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...actually it doesn't sound to me like this article is about HFT-based prop trading at all (prop trading would mean Goldman Sachs taking positions onto their o

...actually it doesn't sound to me like this article is about HFT-based prop trading at all (prop trading would mean Goldman Sachs taking positions onto their own books), but about the business unit called GSAT (Goldman Sachs algorithmic trading) who execute trades on behalf of clients, so never taking any positions onto their own books. The traditional market model used to be that at every point in time, a market maker would offer a price to buy/sell at. The bid would, of course, be lower than the ask, the difference being called the spread. When a pension fund wanted to execute a trade, they would have had to cross the spread, and, statistically speaking, half the spread would immediately accrue to the market maker as profit. ..so this is money that YOU, the holder of a pension, are losing, and that THEY, the rich folks acting as market makers that the public likes to get mad at, are taking away from you. The business model of GSAT is that a pension fund can ask Goldman Sachs to use algorithms to do things on their behalf that are less naive than what I just described above and end up giving less money to the market maker. For example, GSAT can become a market maker on your behalf, but make a market on only one side, i.e. only offer a price to buy at or only offer a price to sell at, with the resulting trades being executed on your behalf, so it is now you who makes money off those trades, in the same way as it would traditionally be a market maker's privilege to do. The public loves to get mad at Wall Street. But they should please get their facts straight about who the good guys are and who the bad guys are.

stillworks 7y ago
Have to agree. Catering to HFT shops was already in 100 microsecond latency a few years ago using commodity hardware and software (cannot speak of Goldman Sachs but another one of similar ilk, can't imagine GS were much far away if not even better)
- mieseratte 7y ago
  Worked in an HFT shop and we were down to optimizing nanoseconds. Lots of folks had war stories about spending months to shave off tens of nanoseconds off pieces used millions of times per day.
  - stillworks 7y ago
    Yep, I have heard such stories. "Folks" were FPGA engineers and one of their primary target was to be able to cache "stuff" in SRAM as much as possible as that is the part which yields nanosecond latency. My experience was more along the "man in the middle" setups which HFT shops used to hide their trading in the shorter term. The man in the middle got better prices at the exchange due to increased volumes and the HFT shop got a fairly good opportunity to hide it's activity for a short while. At a later stage at some venues, the HFT shop did not even need to route their orders via MITM, the MITM simply got a firehose of HFT's execution reports to reverse build the order books ! Smoke and mirrors...(and nonsense)
Traster 7y ago
> When a pension fund wanted to execute a trade, they would have had to cross the spread, and, statistically speaking, half the spread would immediately accrue to the market maker as profit. ..so this is money that YOU, the holder of a pension, are losing, and that THEY, the rich folks acting as market makers that the public likes to get mad at, are taking away from you. This is totally incorrect. Let's say a pension fund wants to sell 1000 shares of APPL. The bid is $99, the ask is $101. They sell to the bidders and get $99,000 (minus some fees to the exchange probably). Your pension scheme just successfully liquadated their position. At this point, contrary to what you say, the market maker has made 0 profit. What they've done, is taken a position in APPL which they think theoretically is profitable, but they aren't in the business of speculating on APPL. So now they have to hedge that risk by buying negatively correlated products and slowly trying to offload that position either by letting the market fill their offers on the ask, or hoping the bid improves. Once they have paid for their hedging and closed out their position according to their strategy over a period of time, whatever they have left is their profit. What you paid that market maker for was for taking on the risk of holding the product whilst spending time to offload it to the rest of the market. What GSAT do is say "Hey, don't sell this to the market, let us take care of that for you"- which is exactly the same service a market maker provides except they don't quote publicly, and in fact they probably do this by working with market makers.
- stakhanov 7y ago
  Don't start a reply with "this is totally incorrect", when you're merely pointing out a simplification or approximation. I was making a point about the business model of a proptrader marketmaker versus the business model of an algorithmically sophisticated broker and needed to establish some preliminaries and it would have served zero purpose to go into the particulars of the costs related to risk warehousing. Having worked for an equities highfrequency marketmaking business myself: Mark-to-market at mid-price is the benchmark that those traders will use for figuring out, at the end of the day/week/month, whether it was a good or a bad day/week/month, and at the end of the year for negotiating their bonuses, even when they are left holding some positions with uncertain future. Everybody knows that it's a simplification/approximation, but, due to the efficient markets hypothesis, it's a very good one. It's the kind of approximation where it's being taken for granted that people understand that it's not ACTUALLY the trader's profit. Because otherwise one would need to include in the discussion the fact that the receptionist at the proptrader marketmaker's office building is also a cost factor eating into their margins. I didn't mention the risk warehousing for the same reason I didn't mention the receptionist. And I'm not going to go into a rebuttal about how it's definitely not necessary to hedge every single trade, for the same reason: because it's not the topic under discussion here. It's called the "maxim of quantity" and it is a generally-accepted maxim of conversation. (see https://en.wikipedia.org/wiki/Cooperative_principle https://en.wikipedia.org/wiki/Cooperative_principle) Maxim of quantity: * Make your contribution as informative as is required (for the current purposes of the exchange). * Do not make your contribution more informative than is required. So, to conclude: Your conversational move in this language game was a pretty weak one. The sentence "this is totally incorrect" however sounds like someone trying to establish dominance. Weakness and trying to establish dominance is a bad combo.
FabHK 7y ago
Yes. Many people use "algorithmic trading" as a synonym for "automated trading" or even HFT, when it is used (in the industry) basically for "optimal execution, computer aided, of a client order".

stillworks 7y ago

Have to agree. Catering to HFT shops was already in 100 microsecond latency a few years ago using commodity hardware and software (cannot speak of Goldman Sachs but another one of similar ilk, can't imagine GS were much far away if not even better)

mieseratte 7y ago
Worked in an HFT shop and we were down to optimizing nanoseconds. Lots of folks had war stories about spending months to shave off tens of nanoseconds off pieces used millions of times per day.
- stillworks 7y ago
  Yep, I have heard such stories. "Folks" were FPGA engineers and one of their primary target was to be able to cache "stuff" in SRAM as much as possible as that is the part which yields nanosecond latency. My experience was more along the "man in the middle" setups which HFT shops used to hide their trading in the shorter term. The man in the middle got better prices at the exchange due to increased volumes and the HFT shop got a fairly good opportunity to hide it's activity for a short while. At a later stage at some venues, the HFT shop did not even need to route their orders via MITM, the MITM simply got a firehose of HFT's execution reports to reverse build the order books ! Smoke and mirrors...(and nonsense)

Traster 7y ago

> When a pension fund wanted to execute a trade, they would have had to cross the spread, and, statistically speaking, half the spread would immediately accrue to the market maker as profit. ..so this is money that YOU, the holder of a pension, are losing, and that THEY, the rich folks acting as market makers that the public likes to get mad at, are taking away from you. This is totally incorrect. Let's say a pension fund wants to sell 1000 shares of APPL. The bid is $99, the ask is $101. They sell to the bidders and get $99,000 (minus some fees to the exchange probably). Your pension scheme just successfully liquadated their position. At this point, contrary to what you say, the market maker has made 0 profit. What they've done, is taken a position in APPL which they think theoretically is profitable, but they aren't in the business of speculating on APPL. So now they have to hedge that risk by buying negatively correlated products and slowly trying to offload that position either by letting the market fill their offers on the ask, or hoping the bid improves. Once they have paid for their hedging and closed out their position according to their strategy over a period of time, whatever they have left is their profit. What you paid that market maker for was for taking on the risk of holding the product whilst spending time to offload it to the rest of the market. What GSAT do is say "Hey, don't sell this to the market, let us take care of that for you"- which is exactly the same service a market maker provides except they don't quote publicly, and in fact they probably do this by working with market makers.

stakhanov 7y ago
Don't start a reply with "this is totally incorrect", when you're merely pointing out a simplification or approximation. I was making a point about the business model of a proptrader marketmaker versus the business model of an algorithmically sophisticated broker and needed to establish some preliminaries and it would have served zero purpose to go into the particulars of the costs related to risk warehousing. Having worked for an equities highfrequency marketmaking business myself: Mark-to-market at mid-price is the benchmark that those traders will use for figuring out, at the end of the day/week/month, whether it was a good or a bad day/week/month, and at the end of the year for negotiating their bonuses, even when they are left holding some positions with uncertain future. Everybody knows that it's a simplification/approximation, but, due to the efficient markets hypothesis, it's a very good one. It's the kind of approximation where it's being taken for granted that people understand that it's not ACTUALLY the trader's profit. Because otherwise one would need to include in the discussion the fact that the receptionist at the proptrader marketmaker's office building is also a cost factor eating into their margins. I didn't mention the risk warehousing for the same reason I didn't mention the receptionist. And I'm not going to go into a rebuttal about how it's definitely not necessary to hedge every single trade, for the same reason: because it's not the topic under discussion here. It's called the "maxim of quantity" and it is a generally-accepted maxim of conversation. (see https://en.wikipedia.org/wiki/Cooperative_principle https://en.wikipedia.org/wiki/Cooperative_principle) Maxim of quantity: * Make your contribution as informative as is required (for the current purposes of the exchange). * Do not make your contribution more informative than is required. So, to conclude: Your conversational move in this language game was a pretty weak one. The sentence "this is totally incorrect" however sounds like someone trying to establish dominance. Weakness and trying to establish dominance is a bad combo.

FabHK 7y ago

Yes. Many people use "algorithmic trading" as a synonym for "automated trading" or even HFT, when it is used (in the industry) basically for "optimal execution, computer aided, of a client order".