8 ms·

Banning Some HFT Strategies Helped This Market Grow: Chart

39 points by randomname2 11y ago

chollida1 11y ago
Really, the article is one paragraph. It quotes Doug Cifu, the head of the largest HFT firm in the world. I don't know much about Aquis strategy for growing their exchange but if its anything like the aequitas exchange that has just opened in Canada then they get inflated numbers by begin the exchange off record where some banks get paid to report their large block trades.
- randomname2 11y ago
  The article argues it doubled its share of public European stock trading since Feb. 8, when it banned what it considers a problematic high-frequency-trading strategy, just wanting to limit proprietary traders to passively providing price quotes, i.e. banning HFT firms which are parasitic orderflow frontrunners not market makers, and take zero risk which is about 99% of them.
andylei 11y ago
great chart bloomberg http://tylervigen.com/spurious-correlations http://tylervigen.com/spurious-correlations
ryporter 11y ago
It links to a slightly longer article [1], which provides a bit of detail, but doesn't elucidate. First of all, how do you only allow passive orders? If an order is marketable when it arrives at the exchange, then is it rejected? Second, how does this resemble IEX's speed bump? I'm very confused. [1] http://www.bloomberg.com/news/articles/2016-02-03/this-upstart-market-hopes-to-grow-with-flash-boys-strategy http://www.bloomberg.com/news/articles/2016-02-03/this-upsta...
- randomname2 11y ago
  Well for one it explains why some HFT actors are so vehemently opposed to IEX's HFT-limiting exchange application, as investors leave any venue that still permits HFTs, and go to alternatives such as Aquis and, if its application is granted, IEX.
  - minimax 11y ago
    Comments like these... they just show you have no idea what you're talking about. Investors are perfectly free to trade on the IEX ATS all day long in its current incarnation.
- minimax 11y ago
  Basically in their rulebook it says that all prop (as opposed to agency) flow must be passive, and if they find aggressive prop flow from a member they can terminate the membership. The tie in to IEX is tenuous at best.
  - randomname2 11y ago
    Good explanation of IEX here: https://www.fastcompany.com/3031242/a-no-nonsense-explanation-of-iex-the-exchange-fighting-high-frequency-trading https://www.fastcompany.com/3031242/a-no-nonsense-explanatio...
jakozaur 11y ago
What if all stock market would adopt a strategy that orders are processed one per minute. Same way it works during opening/closing market. Some advantages: 1. All assets will be as liquid as they are now. Still got opportunity to buy/sell 8 * 60 = 480 times per day. 2. Most of the HFT industry will be redundant. Instead of allocating super smart people on made up problem, they can solve more important social problems (e.g. robotics, curing cancer, aging, space exploration, high growth tech companies). 3. Less day trading, encourage long term perspective.
- JupiterMoon 11y ago
  4. Competing stock markets grow (maybe in another jurisdiction) that allows faster order processing
  - cdetrio 11y ago
    But faster (continuous-time) order processing results in wider bid/ask spreads; slower (discrete-time) batch processing results in narrower spreads. At least that's what the models show. Follow-up papers even analyze a multi-exchange model (competing continuous-time and discrete-time exchanges), and concluded that investors and retail traders would prefer the discrete-time exchange because it would have narrower spreads (i.e. lower transaction costs).
    - fr0sty 11y ago
      > At least that's what the models show. What models? Increasing the amount of risk a market maker must bear will widen the quoted spreads not narrow them since that increased risk needs to be priced in.
      - cdetrio 11y ago
        The models in the "Frequent batch auctions as a market design response to HFT" paper by Budish et. al.; i linked the slides in another comment. Since batch auctions use single-price clearing, market makers can post bids and asks without fear of being sniped (so its less risk, not more). And since you can't snipe, they have to compete on price rather than investing in faster connections, resulting in narrower spreads.
murbard2 11y ago
The problem isn't HFT per se it's adverse selection. Large trades are more likely to happen if the exchange discriminates in who participates in the exchange, not how they participate. Regulation NMS destroyed upstairs trading in the US and is effectively making such discrimination illegal/impossible unless you operate a dark pool which cannot openly show prices.
Zenst 11y ago
I often wonder, why the need for speed. If stock markets updated once a day, would that really cause a problem? The whole aspect of making updates faster, transactions faster will always lead to those who can afford it looking for an edge in speed and in most cases - getting it, aided or unaided. But with such dysnimic speed any misdirection in price rise or fall can and has been in the past exhausebated and when you look at the impact again, wonder why so fast. I can appreciete the fater exchanges operate the mroe transacitons and brokers just love commision, more transactions more commision and it was and always is a crux in any fiscal market. Indeed the Llyods crash was due to many brokers factoring (watering down the pools of money in effect) risks (groups of insurance poiceys) so many times that when there was a big claim (asbestos) then the whole thing crashed as the pools of money to cover the insurance were eaten away so much by all this over factoring of the risks about with brokers taking a slice everytime it got passed about and reinsurance became a rererererereinsurance style affair that with so much commision taken out it was a financial timebomb awaiting to happen. Again can look more recently at mortgages and how companies polled those together as they do with insurance and reinsurance in much the same way. Though more case of hiding potentual asbestos risks in with less risker mortgages and the rest we all remember. So can see why I do question the need for faster and faster stock markets when, too me daily would work and indeed even hourly. Would eliminate HFT and indeed make the whole market more stable and focused upon the companies and not what todays market become based upon somebody famous doing or saying something on twitter more then actual results.
- TTPrograms 11y ago
  I've also wondered the same thing. I've always been replied to with "it provides liquidity to the market" but I still don't see why anybody needs microsecond level liquidity. Seems like it provides marginal benefit over a minute or hourly quantized exchange at tremendous cost (to society).
  - wdewind 11y ago
    TLDR: Compounding effects that add up over time, and extremely dubious use of the words "tremendous cost (to society)."
epx 11y ago
As I commented in another related article, I think it in terms of "nuclear reactors", whose reaction times are crafted to match human reaction times (tens of seconds). Trading could follow the same principle. Compounding with that, some studies say that trading itself causes most (2/3) of the volatility, so it is expected that µs-scale trading creates even more volatility.
- vostok 11y ago
  > so it is expected that µs-scale trading creates even more volatility. Could you help me understand why this might be expected?

39 points by randomname2 11y ago

Really, the article is one paragraph. It quotes Doug Cifu, the head of the largest HFT firm in the world. I don't know much about Aquis strategy for growing their exchange but if its anything like the aequitas exchange that has just opened in Canada then they get inflated numbers by begin the exchange off record where some banks get paid to report their large block trades.

randomname2 11y ago
The article argues it doubled its share of public European stock trading since Feb. 8, when it banned what it considers a problematic high-frequency-trading strategy, just wanting to limit proprietary traders to passively providing price quotes, i.e. banning HFT firms which are parasitic orderflow frontrunners not market makers, and take zero risk which is about 99% of them.

andylei 11y ago

great chart bloomberg http://tylervigen.com/spurious-correlations http://tylervigen.com/spurious-correlations

ryporter 11y ago

It links to a slightly longer article [1], which provides a bit of detail, but doesn't elucidate. First of all, how do you only allow passive orders? If an order is marketable when it arrives at the exchange, then is it rejected? Second, how does this resemble IEX's speed bump? I'm very confused. [1] http://www.bloomberg.com/news/articles/2016-02-03/this-upstart-market-hopes-to-grow-with-flash-boys-strategy http://www.bloomberg.com/news/articles/2016-02-03/this-upsta...

randomname2 11y ago
Well for one it explains why some HFT actors are so vehemently opposed to IEX's HFT-limiting exchange application, as investors leave any venue that still permits HFTs, and go to alternatives such as Aquis and, if its application is granted, IEX.
- minimax 11y ago
  Comments like these... they just show you have no idea what you're talking about. Investors are perfectly free to trade on the IEX ATS all day long in its current incarnation.
minimax 11y ago
Basically in their rulebook it says that all prop (as opposed to agency) flow must be passive, and if they find aggressive prop flow from a member they can terminate the membership. The tie in to IEX is tenuous at best.
- randomname2 11y ago
  Good explanation of IEX here: https://www.fastcompany.com/3031242/a-no-nonsense-explanation-of-iex-the-exchange-fighting-high-frequency-trading https://www.fastcompany.com/3031242/a-no-nonsense-explanatio...

jakozaur 11y ago

What if all stock market would adopt a strategy that orders are processed one per minute. Same way it works during opening/closing market. Some advantages: 1. All assets will be as liquid as they are now. Still got opportunity to buy/sell 8 * 60 = 480 times per day. 2. Most of the HFT industry will be redundant. Instead of allocating super smart people on made up problem, they can solve more important social problems (e.g. robotics, curing cancer, aging, space exploration, high growth tech companies). 3. Less day trading, encourage long term perspective.

JupiterMoon 11y ago
4. Competing stock markets grow (maybe in another jurisdiction) that allows faster order processing
- cdetrio 11y ago
  But faster (continuous-time) order processing results in wider bid/ask spreads; slower (discrete-time) batch processing results in narrower spreads. At least that's what the models show. Follow-up papers even analyze a multi-exchange model (competing continuous-time and discrete-time exchanges), and concluded that investors and retail traders would prefer the discrete-time exchange because it would have narrower spreads (i.e. lower transaction costs).
  - fr0sty 11y ago
    > At least that's what the models show. What models? Increasing the amount of risk a market maker must bear will widen the quoted spreads not narrow them since that increased risk needs to be priced in.
    - cdetrio 11y ago
      The models in the "Frequent batch auctions as a market design response to HFT" paper by Budish et. al.; i linked the slides in another comment. Since batch auctions use single-price clearing, market makers can post bids and asks without fear of being sniped (so its less risk, not more). And since you can't snipe, they have to compete on price rather than investing in faster connections, resulting in narrower spreads.

murbard2 11y ago

The problem isn't HFT per se it's adverse selection. Large trades are more likely to happen if the exchange discriminates in who participates in the exchange, not how they participate. Regulation NMS destroyed upstairs trading in the US and is effectively making such discrimination illegal/impossible unless you operate a dark pool which cannot openly show prices.

Zenst 11y ago

I often wonder, why the need for speed. If stock markets updated once a day, would that really cause a problem? The whole aspect of making updates faster, transactions faster will always lead to those who can afford it looking for an edge in speed and in most cases - getting it, aided or unaided. But with such dysnimic speed any misdirection in price rise or fall can and has been in the past exhausebated and when you look at the impact again, wonder why so fast. I can appreciete the fater exchanges operate the mroe transacitons and brokers just love commision, more transactions more commision and it was and always is a crux in any fiscal market. Indeed the Llyods crash was due to many brokers factoring (watering down the pools of money in effect) risks (groups of insurance poiceys) so many times that when there was a big claim (asbestos) then the whole thing crashed as the pools of money to cover the insurance were eaten away so much by all this over factoring of the risks about with brokers taking a slice everytime it got passed about and reinsurance became a rererererereinsurance style affair that with so much commision taken out it was a financial timebomb awaiting to happen. Again can look more recently at mortgages and how companies polled those together as they do with insurance and reinsurance in much the same way. Though more case of hiding potentual asbestos risks in with less risker mortgages and the rest we all remember. So can see why I do question the need for faster and faster stock markets when, too me daily would work and indeed even hourly. Would eliminate HFT and indeed make the whole market more stable and focused upon the companies and not what todays market become based upon somebody famous doing or saying something on twitter more then actual results.

TTPrograms 11y ago
I've also wondered the same thing. I've always been replied to with "it provides liquidity to the market" but I still don't see why anybody needs microsecond level liquidity. Seems like it provides marginal benefit over a minute or hourly quantized exchange at tremendous cost (to society).
- wdewind 11y ago
  TLDR: Compounding effects that add up over time, and extremely dubious use of the words "tremendous cost (to society)."

epx 11y ago

As I commented in another related article, I think it in terms of "nuclear reactors", whose reaction times are crafted to match human reaction times (tens of seconds). Trading could follow the same principle. Compounding with that, some studies say that trading itself causes most (2/3) of the volatility, so it is expected that µs-scale trading creates even more volatility.

vostok 11y ago
> so it is expected that µs-scale trading creates even more volatility. Could you help me understand why this might be expected?