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I'd say play around and see if you can predict the price - treat it like any machine learning/optimization problem - if you want to learn and have fun. If your

I'd say play around and see if you can predict the price - treat it like any machine learning/optimization problem - if you want to learn and have fun. If your goal is to make money, unfortunately it'll take a lot more. I've worked at a high frequency trading company, and now work at an algorithmic hedge fund, and you really need to scale horizontally to make money overall. There's a lot I can talk about but here are some points: - Most of the time you don't trade instruments in isolation. They are all correlated (even if inversely) one way or another , so movements in one will affect others. Having a myopic view of just one instrument will have too much unexplainable randomness. - The other way to scale is having more data inform your pricing - i.e. don't just look at the prices of one or more instruments. Look at twitter, look at weather reports, news etc. It kind of suggested that in the article. The meaningful movements in the market are most of the time due to truths outside of the price itself. - You have to decide whether you want to trade directionally and long term (like a hedge fund) and take on positions over time, or trade in and out of positions quickly (like high frequency trading firms) to minimize risk. You can be anywhere along that spectrum. The faster you are, the more myopic you can be and just react to current trading activity of other participants. The more long-term you are, the more you have to look at the big picture, more data, more instruments, making sure you have the right balance in your portfolio (whatever that means to you). I'd be happy to expand more :)

richardw 8y ago
Very interesting. No obligation but if you're bored feel free to expand!
- khold_stare 8y ago
  Sure! I'll just ramble a bit about HFTs. I'd say starting a "pure" HFT firm is incredibly hard nowadays. There's a big upfront investment and huge operating costs, and there's a lot of consolidation happening in the industry. In general, most hardware and software is tailored to high-throughput, and a huge part of the effort of HFT is fighting all that to prioritize latency. If you want to compete with the very best firms, that means renting rackspace in a colocation with the exchanges, overclocked CPUs, expensive network cards, FPGAs, paying out the nose for the most accurate market-data feeds, and many order-entry connections. Then you have to tweak the BIOS, kernel settings, isolate your processes on cores, write your own userspace networking stack etc. etc. etc. On top of that if you want to trade between different colocations, you might need a network of microwave towers because fiber is too slow (light travels about 2/3 slower in fiber because it effectively "bounces" along the fiber). At the end of the day though, if your algorithm or strategy doesn't work, you won't make any money - speed is only a part of it. At the previous firm, we had a market making desk that was very profitable, but was quite "slow" by HFT standards (triple digit microseconds vs sub-microsecond response times). You still need to be smart about it. Having said all that, I think HFT gets a bad rap, about being a waste of resources/talent, and somehow "stealing" from the common man. The truth is, they are only "stealing" from each other - they compete to remove the tiniest inefficiencies in pricing. They ensure the cost of trading is actually as low as it can possibly be. By themselves they don't have enough capital to move the market in any meaningful way. In fact, most flash crashes occur when HFT firms step out of the way! They move out of the way of huge market movements because they can't cushion the blow without taking an unnecessary risk as a business. It's like asking your plumber to fix your sink while your house is on fire. Market orders, stop orders and panic are most of the problem when it comes to flash crashes. PSA: Please use limit orders :) I might ruffle some feathers with the comments, but I think overall HFTs aren't the bogeyman most people think them to be. Sure there are some bad apples, but that's true of any industry, and it comes down to the people - not the system itself.
  - nodesocket 8y ago
    > At the previous firm, we had a market making desk that was very profitable Are you saying, it was guaranteed to make money? I.E. the algorithm never failed, or never made losing trades? That seems insane, to always be able to make money even if it's fractions of a percent.
    - khold_stare 8y ago
      This particular desk wasn't perfect - it had its ups and downs (there were definitely days where money was lost). Overall though it was profitable.
    - pc86 8y ago
      How does "very profitable" equate to "never made losing trades?" If you're only right 60% of the time you can still be profitable overall with proper risk management.
  - richardw 8y ago
    Thank you!
nodesocket 8y ago
Thanks for the great reply. Indeed I am interested in you expanding more. I've been a long-term "valueish" investor, following the preachings of Warren Buffett for over 15 years. My long-term portfolio is pretty well balanced, Apple, to banks, to Berkshire Hathaway, Amazon, Ford, AMD, and SPY. Recently, when the market got way overdone and oversold, I'd even call some of it panic selling with the bottoming happening Christmas Eve. I am curious how I can be more analytical, and data driven to make decisions during these events, rather than just gut feeling of panicking, negative news, and oversold conditions. Well I did add to my Apple position in this late December, I should have pulled the trigger more. I was somewhat conservative, missing the huge runup last month in January of most all stocks.
- khold_stare 8y ago
  I can give some advice, but you should take it with a grain of salt :) I have been more of an infrastructure guy, and building the platforms with quants/traders, and not really trading myself. I am also more familiar with HFT trades overall. I think you're on the right track regarding value investment, if you're thinking about it long-term, and it's for personal investments. Passive index funds like SPY are the best bet for most people. Finding companies or following trends you in particular have some insight on can also help. Things like "having worked in industry X, and having read their whitepapers, this new company is clearly overbought and is all marketing hype". If you want to get more analytical, look at portfolio theory, different hedging strategies, and try and find "alpha" - roughly meaning the extra factors explaining the price of an instrument that gives you an edge over others. Check out Quantopian - they have some nice articles too. The key is coming up with a model that accurately captures the risk of your assets which would allow you to properly allocate your money amongst them.

richardw 8y ago

Very interesting. No obligation but if you're bored feel free to expand!

khold_stare 8y ago
Sure! I'll just ramble a bit about HFTs. I'd say starting a "pure" HFT firm is incredibly hard nowadays. There's a big upfront investment and huge operating costs, and there's a lot of consolidation happening in the industry. In general, most hardware and software is tailored to high-throughput, and a huge part of the effort of HFT is fighting all that to prioritize latency. If you want to compete with the very best firms, that means renting rackspace in a colocation with the exchanges, overclocked CPUs, expensive network cards, FPGAs, paying out the nose for the most accurate market-data feeds, and many order-entry connections. Then you have to tweak the BIOS, kernel settings, isolate your processes on cores, write your own userspace networking stack etc. etc. etc. On top of that if you want to trade between different colocations, you might need a network of microwave towers because fiber is too slow (light travels about 2/3 slower in fiber because it effectively "bounces" along the fiber). At the end of the day though, if your algorithm or strategy doesn't work, you won't make any money - speed is only a part of it. At the previous firm, we had a market making desk that was very profitable, but was quite "slow" by HFT standards (triple digit microseconds vs sub-microsecond response times). You still need to be smart about it. Having said all that, I think HFT gets a bad rap, about being a waste of resources/talent, and somehow "stealing" from the common man. The truth is, they are only "stealing" from each other - they compete to remove the tiniest inefficiencies in pricing. They ensure the cost of trading is actually as low as it can possibly be. By themselves they don't have enough capital to move the market in any meaningful way. In fact, most flash crashes occur when HFT firms step out of the way! They move out of the way of huge market movements because they can't cushion the blow without taking an unnecessary risk as a business. It's like asking your plumber to fix your sink while your house is on fire. Market orders, stop orders and panic are most of the problem when it comes to flash crashes. PSA: Please use limit orders :) I might ruffle some feathers with the comments, but I think overall HFTs aren't the bogeyman most people think them to be. Sure there are some bad apples, but that's true of any industry, and it comes down to the people - not the system itself.
- nodesocket 8y ago
  > At the previous firm, we had a market making desk that was very profitable Are you saying, it was guaranteed to make money? I.E. the algorithm never failed, or never made losing trades? That seems insane, to always be able to make money even if it's fractions of a percent.
  - khold_stare 8y ago
    This particular desk wasn't perfect - it had its ups and downs (there were definitely days where money was lost). Overall though it was profitable.
  - pc86 8y ago
    How does "very profitable" equate to "never made losing trades?" If you're only right 60% of the time you can still be profitable overall with proper risk management.
- richardw 8y ago
  Thank you!

nodesocket 8y ago

Thanks for the great reply. Indeed I am interested in you expanding more. I've been a long-term "valueish" investor, following the preachings of Warren Buffett for over 15 years. My long-term portfolio is pretty well balanced, Apple, to banks, to Berkshire Hathaway, Amazon, Ford, AMD, and SPY. Recently, when the market got way overdone and oversold, I'd even call some of it panic selling with the bottoming happening Christmas Eve. I am curious how I can be more analytical, and data driven to make decisions during these events, rather than just gut feeling of panicking, negative news, and oversold conditions. Well I did add to my Apple position in this late December, I should have pulled the trigger more. I was somewhat conservative, missing the huge runup last month in January of most all stocks.

khold_stare 8y ago
I can give some advice, but you should take it with a grain of salt :) I have been more of an infrastructure guy, and building the platforms with quants/traders, and not really trading myself. I am also more familiar with HFT trades overall. I think you're on the right track regarding value investment, if you're thinking about it long-term, and it's for personal investments. Passive index funds like SPY are the best bet for most people. Finding companies or following trends you in particular have some insight on can also help. Things like "having worked in industry X, and having read their whitepapers, this new company is clearly overbought and is all marketing hype". If you want to get more analytical, look at portfolio theory, different hedging strategies, and try and find "alpha" - roughly meaning the extra factors explaining the price of an instrument that gives you an edge over others. Check out Quantopian - they have some nice articles too. The key is coming up with a model that accurately captures the risk of your assets which would allow you to properly allocate your money amongst them.