9 ms·

The rise of high frequency trading - graphic animation

42 points by usedtolurk 14y ago

jcc80 14y ago
What an amazing GIF. They way the colors work out it reminds me of a fire that smoldered for awhile and then woke up in late 2008.
amirmansour 14y ago
What graphing library or tool was used to make these charts?
- aerique 14y ago
  By the looks of it I'm guessing gnuplot. Here's some other graphs generated by gnuplot from when I still played EVE: http://imgur.com/vsNoH http://imgur.com/vsNoH & http://imgur.com/2pleo http://imgur.com/2pleo
maybesofast 14y ago
Wow, huge gif hotlinked from imgur with 5TB of used bandwidth.
Variance 14y ago
This is an excellent graphic, but the author has a strong stance against HFT (such as the pages he links to about high frequency quoting) that readers should moderate with an understanding of what HFT does in an ideal economic context--the "purpose" of HFT. At the level of HFT, the decisions being made are too fast and frequent to be based on the fundamentals of the stocks being traded. Instead, algorithms are used to make trades based on "technical" analysis rather than analysis of fundamentals--technical analysis predicts how stocks will move based only on past movement, not on underlying reasons. In some cases, this movement is movement that happened only seconds, or milliseconds earlier. In a market with no HFT, say that there's a stock where a large sale is made by some investor, driving price quotes down a few cents; and then a second later, another investor buys a large share, pushing prices up again to where they were before. This behavior makes stock charts jagged and gives a certain volatility to prices. Now, imagine that you could algorithmically predict when a price is likely to go down and then up again in cases like that, and so you could make a profit by buying low knowing that the stock price will be back up again one second into the future. You buy stock to capitalize on this, and if you buy as much stock as you profitably can, you'll essentially drive the price back up to where it will be after the original "correction". You end up correcting the price before the other investor does; and if your response time to the first investor's sale is fast enough, the time when the stock is underpriced will be reduced by you quickly buying. This stabilizes prices, smoothing out the curves, and stable prices are valued in the market. People are willing to pay money for stability, even at those small levels; and that amount of money is what HFT is designed to capture. HFT also makes a benefit by being "first" on finding the right price through its algorithmic clairvoyance. Sometimes, obviously, the use of these algos goes wrong. You get a flash crash with a death by ten billion cuts as the market moves to smooth in some incorrect way. But HFT is not all bad, and considering how much there is, it's impressive that it works as well as it usually does. The incidents you hear about are just like plane crashes; just because planes crash sometimes and it's big news doesn't mean that air travel isn't safer per mile than car travel. Similarly, HFT has a powerful smoothing ability that it capitalizes on (among other things that it does--but smoothing is one of its largest abilities), and most people who oppose it don't realize how essential price stability is to the market at those levels given how much non-HFT trading volume goes on these days.
- Seanambers 14y ago
  There is nothing efficient about HFT's. It's all leveraged money used to extract a profit from the market in ways that in their very nature is anti competetive. If there ever were a positive side to HFT is was passed a long time ago.
- brazzy 14y ago
  I think you missed the main point of the article: that the activity of HFT algorithms overwhelmingly takes the form of quotes that never lead to trades and only serve to manipulate prices or create an information asymmetry.
  - Variance 14y ago
    See the excellent comments on this at [1] and [2]. The stuff that HFT currently does can't really cause anything too disingenuous. [1]http://news.ycombinator.com/item?id=4395986 http://news.ycombinator.com/item?id=4395986 [2]http://news.ycombinator.com/item?id=4395834 http://news.ycombinator.com/item?id=4395834
- jamii 14y ago
  > Sometimes, obviously, the use of these algos goes wrong. You get a flash crash with a death by ten billion cuts as the market moves to smooth in some incorrect way. I learned recently that there have been many similar crashes throughout history, well before even the invention of computers eg http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929 http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929 http://en.wikipedia.org/wiki/Black_Monday_%281987%29 http://en.wikipedia.org/wiki/Black_Monday_%281987%29 http://en.wikipedia.org/wiki/Friday_the_13th_mini-crash http://en.wikipedia.org/wiki/Friday_the_13th_mini-crash http://en.wikipedia.org/wiki/October_27,_1997_mini-crash http://en.wikipedia.org/wiki/October_27,_1997_mini-crash It seems to be more a matter of market dynamics rather than crazy algos. If some market shock drops prices too quickly you pass from a stable equilibrium into panic selling. Market makers will only accept so much risk before they start trying to offload stocks too, leading to a feedback loop. Lots of exchanges now have measures in place to break this feedback loop by halting trading on a stock if the price moves too fast and running an auction instead. The 2010 flash crash was really only notable in that the move to electronic trading made both the crash and the subsequent recovery much faster. Panic selling itself is a problem with the market structure, not with the machines on the other end.
nanex 14y ago
Hi, I am Eric Hunsader from Nanex and created this animation using our own custom software tools and our NxCore data feed. Our position on HFT can be summed up in the first lines of text below the image: "It's not high frequency trading (HFT) that concerns us. It's high frequency quoting". Links are included for details. Our latest paper on HFT can be found here: http://www.nanex.net/aqck2/3532.html http://www.nanex.net/aqck2/3532.html Anyone who has taken the time to really look at the contents of the tsunami of data that some HFT creates will come to the conclusion that something very wrong and harmful going on. We've found this is nearly impossible to convey in text or graphics (with the possible exception of this animation), and sooner or later as more and more academics get up to speed, they will generally come to the same conclusions we have. Our primary business is providing a real-time (and historic ) data service for U.S. Stocks, Options and Futures. In the course of monitoring our feed for our subscribers, we run across anomalies that we think need to be published for the public good or long term health of our markets. We have not received a dime from any of our analysis and not a week goes by that we don't regret opening that Pandora's box. I will check back later today to answer any questions. If you don't receive a reply for a few hours, it's because we are working at our "day job".
- yummyfajitas 14y ago
  I'd be curious to know what you believe the harm is. Specifically, since you claim HFT harms long term investors, what are the mechanics by which it does so?
  - _delirium 14y ago
    One thing the site seems to do is keep an occasional catalog of patterns they believe to be evidence of attempts to harm price discovery in the markets through various quote-system-gaming tricks, presumably intended to set up some other strategy. Here's one, an algorithm that seems (in their opinion) designed to target a particular stock and jack up its volatility: http://www.nxcoreapi.com/aqck/3271.html http://www.nxcoreapi.com/aqck/3271.html
    - yummyfajitas 14y ago
theorique 14y ago
I like Nanex's work - the company has done a lot of excellent analysis of the progress of HFT over the past few years. I'm wondering why there tends to be so much value judgment and moralizing in this area coming from various sources (such as Themis). For example: HF traders are taking value from "real" traders ("real" defined by whom?), the systems are "too fast" (compared to what?) or quoting "too much" (compared to what?), and so forth. Exchanges already seem to be penalizing participants with very high quote-to-trade ratios, suggesting that the existing regulatory and commercial system is responding to the needs of its stakeholders. Maybe this kind of reaction is inevitable. I'm sure that there was moralizing in ancient Greece when some entrepreneur bought a load of olive oil at a low price in Athens and ran it on a fast chariot to Thessaloniki, unfairly undercutting the honest merchants of Thessaloniki and pocketing a tidy profit through their "high-speed trading" … same thing with those who used an undersea New York - London cable to gain advance knowledge of events.
- Retric 14y ago
  The point of the stock market is to create a liquid market for businesses and investors. HFT who don't actually keep any skin in the game is just a market efficiency which is best dealt with by changing how the market operates not flooding it with 100 billion meaningless buy and sell orders a day. EX: Put a 24 hour hold after a stock transaction is held before you can sell and you just killed 99% of HFTing.
  - theorique 14y ago
    Put a 24 hour hold after a stock transaction is held before you can sell and you just killed 99% of HFTing. Not just HFT - you just killed some significant fraction of all forms of trading. Bought something and it's declining? Oops, too bad, you're locked in - better wait 24h. The arbitrary phase shift of transactions will add massive amounts of complexity and create a new system to be gamed. Edit: Also, regarding "skin in the game" - the recent $440M Knight fiasco shows that firms participating in all forms of HFT are exposed to real financial risk. They definitely have some skin in the game.

42 points by usedtolurk 14y ago

jcc80 14y ago

What an amazing GIF. They way the colors work out it reminds me of a fire that smoldered for awhile and then woke up in late 2008.

amirmansour 14y ago

What graphing library or tool was used to make these charts?

aerique 14y ago
By the looks of it I'm guessing gnuplot. Here's some other graphs generated by gnuplot from when I still played EVE: http://imgur.com/vsNoH http://imgur.com/vsNoH & http://imgur.com/2pleo http://imgur.com/2pleo

maybesofast 14y ago

Wow, huge gif hotlinked from imgur with 5TB of used bandwidth.

Variance 14y ago

This is an excellent graphic, but the author has a strong stance against HFT (such as the pages he links to about high frequency quoting) that readers should moderate with an understanding of what HFT does in an ideal economic context--the "purpose" of HFT. At the level of HFT, the decisions being made are too fast and frequent to be based on the fundamentals of the stocks being traded. Instead, algorithms are used to make trades based on "technical" analysis rather than analysis of fundamentals--technical analysis predicts how stocks will move based only on past movement, not on underlying reasons. In some cases, this movement is movement that happened only seconds, or milliseconds earlier. In a market with no HFT, say that there's a stock where a large sale is made by some investor, driving price quotes down a few cents; and then a second later, another investor buys a large share, pushing prices up again to where they were before. This behavior makes stock charts jagged and gives a certain volatility to prices. Now, imagine that you could algorithmically predict when a price is likely to go down and then up again in cases like that, and so you could make a profit by buying low knowing that the stock price will be back up again one second into the future. You buy stock to capitalize on this, and if you buy as much stock as you profitably can, you'll essentially drive the price back up to where it will be after the original "correction". You end up correcting the price before the other investor does; and if your response time to the first investor's sale is fast enough, the time when the stock is underpriced will be reduced by you quickly buying. This stabilizes prices, smoothing out the curves, and stable prices are valued in the market. People are willing to pay money for stability, even at those small levels; and that amount of money is what HFT is designed to capture. HFT also makes a benefit by being "first" on finding the right price through its algorithmic clairvoyance. Sometimes, obviously, the use of these algos goes wrong. You get a flash crash with a death by ten billion cuts as the market moves to smooth in some incorrect way. But HFT is not all bad, and considering how much there is, it's impressive that it works as well as it usually does. The incidents you hear about are just like plane crashes; just because planes crash sometimes and it's big news doesn't mean that air travel isn't safer per mile than car travel. Similarly, HFT has a powerful smoothing ability that it capitalizes on (among other things that it does--but smoothing is one of its largest abilities), and most people who oppose it don't realize how essential price stability is to the market at those levels given how much non-HFT trading volume goes on these days.

Seanambers 14y ago
There is nothing efficient about HFT's. It's all leveraged money used to extract a profit from the market in ways that in their very nature is anti competetive. If there ever were a positive side to HFT is was passed a long time ago.
brazzy 14y ago
I think you missed the main point of the article: that the activity of HFT algorithms overwhelmingly takes the form of quotes that never lead to trades and only serve to manipulate prices or create an information asymmetry.
- Variance 14y ago
  See the excellent comments on this at [1] and [2]. The stuff that HFT currently does can't really cause anything too disingenuous. [1]http://news.ycombinator.com/item?id=4395986 http://news.ycombinator.com/item?id=4395986 [2]http://news.ycombinator.com/item?id=4395834 http://news.ycombinator.com/item?id=4395834
jamii 14y ago
> Sometimes, obviously, the use of these algos goes wrong. You get a flash crash with a death by ten billion cuts as the market moves to smooth in some incorrect way. I learned recently that there have been many similar crashes throughout history, well before even the invention of computers eg http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929 http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929 http://en.wikipedia.org/wiki/Black_Monday_%281987%29 http://en.wikipedia.org/wiki/Black_Monday_%281987%29 http://en.wikipedia.org/wiki/Friday_the_13th_mini-crash http://en.wikipedia.org/wiki/Friday_the_13th_mini-crash http://en.wikipedia.org/wiki/October_27,_1997_mini-crash http://en.wikipedia.org/wiki/October_27,_1997_mini-crash It seems to be more a matter of market dynamics rather than crazy algos. If some market shock drops prices too quickly you pass from a stable equilibrium into panic selling. Market makers will only accept so much risk before they start trying to offload stocks too, leading to a feedback loop. Lots of exchanges now have measures in place to break this feedback loop by halting trading on a stock if the price moves too fast and running an auction instead. The 2010 flash crash was really only notable in that the move to electronic trading made both the crash and the subsequent recovery much faster. Panic selling itself is a problem with the market structure, not with the machines on the other end.

nanex 14y ago

Hi, I am Eric Hunsader from Nanex and created this animation using our own custom software tools and our NxCore data feed. Our position on HFT can be summed up in the first lines of text below the image: "It's not high frequency trading (HFT) that concerns us. It's high frequency quoting". Links are included for details. Our latest paper on HFT can be found here: http://www.nanex.net/aqck2/3532.html http://www.nanex.net/aqck2/3532.html Anyone who has taken the time to really look at the contents of the tsunami of data that some HFT creates will come to the conclusion that something very wrong and harmful going on. We've found this is nearly impossible to convey in text or graphics (with the possible exception of this animation), and sooner or later as more and more academics get up to speed, they will generally come to the same conclusions we have. Our primary business is providing a real-time (and historic ) data service for U.S. Stocks, Options and Futures. In the course of monitoring our feed for our subscribers, we run across anomalies that we think need to be published for the public good or long term health of our markets. We have not received a dime from any of our analysis and not a week goes by that we don't regret opening that Pandora's box. I will check back later today to answer any questions. If you don't receive a reply for a few hours, it's because we are working at our "day job".

yummyfajitas 14y ago
I'd be curious to know what you believe the harm is. Specifically, since you claim HFT harms long term investors, what are the mechanics by which it does so?
- _delirium 14y ago
  One thing the site seems to do is keep an occasional catalog of patterns they believe to be evidence of attempts to harm price discovery in the markets through various quote-system-gaming tricks, presumably intended to set up some other strategy. Here's one, an algorithm that seems (in their opinion) designed to target a particular stock and jack up its volatility: http://www.nxcoreapi.com/aqck/3271.html http://www.nxcoreapi.com/aqck/3271.html
  - yummyfajitas 14y ago

theorique 14y ago

I like Nanex's work - the company has done a lot of excellent analysis of the progress of HFT over the past few years. I'm wondering why there tends to be so much value judgment and moralizing in this area coming from various sources (such as Themis). For example: HF traders are taking value from "real" traders ("real" defined by whom?), the systems are "too fast" (compared to what?) or quoting "too much" (compared to what?), and so forth. Exchanges already seem to be penalizing participants with very high quote-to-trade ratios, suggesting that the existing regulatory and commercial system is responding to the needs of its stakeholders. Maybe this kind of reaction is inevitable. I'm sure that there was moralizing in ancient Greece when some entrepreneur bought a load of olive oil at a low price in Athens and ran it on a fast chariot to Thessaloniki, unfairly undercutting the honest merchants of Thessaloniki and pocketing a tidy profit through their "high-speed trading" … same thing with those who used an undersea New York - London cable to gain advance knowledge of events.

Retric 14y ago
The point of the stock market is to create a liquid market for businesses and investors. HFT who don't actually keep any skin in the game is just a market efficiency which is best dealt with by changing how the market operates not flooding it with 100 billion meaningless buy and sell orders a day. EX: Put a 24 hour hold after a stock transaction is held before you can sell and you just killed 99% of HFTing.
- theorique 14y ago
  Put a 24 hour hold after a stock transaction is held before you can sell and you just killed 99% of HFTing. Not just HFT - you just killed some significant fraction of all forms of trading. Bought something and it's declining? Oops, too bad, you're locked in - better wait 24h. The arbitrary phase shift of transactions will add massive amounts of complexity and create a new system to be gamed. Edit: Also, regarding "skin in the game" - the recent $440M Knight fiasco shows that firms participating in all forms of HFT are exposed to real financial risk. They definitely have some skin in the game.