale in that short a period of time and you only need to know where the market is going for say the next second to be in an out of a slew of trades. > The market is pretty efficient. Agreed. > The average limit order loses the spread and rebates after execution. I don't believe that. That would mean that slippage exceeds the spread and more on most orders and unless you're trading a very illiquid market there's no way that can be true unless you're trading very large, large enough to move the market alone. > You are right that the actual execution algorithms aren't doing super complex analysis in real-time. That's my main point. > Usually that is done offline through simulation to generate rule sets, decision trees or factor weightings. That work is definitely quantitative. I agree with that as well, but that's not HFT trading, that's market analysis and mostly I believe, though I admit I could be totally wrong here, that analysis is mostly used for slower algorithmic trading, not HFT. In HFT, it's better to be faster than smarter, especially with the sub-penny rule imposed by Dodd-Frank.
    - mrchicity 11y ago
      http://www.tradeworx.com/media/pdf/TWX-SEC-2010.pdf http://www.tradeworx.com/media/pdf/TWX-SEC-2010.pdf (p.13) and https://mechanicalmarkets.files.wordpress.com/2015/01/toa-exchangesummary-13661.png https://mechanicalmarkets.files.wordpress.com/2015/01/toa-ex... back up my claim that limit orders lose the spread on average net of costs. In a competitive equilibrium, this has to be the case. If the average limit order lost less than the spread and rebate, it would be profitable to mechanically copy every limit order with an infinitesimally small limit order placed right behind it. If the average limit order lost more, it would be profitable to copy every marketable order trading to remove any residual liquidity on the book at that price. Of course HFTs limit orders perform better than average or they'd be out of business (and many do go out of business). FWIW, every successful HFT trader I know does this type of "market analysis" driven trading backed by very fast execution. Speed alone is no longer an edge in most markets. Most are holding risk for more than microseconds or single seconds. Trade direction is auto-correlated in short timescales so even being front of the line you are unlikely to buy and sell to earn the spread so quickly.