5 ms·

Can someone explain in simple terms why high-frequency trading actually works? I can't understand how trading at a high frequency provides any advantage at all

by ssp 16y ago

Can someone explain in simple terms why high-frequency trading actually works? I can't understand how trading at a high frequency provides any advantage at all, except in a Martingale-fallacy way.

deleted 16y ago
[deleted]
Elite 16y ago
Caveat, I'm not a finance guy, but my understanding is that on a short time scale you can predict the price direction of stocks under certain conditions. For example, if I notice that there are several large orders buying a stock, I can assume that a large institution is trying to purchase a position. If you reach this conclusion quickly enough, you can buy up enough stock, temporarily hiking the price, and selling the stock back to the large institution as they are trying to fulfill their purchase order. Do this enough times, and for large enough orders, and you can make money.
Dilpil 16y ago
Certain trades are obvious winners- index funds available for less than the sum of their component parts for example. Everyone on the street knows they are obvious winners, so usually the trade isn't available for long. Firms have computers set up to constantly scan the markets for these opportunities. Whoever sees the trade first and gets to the exchange first ends up making all the money.
- anonymousDan 16y ago
  But that sounds to me like it should be called low-latency trading, not high frequency?
  - sp332 16y ago
    Right so far :-) But the HFTs are not in the game for the long haul; they will immediately sell the stock to another investor, at a price between what the HFT paid for it and what the stock is worth to the other investors. That's why it's high-frequency trading. The buy and sell are almost synchronous.
davemabe 16y ago
Here's a very good presentation that describes what HFT is and how it works (and some of the myths): http://www.tradeworx.com/TWX-SEC-2010.pdf http://www.tradeworx.com/TWX-SEC-2010.pdf
- rchi 16y ago
  how does tradeworx compare to jane street capital?
megafotze 16y ago
10 buy N shares @ $0.011 20 sell 500 milliseconds later at $0.014 30 goto 10 well that's pretty much simplified. but the idea is to make profits from really small price differences very frequently. the hard part is to chose the right stock and do the trade fast enough. the first part is solved by supposedly smart algorithms (the guys who invent those algorithm are called quants because ... well ... the first guys who started HFT were ex quantum physicists. nowadays the term got coined to quantitative analyst) the 2nd part of the problem is the execution of a trade in the lowest possible time span. that's where our coder guys come in - they implement the algorithms and trade stuff and make their software as fast as possible. if you ask me this is all big bull shit. it's like a high speed rand() - one time you get lucky one time you don't. and the $100k day/profit is an average. you don't know how large their trade volume is (I guess it's way more than $100k - way way more). so on one day in a year they might hit the jackpot and their rand() chose the right stock at the right time and make like $50 mio and then the rest of the year they only hit shit losing $20 mio. at the end they made $100k/day ...
clistctrl 16y ago
I believe at a certain scale the markets actually pay a fraction of a cent per trade to encourage liquidity.
silverlake 16y ago
It's not a Martingale system because at very short time-frames traders can predict price movements much better than 50%. I think the fancy term is statistical arbitrage.
deleted 16y ago
[deleted]
- yummyfajitas 16y ago
  Utterly and completely wrong. The exchanges are not allowed to fill a sell order at $9.99 with a buy at $9.99 if there is a public buy order for $10.00 on another network - that would violate RegNMS. This is called "crossed markets" and no trades can occur in this situation.

by ssp 16y ago

Can someone explain in simple terms why high-frequency trading actually works? I can't understand how trading at a high frequency provides any advantage at all, except in a Martingale-fallacy way.

deleted 16y ago

[deleted]

Elite 16y ago

Caveat, I'm not a finance guy, but my understanding is that on a short time scale you can predict the price direction of stocks under certain conditions. For example, if I notice that there are several large orders buying a stock, I can assume that a large institution is trying to purchase a position. If you reach this conclusion quickly enough, you can buy up enough stock, temporarily hiking the price, and selling the stock back to the large institution as they are trying to fulfill their purchase order. Do this enough times, and for large enough orders, and you can make money.

Dilpil 16y ago

Certain trades are obvious winners- index funds available for less than the sum of their component parts for example. Everyone on the street knows they are obvious winners, so usually the trade isn't available for long. Firms have computers set up to constantly scan the markets for these opportunities. Whoever sees the trade first and gets to the exchange first ends up making all the money.

anonymousDan 16y ago
But that sounds to me like it should be called low-latency trading, not high frequency?
- sp332 16y ago
  Right so far :-) But the HFTs are not in the game for the long haul; they will immediately sell the stock to another investor, at a price between what the HFT paid for it and what the stock is worth to the other investors. That's why it's high-frequency trading. The buy and sell are almost synchronous.

davemabe 16y ago

Here's a very good presentation that describes what HFT is and how it works (and some of the myths): http://www.tradeworx.com/TWX-SEC-2010.pdf http://www.tradeworx.com/TWX-SEC-2010.pdf

rchi 16y ago
how does tradeworx compare to jane street capital?

megafotze 16y ago

10 buy N shares @ $0.011 20 sell 500 milliseconds later at $0.014 30 goto 10 well that's pretty much simplified. but the idea is to make profits from really small price differences very frequently. the hard part is to chose the right stock and do the trade fast enough. the first part is solved by supposedly smart algorithms (the guys who invent those algorithm are called quants because ... well ... the first guys who started HFT were ex quantum physicists. nowadays the term got coined to quantitative analyst) the 2nd part of the problem is the execution of a trade in the lowest possible time span. that's where our coder guys come in - they implement the algorithms and trade stuff and make their software as fast as possible. if you ask me this is all big bull shit. it's like a high speed rand() - one time you get lucky one time you don't. and the $100k day/profit is an average. you don't know how large their trade volume is (I guess it's way more than $100k - way way more). so on one day in a year they might hit the jackpot and their rand() chose the right stock at the right time and make like $50 mio and then the rest of the year they only hit shit losing $20 mio. at the end they made $100k/day ...

clistctrl 16y ago

I believe at a certain scale the markets actually pay a fraction of a cent per trade to encourage liquidity.

silverlake 16y ago

It's not a Martingale system because at very short time-frames traders can predict price movements much better than 50%. I think the fancy term is statistical arbitrage.

deleted 16y ago

[deleted]

yummyfajitas 16y ago
Utterly and completely wrong. The exchanges are not allowed to fill a sell order at $9.99 with a buy at $9.99 if there is a public buy order for $10.00 on another network - that would violate RegNMS. This is called "crossed markets" and no trades can occur in this situation.