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Insights into High Frequency Trading from the Virtu IPO [pdf]
- chollida1 10y agoWhen HFT firm Virtu went public they announced they had one loosing day in 6 years. A physics professor explained how this was possible by using the law of large numbers and some basic assumptions.
- arcanus 10y agoI was offered a job at virtu, and met people who discussed this in the interview. They had backtested the model but apparently it had a slight bug. After fixing it they claimed to have made much more than the loses.
- Kenji 10y agoI don't know why HFT exists at all. I would just pass a law that forces a bit of random latency/noice in the market data, in the order of seconds (in a similar way as GPS has artificial inaccuracy). Normal people are not gonna notice and all this HFT garbage is completely eliminated. Win win.
- sfeng 10y agoPeople who are pro-HFT see it as a way of increasing the 'liquidity' of the market. In their eyes it makes it easier to move volume of stock, and moves the bid price of the stock closer to the ask price of the stock.
- jandrese 10y agoThat argument still makes no sense to me. How does skimming off of the top of trades make the market more liquid? It's not like they're offering any new product for sale. If a market is moving slowly all they do is artificially inflate the number of transactions without increasing liquidity. HFT is just abusing an information advantage to skim off of the market. Because they have a slightly more accurate view of the market, they can front run trades and make money. That's all it is. There is no benefit to the seller, to the buyer, or to the market. It's pure parasitism.
- airza 10y agobefore HFT these transactions were run by human market makers from giant banks who skimmed hundreds of times more profit off of them (this is the reason that you hear about it in the news all of the time) Someone's job is going to be to sit between the people who just want to sell and those who want to buy- when we talk about liquidity it's just this. The fact that you're directing your anger towards some robots who are ruthlessly driving each other to the minimum possible gap between the buy price and the sell price on this is bizarre
- vostok 10y agoI have a pet theory that anti-HFT sentiment is stoked by banks and other entities that aren't able to compete.
- SimbaOnSteroids 10y agoUnless you're a bank or have similar means you can't compete.
- vostok 10y agoI'm not sure I understand the argument. The publicly traded top trading firms are much smaller than the banks. They're in the $1-2 billion range. Of course you need money to compete. You need money to compete with Facebook too.
- anigbrowl 10y agoHeaven forfend that people should form their own opinions on first principles, even though those opinions might be mistaken.
- lobster_johnson 10y agoDoes HFT only hurt "other bots"? My understanding was that HFT could take advantage of faster feeds to front-run human traders.
- WideCharr 10y agoInteresting that you "don't know" something and would immediately start passing laws about it...
- 21 10y agoNo they would not. Even if you introduce a 10 sec delay, there will still be someone which will be first after the 10 sec pass, and you can still create models which will be tuned to predict what the price will do 10 sec into the future. And what do you think about a law which forces all news agencies to wait 1 hour before reporting major news, so that everybody gets a chance to report it, and not only the huge agencies/papers like AFP of NYT.
- Glyptodon 10y agoI agree that it's likely not particularly useful for the market to care about things in millisecond resolution.
- vostok 10y agoIt is useful if you start thinking about products whose prices depend on the prices of other things. Suppose that I'm a SPY trader. I need to know where a bunch of other things are trading in order to figure out where I should be quoting SPY. If I only know those prices on a second stale basis then I can't get my hedge off and so I can't quote SPY as tightly. I lose, investors lose, and investment banks win because they're better adapted to trading where prices aren't clear.
- sidlls 10y agoThat's a very clever comment, but I think you should include something indicating why for those who don't know how HFT works.
- ForHackernews 10y agoIf nothing else, it means that firms that can afford to collocate their servers in the cage next to the exchange's servers have an advantage over those that can't. It seems like something like the roundtrip time for a packet from NYC to Tokyo would be a fair "speed limit" for exchanges, and ensure that all firms, globally, are on an even footing.
- MichaelGG 10y agoI think you'll find, when you try to get down into it, there's no easy way to enforce a speed limit. It's a naturally arising behaviour. You could try making a market that crosses orders every X seconds, but then you move the speed to the edge of those periods. If you wanna slow down HFT, then kill the stupid restriction that stocks be priced in pennies. With 8 digits of resolution, HFTs would then be forced to compete on price.
- 10y ago
- deleted 10y ago[deleted]
- lobster_johnson 10y agoBecause the stock exchanges are private companies that profit from every trade. It's in their interest to keep making everyone trade as much as possible. I doubt anything is going to happen unless all exchanges agree to institute the same policy, or a law is passed to that effect. I don't know why you're being downvoted. It's a legitimate concern.
- jasonmunro 10y agoWhile it's true that stock exchange operators are private companies, they are also SROs that undergo significant scrutiny from various government organizations (FINRA, SEC, etc). Most (all?) exchanges use "maker/taker" pricing, so while it is possible the trading platform might not make money on _every_ trade depending on the exact pricing rules, they do make money in the aggregate, and in general more trades equal more profits. Many of the opponents to HFT believe that the maker/taker pricing model is a big problem in the markets, and doing away with it would significantly curb HFT profits. Personally, I'm ambivalent about HFT. All stock trading seems to me far removed from the actual value of the underlying companies anyway :). Disclaimer: I was an engineer at BATS Global Markets for 5 years, but have been out of finance for the last 4, so my info may be out of date.
- Kenji 10y agoIdk why I'm being downvoted either. I bet in 2 years there will be a blog post which refines the idea I outlined above and it will be on top of HN and everyone will agree with it. That's how HN works.
- SEJeff 10y agoDo yourself a favor and lookup the history of the IEX exchange, and read flash boys. They do just this, but HFT traders still trade there and make money, just probably less of it.
- MichaelGG 10y agoAny reading of Flash Boys needs to be accompanied by Flash Boys: Not So Fast. Or just a really critical eye. Flash Boys is beyond bizarre in the silly things it implies (like some major manager's trading PC is hacked or something, but somehow that's fixed with IEX). Or how they lament some guy can't buy huge amounts of stock without moving the price. It's a nonsensical book.
- SEJeff 10y agoAlso fun fact for you. Flash Boys: Not So Fast, was written by Peter Kovac. I used to work with Peter @ Madison Tyler (which merged with and became Virtu ~5-6 years ago). He's literally right on with his assessment. I should have mentioned that, excellent point.
- blibble 10y agorandom nearly constant periodic auctions would be how I would fix it something like the Turquoise Uncross: http://www.lseg.com/sites/default/files/content/documents/TURQUOISE_UNCROSS_FACTSHEET_2016_AW.pdf http://www.lseg.com/sites/default/files/content/documents/TU...
- kordless 10y agoElectronic arbitrage. Interesting, scalable with compute, and highly risky, if you aren't careful or fast enough.
- smallnamespace 10y agoNote that the key assumption for why losses are unlikely is that they make many independent trades that are each likely to be profitable. But in real markets, outside events can suddenly make many trades all fail at the same time. This is the same reason AAA tranches of CDOs got those high ratings -- you only lose money if many obligations fail at once, but that is extremely unlikely if you think they have low correlation with each another, which was historically the case. But in a market crash, all correlations will tend towards 1.
- cortesoft 10y agoYeah, the analysis in this article is not really answering the question of WHY they are profitable every day; in reality, it is just explaining the law of large numbers. The whole thing rests on the premise that the company makes a profit on 51% of the trades, a loss on 24%, and break even on 25%. It is easy to show from those assumptions that you will never have a losing day if you make enough trades. The REAL interesting question is "How do they make money on 51% of the trades they make, and are those results sustainable?"
- tptacek 10y agoIs this question as interesting as it might seem to someone unfamiliar with trading? Electronic trading firms do more than make markets, but stipulate that market-making is the sort of baseline approach they take to making money. Are you really asking "how do market makers make money on 51% of their trades"? Because that question is easy to answer; it's the premise of a market maker, whether done by a computer or by a person in a pit.
- cortesoft 10y agoI probably don't know enough about market making and trading to really say whether this question is interesting to people who are. My thinking, and why I found it interesting, is that the connotation behind showing that the company 'never has a losing day' because of the law of large numbers is that the company is taking practically no risk. I was trying to ask a question about that point; do these companies really have no risk? Are they basically printing money? I am sure the answer is no, because no company has zero risk. I want to know where the risk is, and I figured the answer to that question is answered by answering the 'how do they make money on 51% of their trades' question. That might not be the right question, but I don't think my question was equivalent to asking 'how do MARKET MAKERS make money on every trade', because traditional market makers (i.e. the stock exchanges) are not the same as HFTs. A stock exchange has inertia on its side to protect their profits; a competitor has to fight against the network effect to take them on. An HFT has none of that protection.
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- the_cat_kittles 10y agoto me this is a perfect example of how incredibly indifferent capitalism can be to creating value. no one is bad here, per se, but its useless as far as i can tell, and someone gets very very rich. nothing wrong with capitalism of course, but i feel the need to keep harping of the fact that it doesn't necessarily imply anything about value or desert. edit: every time i make a comment along these lines, its interesting to see... it seems like HN is split about 50/50 on this. is it that this point is trite? or that you disagree?
- baq 10y agoi'd say it is a bug of capitalism that HFT is a profitable line of business. it's easily fixed by taxing, but maybe it's already taxed properly, i don't know.
- vzcx 10y agoHFT is not necessarily a feature (nor a bug) of capitalism, although something you might recognize as capitalism is a prerequisite for the phenomenon, but of the fact that information sources and financial exchanges form a distributed system, i.e. one that is spread out across space and time. Of course, in the absence of markets altogether, we have no exchanges, no finance, and no HFT. But... Why do you see this as a problem to be fixed? Who does HFT harm besides those whose bottom lines they cut into: the big, fat, and slow dealers who wish they could drop a block anywhere and have it fill?
- aaronchall 10y agoTrading firms create value by providing liquidity. If they can buy low and sell high, they will be buying when there are relatively fewer other buyers, and sell when there are relatively few other sellers. This activity creates value for other people who want to trade in those circumstances. If no value was created, there would be no value to capture. And the prima facie evidence that they are creating value is that they are capturing value from willing market participants. This is fundamental economics.
- 10y ago
- infecto 10y agoI generally like HFT. I do not like front running or information advantages that have happened in the past. Spreads these days are the lowest in history. What many people fail to realize is that before electronic market makers (I almost want to eliminate the name HFT), people sat in between these trades. It was slow, inefficient and they took a larger spread on the trade.
- metaphorm 10y agothis seems contradictory to me. HFT is basically predicated on front-running information advantages. It wouldn't be profitable otherwise. maybe you can explain in more detail?
- infecto 10y agoApologies. What I am referring is some of the issues of the past. It has been a number of years but IIRC it was a NASDAQ data feed that cost a good chunk extra but gave you a time advantage. Thats what I am referring to, or the fact that at that same time certain exchanges were catering order types for their big clients and leaving those unpublished (also illegal).
- metaphorm 10y agothank you for clarifying
- tptacek 10y agoHFT is in basically no sense predicated on front-running. Front-running is an agency problem: it occurs, for instance, when you're trading on behalf of someone else, and before you execute their orders, you submit your own orders that benefit you at the expense of your client. The whole premise of the market is that people have informational advantages. They don't work without it. The point is that they aggregate the information of all the participants. You can call that, or anything else, "front-running", but that's a meaningless definition.
- 10y ago
- ealloc 10y agoSummary: -- Their trades are profitable f = 51% of the time, and they do N = 3 million trades per day. -- Their net profitability per day is thus (well approximated by) a normal random variable with a mean of f and a standard deviation of sqrt(f(1-f)/N), or 3e-4 -- The probability of this value being less than 50% is well approximated by norm.cdf(0.5, 0.51, sqrt(f(1-f)/3e6)) which gives 2.4e-263 In other words they only expect one loss per 10^263 days, which is much larger than the age of the universe. They are actually doing much worse than expected because they lost on one day.