6 ms·

Machines took over finance a long long time ago. The big firms like Renaissance and D.E. Shaw that ushered us into that age were all largely founded in the 80/9

Machines took over finance a long long time ago. The big firms like Renaissance and D.E. Shaw that ushered us into that age were all largely founded in the 80/90's.

koheripbal 7y ago
yeah, this article lacks any material substance.
- devicetray0 7y ago
  I'd recommend "Flash Boys: A Wall Street Revolt" for more substance
  - mruts 7y ago
    I don’t. As someone in the industry, almost nothing in that book is actually correct. Moreover, HFT is a very small part of the industry and is not particularly profitable. Quantitative investing as a whole is becoming more and more popular, while HFT isn’t.
    - chrisweekly 7y ago
      As someone in the industry, you're also unavoidably biased. This isn't snark or accusation, just a factual observation.
      - tigerBL00D 7y ago
        Someone in the industry might just have a slightly better idea of what's really going on and that's largely what HN is about.
      - onaraft 7y ago
        Another factual observation is to look at Virtu's recent earnings numbers. They're basically pivoting as hard as they can to get out of speed-based HFT and into execution services, because the profitability of the former is cratering.
        rb808 7y ago
        Yeah Virtu's market cap is about the same as Groupon. I hardly doubt they're emptying the pockets of every American here.
  - brobinson 7y ago
    See also (as a rebuttal): "Flash Boys: Not So Fast"
    - bostik 7y ago
      A much more entertaining and informative book than it's title or pedigree would hint at. Genuinely recommended reading. One of the most surprising details in the whole book was the trading system devised by the biggest HFT-complainer, "Thor". And not even the system itself. Trading firms have to connect to practically all the exchanges, because they need the ability to send in orders directly to one of them. In trading, adverse selection is a thing - if an institutional trader sends in a big order, liquidity providers (HFT firms) can get hammered pretty badly. So when someone is buying or selling in one exchange, the HFT shops will adjust (read: pull) their quotes on other exchanges before the same executions would hit them there as well. The basic assumption of a liquidity provider can be summed up as: if someone is executing trades, they must know something more; the prices currently on offer are clearly wrong. Pull quotes before things get expensive. Thor wasn't exactly an optimisation engine, it was more a synchronisation engine. It kept track of transmission latencies across all the exchanges and could coordinate order creation times to such a degree that the orders that it wanted executed would land in all the exchanges at almost exactly the same time. This would allow it to execute its orders on all the exchanges at the prices available at that very time, without giving HFT firms the time to communicate across exchanges to pull their quotes. If I remember correctly, even the book used the term "slam" for the behaviour. Thor used a strategy that any half-decent engineer should come up with in less than 5 minutes. But it was considered unfair by all the other market participants. The book didn't tell much more about Thor, other than that its use was discontinued shortly afterwards. Rather amusing, nonetheless.
  - bryanwb 7y ago
    that book is garbage
    - mrfredward 7y ago
      As someone who enjoys a lot of Michael Lewis's books, I completely agree. The arguments and explanations throughout make no sense, because it's a lot motivated reasoning trying to justify a false narrative.
      - BubRoss 7y ago
        It all made perfect sense to me. I'm not sure why people get so upset about it. I suspect people can't tell the difference between the arbitrage that will happen no matter what (Chicago to New York, etc.) with the front running that came from seeing orders too large for one exchange and buying the rest from the other exchanges so they could sell it to the original buyer.
        mruts 7y ago
        I mean that part is true and is exactly how markets are supposed to work, but the conclusions he draws are just bizarre. He makes the argument that HFT is the classic story of the fat cats stealing even more money from the little guys. But it couldn't be further from the truth. HFT's are helping the retail investors and actually "stealing" from the "fat cats" (institutional investors). Retail trading is now cheaper (free in a lot of cases), easier, and faster today than it has ever been, largely due to HFT firms and low-latency liquidity providing strategies. Also the ETF revolution and the massive democratization of financial asset classes and strategies is entirely predicated on HFT arbitrageurs. But Lewis realized that the idea of HFT actually helping the little guys and hurting the big guys wouldn't be as sensationalist and provocative a story, so he decided to twist the facts to suit his own narrative.
        rapind 7y ago
        Wait so you're saying that trade sniping is good for more than just the handful doing it because side effects? I've heard this pro-HFT argument before and always assumed it was biased BS.
- Bubbadoo 7y ago
  Absolutely.
nightski 7y ago
A few players using them effectively is different than 30-60% of the market being run by algorithms. Granted I can't read much of the article because it is behind a paywall which seems to be very common on HN.
- pmart123 7y ago
  You have to account for the fact that a lot of the algorithmic volume is due to ETF arbitrage. We now have more ETFs than stocks in the US by a wide margin, and each new ETF likely creates another trading opportunity. There are also a lot of factor and smart beta strategies now, which I would classify as more systematic, but these could distort the market more than arb strategies.
  - cmroanirgo 7y ago
    Not disagreeing with you, but the arbitrage generally lasts only for a few ms, which makes the article's comment incorrect: "Visit a trading floor today and you will hear the hum of servers" In my experience, the machines doing the actual trades are as close as possible to the exchange, generally inside. What's in the trading floor are the client and ML programs that issue the strategies. That said, I've been away from the industry for a few years and it might have changed.
- bduerst 7y ago
  >Granted I can't read much of the article because it is behind a paywall which seems to be very common on HN. https://outline.com/nGrnKy https://outline.com/nGrnKy
  - nyolfen 7y ago
    https://github.com/iamadamdev/bypass-paywalls-firefox https://github.com/iamadamdev/bypass-paywalls-firefox
    - rosege 7y ago
      Thanks this looks good
mruts 7y ago
Yes, but they weren’t the dominant paradigm. The major push toward automation for both the buy and sell-side came after the crash of 2007/2008. Moreover, very few funds pursue completely automated strategies. Quantitative giants like DE Shaw, Bridgewater, and Jane Street still execute large amount of discretionary human trades. Of course these trades are informed by models to a large degree, but if that’s the definition of automation, the markets have been automated for over 50 years.
- lawrenceyan 7y ago
  I assure you, stock markets stopped being led by human trading long before 2007/2008.
  - mruts 7y ago
    I assure, as someone who worked alongside of traders and had access to hundreds of hedge fund portfolios, that you are wrong.
    - JackFr 7y ago
      In one sense you both are right. When a portfolio manager puts in a large block trade, its been common for a long time for execution management systems to optimally handle the execution, by breaking the trade into smaller pieces of varying size, at various prices over a period of time, to try to get the best execution possible. Proprietary systems have been built which are very good at that. So while the gross holdings of a fund might be set by a human, the executions likely are handled by software.
    - Bubbadoo 7y ago
      Having worked on an Equity Derivatives desk for a time, I can tell you much of the exchanges' trade volume--as early as 1990--was from DOT (program trading) and super-DOT executions. Monthly volume leaders included Susquehanna Partners, who did almost all of it's transactions via computer (DOT) trades. Late 90s and early 2000s saw the rise of the Swaps market where one deal could generate literally tens of thousands of transactions. It wasn't Bud Fox with a Quotron and a phone doing those executions.

Machines took over finance a long long time ago. The big firms like Renaissance and D.E. Shaw that ushered us into that age were all largely founded in the 80/90's.

koheripbal 7y ago

yeah, this article lacks any material substance.

devicetray0 7y ago
I'd recommend "Flash Boys: A Wall Street Revolt" for more substance
- mruts 7y ago
  I don’t. As someone in the industry, almost nothing in that book is actually correct. Moreover, HFT is a very small part of the industry and is not particularly profitable. Quantitative investing as a whole is becoming more and more popular, while HFT isn’t.
  - chrisweekly 7y ago
    As someone in the industry, you're also unavoidably biased. This isn't snark or accusation, just a factual observation.
    - tigerBL00D 7y ago
      Someone in the industry might just have a slightly better idea of what's really going on and that's largely what HN is about.
    - onaraft 7y ago
      Another factual observation is to look at Virtu's recent earnings numbers. They're basically pivoting as hard as they can to get out of speed-based HFT and into execution services, because the profitability of the former is cratering.
      - rb808 7y ago
        Yeah Virtu's market cap is about the same as Groupon. I hardly doubt they're emptying the pockets of every American here.
- brobinson 7y ago
  See also (as a rebuttal): "Flash Boys: Not So Fast"
  - bostik 7y ago
    A much more entertaining and informative book than it's title or pedigree would hint at. Genuinely recommended reading. One of the most surprising details in the whole book was the trading system devised by the biggest HFT-complainer, "Thor". And not even the system itself. Trading firms have to connect to practically all the exchanges, because they need the ability to send in orders directly to one of them. In trading, adverse selection is a thing - if an institutional trader sends in a big order, liquidity providers (HFT firms) can get hammered pretty badly. So when someone is buying or selling in one exchange, the HFT shops will adjust (read: pull) their quotes on other exchanges before the same executions would hit them there as well. The basic assumption of a liquidity provider can be summed up as: if someone is executing trades, they must know something more; the prices currently on offer are clearly wrong. Pull quotes before things get expensive. Thor wasn't exactly an optimisation engine, it was more a synchronisation engine. It kept track of transmission latencies across all the exchanges and could coordinate order creation times to such a degree that the orders that it wanted executed would land in all the exchanges at almost exactly the same time. This would allow it to execute its orders on all the exchanges at the prices available at that very time, without giving HFT firms the time to communicate across exchanges to pull their quotes. If I remember correctly, even the book used the term "slam" for the behaviour. Thor used a strategy that any half-decent engineer should come up with in less than 5 minutes. But it was considered unfair by all the other market participants. The book didn't tell much more about Thor, other than that its use was discontinued shortly afterwards. Rather amusing, nonetheless.
- bryanwb 7y ago
  that book is garbage
  - mrfredward 7y ago
    As someone who enjoys a lot of Michael Lewis's books, I completely agree. The arguments and explanations throughout make no sense, because it's a lot motivated reasoning trying to justify a false narrative.
    - BubRoss 7y ago
      It all made perfect sense to me. I'm not sure why people get so upset about it. I suspect people can't tell the difference between the arbitrage that will happen no matter what (Chicago to New York, etc.) with the front running that came from seeing orders too large for one exchange and buying the rest from the other exchanges so they could sell it to the original buyer.
      - mruts 7y ago
        I mean that part is true and is exactly how markets are supposed to work, but the conclusions he draws are just bizarre. He makes the argument that HFT is the classic story of the fat cats stealing even more money from the little guys. But it couldn't be further from the truth. HFT's are helping the retail investors and actually "stealing" from the "fat cats" (institutional investors). Retail trading is now cheaper (free in a lot of cases), easier, and faster today than it has ever been, largely due to HFT firms and low-latency liquidity providing strategies. Also the ETF revolution and the massive democratization of financial asset classes and strategies is entirely predicated on HFT arbitrageurs. But Lewis realized that the idea of HFT actually helping the little guys and hurting the big guys wouldn't be as sensationalist and provocative a story, so he decided to twist the facts to suit his own narrative.
        rapind 7y ago
        Wait so you're saying that trade sniping is good for more than just the handful doing it because side effects? I've heard this pro-HFT argument before and always assumed it was biased BS.
Bubbadoo 7y ago
Absolutely.

nightski 7y ago

A few players using them effectively is different than 30-60% of the market being run by algorithms. Granted I can't read much of the article because it is behind a paywall which seems to be very common on HN.

pmart123 7y ago
You have to account for the fact that a lot of the algorithmic volume is due to ETF arbitrage. We now have more ETFs than stocks in the US by a wide margin, and each new ETF likely creates another trading opportunity. There are also a lot of factor and smart beta strategies now, which I would classify as more systematic, but these could distort the market more than arb strategies.
- cmroanirgo 7y ago
  Not disagreeing with you, but the arbitrage generally lasts only for a few ms, which makes the article's comment incorrect: "Visit a trading floor today and you will hear the hum of servers" In my experience, the machines doing the actual trades are as close as possible to the exchange, generally inside. What's in the trading floor are the client and ML programs that issue the strategies. That said, I've been away from the industry for a few years and it might have changed.
bduerst 7y ago
>Granted I can't read much of the article because it is behind a paywall which seems to be very common on HN. https://outline.com/nGrnKy https://outline.com/nGrnKy
- nyolfen 7y ago
  https://github.com/iamadamdev/bypass-paywalls-firefox https://github.com/iamadamdev/bypass-paywalls-firefox
  - rosege 7y ago
    Thanks this looks good

mruts 7y ago

Yes, but they weren’t the dominant paradigm. The major push toward automation for both the buy and sell-side came after the crash of 2007/2008. Moreover, very few funds pursue completely automated strategies. Quantitative giants like DE Shaw, Bridgewater, and Jane Street still execute large amount of discretionary human trades. Of course these trades are informed by models to a large degree, but if that’s the definition of automation, the markets have been automated for over 50 years.

lawrenceyan 7y ago
I assure you, stock markets stopped being led by human trading long before 2007/2008.
- mruts 7y ago
  I assure, as someone who worked alongside of traders and had access to hundreds of hedge fund portfolios, that you are wrong.
  - JackFr 7y ago
    In one sense you both are right. When a portfolio manager puts in a large block trade, its been common for a long time for execution management systems to optimally handle the execution, by breaking the trade into smaller pieces of varying size, at various prices over a period of time, to try to get the best execution possible. Proprietary systems have been built which are very good at that. So while the gross holdings of a fund might be set by a human, the executions likely are handled by software.
  - Bubbadoo 7y ago
    Having worked on an Equity Derivatives desk for a time, I can tell you much of the exchanges' trade volume--as early as 1990--was from DOT (program trading) and super-DOT executions. Monthly volume leaders included Susquehanna Partners, who did almost all of it's transactions via computer (DOT) trades. Late 90s and early 2000s saw the rise of the Swaps market where one deal could generate literally tens of thousands of transactions. It wasn't Bud Fox with a Quotron and a phone doing those executions.