6 ms·

New Revealing paper on High Frequency Trading

49 points by d4ft 16y ago

aresant 16y ago
Three most salient points of the paper offer an almost direct counter to HFT’s biggest critics: - HFT activity has no impact on market volatility and may event decrease it. - The authors find that there is no evidence of abusive front running. - HFT plays an important role in price efficiency and the price discovery process.
jayro 16y ago
Based on my experience building HFT systems and communicating with others doing HFT, the results of this study sound about right. HFT traders are essentially just market makers, meaning that they generally place orders on both sides of the market in an attempt to profit from short-term mean reversion.
- deleted 16y ago
  [deleted]
- cturner 16y ago
  HFT traders are essentially just market makers The systems you worked on may have fitted into both groups, but your grouping isn't quite right. High frequency trading is a broad term that encompasses anything that involves computerised algorithms interacting with a market, and with short position holding periods. MM is a set of strategies which generally requires HFT if you're to be competitive with it on electronic markets.
Eliezer 16y ago
Scientific papers about politically controversial topics that involve billions of dollars of money flowing around in firms that can potentially hire the author later, need to be taken with a grain of salt. A large grain of salt. Sad but true. You can't trust science papers about politically controversial, money-impregnated topics the way you can almost sorta sometimes trust science papers about completely noncontroversial topics. I have no particular reason to distrust the author or the paper. Only general reasons to distrust the topic.
- arethuza 16y ago
  Indeed, I wonder if anyone has done a literature survey to detect whether economics academics ever manage to state contrary conclusions to general market sentiments? For example, whether anyone was warning of the dangers of the pricing models used for CDOs etc. a few years back.
  - maigret 16y ago
    No time to make some search right now, but I remember a few people pretend having known and spoken about the CDO dangers a few years before the crisis. Roubini is one them, but there is still a discussion going on whether he really foresaw it. If you look at economic research in Europe, you'll see many other opinions, like about the importance of the state, or alternative economic models. You'll probably find studies against HFT also.
    - rdm70 16y ago
      There are a number of people who foresaw the problems brewing in the CDO market. The book "The Big Short" by Michael Lewis provides a detailed portrait of a number of them. As usual, even when someone knows that the generally accepted wisdom is bunk, no one listens. Another comment that comes to mind is from Warren Buffett, who famously called derivatives "weapons of financial mass destruction" years before the recent blow up.
      - yummyfajitas 16y ago
        While I completely agree that Burry foresaw the collapse of the housing bubble, Buffet didn't. Buffet never described derivatives as creating a housing bubble. Buffet's problem with derivatives is that they make accounting tricky and fraud easier. But have no fear! Moodys (which Buffet owns about 20% of) will distill the complex accounting down to a simple letter rating. If Moodys calls a derivative "AAA", you know it's safe. Snark aside, this was not a prediction of a housing bubble. CDO's did exactly what everyone thought they would do. They behaved like AAA securities for as long as the beliefs underlying them held true ("housing never goes down").
RiderOfGiraffes 16y ago
The only function of economic forecasting is to make astrology look respectable. -- J K Galbraith:
- yummyfajitas 16y ago
  What is the relevance of the quote? Near as I can tell, the article is not engaging in economic forecasting, they are simply looking at historical data. (Note: I haven't read all of the paper, so please correct me if the details involve forecasting.)
  - _grrr 16y ago
    I would agree. HFT strategies are unlikely to have anything to do with 'economic' forecasting - even in the short term. They are about order-book and micro-market dynamics.
  - RiderOfGiraffes 16y ago
    Part of the point is that it is looking at historical data, and that most academic economics results look at historical data, and historical data does not, for example (as I understand it), enable predictions of the crashes of 1929 or 2008. This paper is fundamentally talking about "normal" trading conditions, and the continuing danger is that results like this will be used to bolster the contention that HFT is in fact a good thing, whereas when the market crashes it might be an incredibly bad thing. I'm not saying it is or it isn't, I'm just saying that there seem to be a lot of assumptions that aren't being made explicit, those assumptions might not be valid, and when they're not valid, all predictions go out the window. Hence the quotation. I should add that perhaps this is no surprise. A claim I've seen made is that the information economists need to be accurate is fundamentally undiscoverable. Hence the article I lunk to earlier: http://news.ycombinator.com/item?id=1686077 http://news.ycombinator.com/item?id=1686077
vide0star 16y ago
There's a lot of FUD surrounding the topic of high frequency trading (lowercase). Much more important to stability and sanctity of markets is transparency and effective regulation. Traders by design are trained to find inefficiencies to exploit -- that's how they make money. If some traders have discovered that by having computers trade really quickly, they can get an edge - well, that's kind of the point of trading. I think this paper is right to point out that high frequency trading has little to no impact on the overall marketplace.
deleted 16y ago
[deleted]
msy 16y ago
At least in the abstract this study doesn't seem to differentiate between market making and more agressive HTF strategies, furthermore the firms involved and strategies they are running aren't listed. The potential bias in both these factors is enormous. Given there is significant empirical evidence that at least some HFT strategies have involved market manipulation and in one notable example, the temporary total destabilisation of the entire market I'm extremely dubious as to the origins and motivations behind this paper and the data used. That the author appears to run a high-freq quant fund hardly helps: http://www.linkedin.com/pub/jonathan-brogaard/22/b04/b60 http://www.linkedin.com/pub/jonathan-brogaard/22/b04/b60
- yummyfajitas 16y ago
  Given there is significant empirical evidence that at least some HFT strategies have involved market manipulation and in one notable example, the temporary total destabilisation of the entire market... [citation (or even a few google keywords) needed]
  - jbarham 16y ago
    Try these keywords: "flash crash" HFT
    - yummyfajitas 16y ago
      The first page of google results provides no empirical evidence that either HFT involves market manipulation or that HFT caused the flash crash. All it provides is speculation.
      - msy 16y ago
        Ask and ye shall receive. http://www.zerohedge.com/article/its-not-market-its-hft-crop-circle-crime-scene-further-evidence-quote-stuffing-manipulation- http://www.zerohedge.com/article/its-not-market-its-hft-crop... If detailed, fully sourced graphs, demonstrating deliberate use of quote stuffing to essentially jam markets isn't good enough for you I suggest you consider carefully your own bias.
VengefulCynic 16y ago
Let's assume for a second that the author is correct and that correctly-executed HFT systems are generally a non-issue. Even with that core assumption, there is still the significant question as to what happens HFT systems misbehave (either due to suboptimal algorithms, bugs or a lack of adhering to stock trading good practices), which is the allegation that NANEX makes (http://www.nanex.net/20100506/FlashCrashAnalysis_Intro.html http://www.nanex.net/20100506/FlashCrashAnalysis_Intro.html). Obviously, that isn't the subject matter that this paper is covering, but it definitely seems to be making an attempt to paint HFT as a Force for Good in the marketplace (or at least dispel attempts to paint it as a Bad Thing), and in my mind as a software developer, even more than impacts when things are Working As Intended, the bugs are what scare me.
elecengin 16y ago
The author makes use of a dataset of trades from major exchanges annotated with which parties were "HFT". Besides the definition of "HFT" being very unclear, deciding if a trade was executed by an HFT firm (even by what he defines as a HFT trader) is very hard to determine. The author utilizes the Market Participant ID (MPID) to try to determine the underlying firm for a trade, but this is not reliable. It is very common for many many firms to share a single MPID for "tier aggregation" since fees are calculated by MPID and the fees exchanges charge improve with higher volume. This means that many firms (HFT and not) can share a single identifier. Also, many large banks have a single MPID for all their flow, which may include HFT proprietary trading as well as non-HFT flow. He notes these flaws, but I am not sure he realizes how pervasive these arrangements are in the marketplace. Even if he was able to determine the underlying firm for each trade, there is no rolodex of HFT traders. The author makes a valiant attempt using firm websites and such, but this process is somewhat error prone.
deleted 16y ago
[deleted]
known 16y ago
Trading = Zero sum Investing != Zero sum

49 points by d4ft 16y ago

Three most salient points of the paper offer an almost direct counter to HFT’s biggest critics: - HFT activity has no impact on market volatility and may event decrease it. - The authors find that there is no evidence of abusive front running. - HFT plays an important role in price efficiency and the price discovery process.

jayro 16y ago

Based on my experience building HFT systems and communicating with others doing HFT, the results of this study sound about right. HFT traders are essentially just market makers, meaning that they generally place orders on both sides of the market in an attempt to profit from short-term mean reversion.

deleted 16y ago
[deleted]
cturner 16y ago
HFT traders are essentially just market makers The systems you worked on may have fitted into both groups, but your grouping isn't quite right. High frequency trading is a broad term that encompasses anything that involves computerised algorithms interacting with a market, and with short position holding periods. MM is a set of strategies which generally requires HFT if you're to be competitive with it on electronic markets.

Eliezer 16y ago

Scientific papers about politically controversial topics that involve billions of dollars of money flowing around in firms that can potentially hire the author later, need to be taken with a grain of salt. A large grain of salt. Sad but true. You can't trust science papers about politically controversial, money-impregnated topics the way you can almost sorta sometimes trust science papers about completely noncontroversial topics. I have no particular reason to distrust the author or the paper. Only general reasons to distrust the topic.

arethuza 16y ago
Indeed, I wonder if anyone has done a literature survey to detect whether economics academics ever manage to state contrary conclusions to general market sentiments? For example, whether anyone was warning of the dangers of the pricing models used for CDOs etc. a few years back.
- maigret 16y ago
  No time to make some search right now, but I remember a few people pretend having known and spoken about the CDO dangers a few years before the crisis. Roubini is one them, but there is still a discussion going on whether he really foresaw it. If you look at economic research in Europe, you'll see many other opinions, like about the importance of the state, or alternative economic models. You'll probably find studies against HFT also.
  - rdm70 16y ago
    There are a number of people who foresaw the problems brewing in the CDO market. The book "The Big Short" by Michael Lewis provides a detailed portrait of a number of them. As usual, even when someone knows that the generally accepted wisdom is bunk, no one listens. Another comment that comes to mind is from Warren Buffett, who famously called derivatives "weapons of financial mass destruction" years before the recent blow up.
    - yummyfajitas 16y ago
      While I completely agree that Burry foresaw the collapse of the housing bubble, Buffet didn't. Buffet never described derivatives as creating a housing bubble. Buffet's problem with derivatives is that they make accounting tricky and fraud easier. But have no fear! Moodys (which Buffet owns about 20% of) will distill the complex accounting down to a simple letter rating. If Moodys calls a derivative "AAA", you know it's safe. Snark aside, this was not a prediction of a housing bubble. CDO's did exactly what everyone thought they would do. They behaved like AAA securities for as long as the beliefs underlying them held true ("housing never goes down").

RiderOfGiraffes 16y ago

The only function of economic forecasting is to make astrology look respectable. -- J K Galbraith:

yummyfajitas 16y ago
What is the relevance of the quote? Near as I can tell, the article is not engaging in economic forecasting, they are simply looking at historical data. (Note: I haven't read all of the paper, so please correct me if the details involve forecasting.)
- _grrr 16y ago
  I would agree. HFT strategies are unlikely to have anything to do with 'economic' forecasting - even in the short term. They are about order-book and micro-market dynamics.
- RiderOfGiraffes 16y ago
  Part of the point is that it is looking at historical data, and that most academic economics results look at historical data, and historical data does not, for example (as I understand it), enable predictions of the crashes of 1929 or 2008. This paper is fundamentally talking about "normal" trading conditions, and the continuing danger is that results like this will be used to bolster the contention that HFT is in fact a good thing, whereas when the market crashes it might be an incredibly bad thing. I'm not saying it is or it isn't, I'm just saying that there seem to be a lot of assumptions that aren't being made explicit, those assumptions might not be valid, and when they're not valid, all predictions go out the window. Hence the quotation. I should add that perhaps this is no surprise. A claim I've seen made is that the information economists need to be accurate is fundamentally undiscoverable. Hence the article I lunk to earlier: http://news.ycombinator.com/item?id=1686077 http://news.ycombinator.com/item?id=1686077

vide0star 16y ago

There's a lot of FUD surrounding the topic of high frequency trading (lowercase). Much more important to stability and sanctity of markets is transparency and effective regulation. Traders by design are trained to find inefficiencies to exploit -- that's how they make money. If some traders have discovered that by having computers trade really quickly, they can get an edge - well, that's kind of the point of trading. I think this paper is right to point out that high frequency trading has little to no impact on the overall marketplace.

deleted 16y ago

[deleted]

msy 16y ago

At least in the abstract this study doesn't seem to differentiate between market making and more agressive HTF strategies, furthermore the firms involved and strategies they are running aren't listed. The potential bias in both these factors is enormous. Given there is significant empirical evidence that at least some HFT strategies have involved market manipulation and in one notable example, the temporary total destabilisation of the entire market I'm extremely dubious as to the origins and motivations behind this paper and the data used. That the author appears to run a high-freq quant fund hardly helps: http://www.linkedin.com/pub/jonathan-brogaard/22/b04/b60 http://www.linkedin.com/pub/jonathan-brogaard/22/b04/b60

yummyfajitas 16y ago
Given there is significant empirical evidence that at least some HFT strategies have involved market manipulation and in one notable example, the temporary total destabilisation of the entire market... [citation (or even a few google keywords) needed]
- jbarham 16y ago
  Try these keywords: "flash crash" HFT
  - yummyfajitas 16y ago
    The first page of google results provides no empirical evidence that either HFT involves market manipulation or that HFT caused the flash crash. All it provides is speculation.
    - msy 16y ago
      Ask and ye shall receive. http://www.zerohedge.com/article/its-not-market-its-hft-crop-circle-crime-scene-further-evidence-quote-stuffing-manipulation- http://www.zerohedge.com/article/its-not-market-its-hft-crop... If detailed, fully sourced graphs, demonstrating deliberate use of quote stuffing to essentially jam markets isn't good enough for you I suggest you consider carefully your own bias.

VengefulCynic 16y ago

Let's assume for a second that the author is correct and that correctly-executed HFT systems are generally a non-issue. Even with that core assumption, there is still the significant question as to what happens HFT systems misbehave (either due to suboptimal algorithms, bugs or a lack of adhering to stock trading good practices), which is the allegation that NANEX makes (http://www.nanex.net/20100506/FlashCrashAnalysis_Intro.html http://www.nanex.net/20100506/FlashCrashAnalysis_Intro.html). Obviously, that isn't the subject matter that this paper is covering, but it definitely seems to be making an attempt to paint HFT as a Force for Good in the marketplace (or at least dispel attempts to paint it as a Bad Thing), and in my mind as a software developer, even more than impacts when things are Working As Intended, the bugs are what scare me.

elecengin 16y ago

The author makes use of a dataset of trades from major exchanges annotated with which parties were "HFT". Besides the definition of "HFT" being very unclear, deciding if a trade was executed by an HFT firm (even by what he defines as a HFT trader) is very hard to determine. The author utilizes the Market Participant ID (MPID) to try to determine the underlying firm for a trade, but this is not reliable. It is very common for many many firms to share a single MPID for "tier aggregation" since fees are calculated by MPID and the fees exchanges charge improve with higher volume. This means that many firms (HFT and not) can share a single identifier. Also, many large banks have a single MPID for all their flow, which may include HFT proprietary trading as well as non-HFT flow. He notes these flaws, but I am not sure he realizes how pervasive these arrangements are in the marketplace. Even if he was able to determine the underlying firm for each trade, there is no rolodex of HFT traders. The author makes a valiant attempt using firm websites and such, but this process is somewhat error prone.

deleted 16y ago

[deleted]

known 16y ago

Trading = Zero sum Investing != Zero sum