5 ms·

Absolutely terrible blog post. Saying algorithmic trading isn't HFT is like saying a bird isn't an ostrich. HFT is a subset of algorithmic trading. It's as s

Absolutely terrible blog post. Saying algorithmic trading isn't HFT is like saying a bird isn't an ostrich. HFT is a subset of algorithmic trading. It's as simple as that. Not all algorithmic trading is HFT. But all HFT is algorithmic trading. Algorithmic trading is any type of trading done based on an algorithm, and not based on "traditional investing principles". For example, "buy when the 10-day moving average crosses over the 20-day MA, and sell when the 10-day it crosses below 20-day". One of the most famous types of this is Richard Dennis and the Turtle Traders, where a successful commodities trader took a bunch of ordinary people and tried to turn them into traders using this method. I'm also an algorithmic trader. Not a wildly successful algorithmic trader yet, but I'm still learning and growing, and I love it more than any programming venture I've ever been involved with. And I haven't taken a catastrophic loss yet, so that's good. I trade on 3 separate markets using different algorithms, and for the most part it is fully automated. I'll hold futures contracts anywhere from 1 seconds to 20 mins. HFT is several orders of magnitude more intense. For the most part, they are types of arbitrage, where they can arbitrage a few cents worth of difference in stock prices between different markets, and make a few pennies per 1000 shares. Or they will arbitrage between the price of an ETF or futures contract and the underlying basket of stocks that it represents. These are the ones that need colocation and trade on the millisecond. The more nefarious ones are the ones that game the system, by "quote stuffing", by frontrunning large orders by institutions, or by creating volatility through momentum-trading. Is there a downside to algorithmic trading? Sure. Algorithmic trading is what has turned the stock market from a predictive market of future earnings, into essentially a casino, where the predictive nature of the markets is completely dead. Instead, it's about thousands of computers running random number generators and picking up nickels every 10 ms. This is why I believe there will be market crashes every 7-10 years, and long term investing is dead. But unfortunately, this is the reality of the system that we live in, and we have to adapt or die. Or you can just buy bonds and get a stable 3-5% return every year, which is nothing to shake a stick at.

eru 15y ago
If nobody were investing long term any longer, wouldn't there be less money in the system, and thus it would be relatively cheap to buy and hold?
- steve8918 15y ago
  Not sure exactly what you're asking, but the fact is that trading has been drying up. Since 2007, volume has plummeted, and August I believe was one of the worst, if not the worst, month for people withdrawing from mutual funds. Less and less retail are staying in the markets because of the volatility. So I don't know if it will get cheaper to buy and hold. It will definitely get more volatile.
  - eru 15y ago
    If the increased volatility is driving people out of the market, people who don't mind the volatility should profit, shouldn't they?
    - ovi256 15y ago
      Exactly, until their counterparts are all gone and they're left moving hot potatoes among themselves.
      - eru 15y ago
        Why? Warren Buffet doesn't need a counterpart after he buys a stock.
flourpower 15y ago
What evidence do you have that the stock prices have recently become less predictive of future earnings? Was the market performing its predictive duty in, for instance, September of 1929?
- steve8918 15y ago
  Previously the vast majority of investors were buy and hold, where they believed in companies and that their earnings would increase. Of course, there were always traders like Jesse Livermore that traded off of order flow, but those were the minority. Most were like Warren Buffett where buying and holding was for the best. Now the majority of trades are done by algorithms with no biases at all towards the earnings growth of a company, be it HFT, or statistical arbitrage, or through other quantitative models. HFT accounts for 75% of daily volume, and by definition, HFT does not take into consideration things like future earnings growth, etc. For the most part, they simply find arbitrage opportunities and profit from them. So stocks being bought and sold are not done based on the earnings potential of a company. Case in point, Citigroup before the reverse split was trading hundreds of millions of shares per day, not because so many people believed in the company, but because it was dominated by rebate traders, HFT, day traders, etc. I believe companies like Fannie Mae and Freddie Mac were trading millions of shares before they went pink slip, even though it was known that they were defunct.
  - flourpower 15y ago
    You're talking about volume, not price. Increased volume should, if a market is performing "properly", accompany new information. If there's new information, there's a reason to trade. The examples you cited seem like evidence of the stock market's predictive value - for instance, increased volume in Citi stock was a piece of evidence that something about the security was expected to change. Moreover, it's not true to say that stat-arb guys don't care about future earnings growth - they just use statistical methods to project it. To use a simplified example, a stat-arb guy might automatically buy shares in some small-cap automotive supplier if Ford rapidly increases in price. If the increase in Ford stock represents positive fundamental information about the auto industry, they've applied that information to the price of the supplier faster than a human would have and they'd make a profit. If, on the other hand, it represents concern about some scandal involving the Ford CEO, they've contributed to the noise and lost money.

eru 15y ago

If nobody were investing long term any longer, wouldn't there be less money in the system, and thus it would be relatively cheap to buy and hold?

steve8918 15y ago
Not sure exactly what you're asking, but the fact is that trading has been drying up. Since 2007, volume has plummeted, and August I believe was one of the worst, if not the worst, month for people withdrawing from mutual funds. Less and less retail are staying in the markets because of the volatility. So I don't know if it will get cheaper to buy and hold. It will definitely get more volatile.
- eru 15y ago
  If the increased volatility is driving people out of the market, people who don't mind the volatility should profit, shouldn't they?
  - ovi256 15y ago
    Exactly, until their counterparts are all gone and they're left moving hot potatoes among themselves.
    - eru 15y ago
      Why? Warren Buffet doesn't need a counterpart after he buys a stock.

flourpower 15y ago

What evidence do you have that the stock prices have recently become less predictive of future earnings? Was the market performing its predictive duty in, for instance, September of 1929?

steve8918 15y ago
Previously the vast majority of investors were buy and hold, where they believed in companies and that their earnings would increase. Of course, there were always traders like Jesse Livermore that traded off of order flow, but those were the minority. Most were like Warren Buffett where buying and holding was for the best. Now the majority of trades are done by algorithms with no biases at all towards the earnings growth of a company, be it HFT, or statistical arbitrage, or through other quantitative models. HFT accounts for 75% of daily volume, and by definition, HFT does not take into consideration things like future earnings growth, etc. For the most part, they simply find arbitrage opportunities and profit from them. So stocks being bought and sold are not done based on the earnings potential of a company. Case in point, Citigroup before the reverse split was trading hundreds of millions of shares per day, not because so many people believed in the company, but because it was dominated by rebate traders, HFT, day traders, etc. I believe companies like Fannie Mae and Freddie Mac were trading millions of shares before they went pink slip, even though it was known that they were defunct.
- flourpower 15y ago
  You're talking about volume, not price. Increased volume should, if a market is performing "properly", accompany new information. If there's new information, there's a reason to trade. The examples you cited seem like evidence of the stock market's predictive value - for instance, increased volume in Citi stock was a piece of evidence that something about the security was expected to change. Moreover, it's not true to say that stat-arb guys don't care about future earnings growth - they just use statistical methods to project it. To use a simplified example, a stat-arb guy might automatically buy shares in some small-cap automotive supplier if Ford rapidly increases in price. If the increase in Ford stock represents positive fundamental information about the auto industry, they've applied that information to the price of the supplier faster than a human would have and they'd make a profit. If, on the other hand, it represents concern about some scandal involving the Ford CEO, they've contributed to the noise and lost money.