10 ms·

Reading this sort of stuff from manual prop traders makes me laugh. It sounds so amateur hour. How in the world can manual traders ever compete against a short-

by consz 12y ago

Reading this sort of stuff from manual prop traders makes me laugh. It sounds so amateur hour. How in the world can manual traders ever compete against a short-term stat arb or HFT strategy? It just sounds like pure luck that any of them will make money. Also, is 130k really a huge loss? I run HFT strategies, and while it would definitely be a big loss even for one of my strategies, it wouldn't be a phenomenal outlier. How small was this guy trading before?

Tyrant505 12y ago
I also think it's an important lesson to learn... I'd rather gain that young then older.
throwaway7808 12y ago
Now you are just bullshitting. A 130k is a huge loss and a phenomental outlier. You've never had even a 100k loss on your strategies. And by current standards your strategies are not even HFT. I've seen you talking milliseconds. Nowadays people are talking sub-microseconds.
- consz 12y ago
  okay
  - throwaway7808 12y ago
    Duh. Common. Describe me just one automated strategy for which $130k would not be a phenomenal outlier. And you were talking multiple strategies...
    - consz 12y ago
      I was talking about 130k in any one strategy. I'm sorry you misunderstood me. A single strategy is easily capable of losing that much. Any bond futures or cash bond strategy post-FOMC. Any equity index futures strategy during Twitter "flash crash". Any strategy taking large size in a big future during early-mid October this year. Any strategy taking large size in a big future during August 2011. Any Nikkei futures strategy right after the recent QE announcement from Japan. All of those are easily capable of dropping 130k in a day.
- sillysaurus3 12y ago
  Sub-microsecond transactions seem impossible unless you're physically jacked in to the trading datacenter's network. If you try to transfer a message (like a string buffer) as quickly as possible from program A running on core 0 to program B running on core 5 on your server-grade computer, the best benchmarks I could achieve were "99% of measurements executed in fewer than 150 nanoseconds." And I worked hard on this problem. It seems like maybe you could execute a trade in ~400 nanoseconds at best, if you have a server that's connected with 10GigE directly to a NASDAQ (or whoever) box and you're bypassing how Linux normally does packet handling, but I wouldn't be surprised if the overhead of the other party's server pushes that to at least 1 microsecond in all cases. But... now that I've examined the facts, I admit what you say may be true. Are HFTs really operating in sub-microsecond time for trades nowadays?
  - throwaway7808 12y ago
    Yes, you are correct. On an average Linux box to have a single cache line data transfer between the cores under 150ns 99% of the time is about the best that you can get. Especially if you are running stock kernel that eats this 1% and creates huge outliers ;). There is some talk though, about crazily-expensive switches with integrated FPGAs...
    - foobarian 12y ago
      Light moves at 1 ft per nanosecond... I sure hope you're close to the NASDAQ data center :)
      - sillysaurus3 12y ago
        It's 1ft/ns in a vacuum, but my understanding is that it's closer to 0.5ft/ns in a wire, so what you say is doubly true. But I think HFTs are running on servers close to the NASDAQ datacenter, and that people pay buckets of money for such privileges.
        steven2012 12y ago
- iaw 12y ago
  I worked at a prop shop where my teams worst 2-day losses totaled more than $2MM. The worst period for any team on the firm was a $30MM loss with an additional $60MM of risk over the course of 5 days. No one was happy about it, but it was part of the job and considered reasonable volatility for a portfolio of our (middle) size. While I wasn't a fan of Consz's tone, his numbers check out from my personal experience at a trading firm. Not HFT, but in the end it's all about return on capital and the P&L's should be similar.
- smrtinsert 12y ago
  People are downvoting you, but as someone who only worked on a FIX application in a tiny finance shop, microsecond was barely acceptable. The comment rings false with me as well.
  - theyoungestgun 12y ago
    What do you mean that 'microsecond as barely acceptable'? That was too long for what? I'm skeptical that there are really that many players out there who are in a position where a single microsecond would really make a difference. There are definitely companies out there in this situation, but not many.
- kasey_junk 12y ago
  One of the big problems about conversations around "HFT" is that there is no definition of what that actually is. I like to put computerized trading systems on a scale of 3 different things: 1) trade volume 2) latency sensitivity and 3) human interaction. So for instance, I've worked on systems that were "fairly" latency sensitive (~tens of micro seconds in latency budget), not very high volume (100s of trades a day) and had virtually no human interaction. I've also worked on systems that were "not very" latency sensitive (co-lo'd but never actually measured tick to trade times, which were assumedly in the tens of milliseconds), high volume (10s of thousands of trades a day) and had a team of clerks looking over it. I would call both of those systems HFT systems, but some people wouldn't consider either of them HFT. In both of those cases a 130k loss would be an outlier, but not a phenomenal one. I've worked with people who have lost millions of dollars in seconds and it blew up the group. I've met others that million dollar swings on a given strategy was par for the course (and there hedge funds doing manual trades that won't notice that trade in a graph). That is, the world of computerized trading is pretty varied. If you are going to say someone is or is not HFT, let them know what your definition is first, as that is the only way the discussion can move forward.
mynameishere 12y ago
It sounds so amateur hour. Amateur hour? The traders could be monkeys, since it's only the salesman who matter. When you bet other people's money, the strategy is fairly simple: Go long (or short). Somebody at another company goes short (or long). One wins, one loses (it's guaranteed) and the winner gets a percentage of the "win". This is why they love volatility so much, as it determines the size of the profits, even in a zero-sum game. Sure, mathematicians can beat the house. Doesn't matter to these guys. Other people's money? Flip a coin.
- consz 12y ago
  Prop shops don't have salesmen (at least, none that I've ever seen).
- lmartel 12y ago
  Prop stands for "proprietary," it means that they trade their own money.
  - harmegido 12y ago
    Correction: it means they trade private money. This could be their own money, but more often than not, it's the owner's/partner's money.
    - mlrtime 12y ago
      The exact definition of proprietary trading is trading with the firm's own money. Public/private is an entirely different dimension. There are no sales reps with prop trading, it isn't an agency. http://en.wikipedia.org/wiki/Proprietary_trading http://en.wikipedia.org/wiki/Proprietary_trading
peterkto2 12y ago
Hey Consz, I'm glad you laughed, as I tried my best to make it humorous. You're absolutely right, it is total amateur hour. Sometimes I can't believe this is how I make money! Price-action based trading can be so intellectually vapid. And that is why I feel so blessed to have this job and to be able to make it work. I don't try to pretend to be anything more than what I am. I don't make 7-figures but I make consistent, steady, low drawdown thousands that add up to a 1%-er income. I'm only 25 so I like to think there's room for improvement too. If you're doing better than that, congratulations. 130k is just a number in the middle of the drawdown that I arbitrarily referenced to give some context. You'll have to read the rest to see what the final number was when the full loss was realized. Well, I'm getting "stop submitting too quickly" msgs and I'm sure there will be no shortage of people telling me this will never work, it's all random, no edge when backtesting, etc. So I'm done debating for the night, best of luck to you guys, hope you read part II!
- tjradcliffe 12y ago
  I'm in the "technical analysis is nonsense" camp but enjoyed your story. You write an entertaining line and I look forward to reading the rest of it.
lzhou 12y ago
I'm not sure that's completely true. 1) Are there places / markets that ST Arb and HFT won't go because it's too illiquid or too idiosyncratically volatile? 2) Are there edges so small that you won't chase? 3) Are there one-off opportunities (2010 flash crash, UST flash crash recently, etc.)? 4) Is there a set of strategies that manual traders know (which they should probably transfer to HFT strategies) that the HFT/ST arb shops don't know? I think the answer to all of those questions is "yes". They probably take on a lot more risk per trade. They would also be better served by automating their strategies. But I think it's not as cut and dry as you state. Each individual trader might be "amateur" -- but the firm as a whole might end up with a decent return / risk.
- dhammack 12y ago
  #4 is the only one which I would say does not hold. I'd be very surprised if a firm of manual traders could consistently outperform the market (or beat a Sharpe of 1).
  - lzhou 12y ago
    I think 4) holds. We have 2 spectrums for all known strategies (the amount of gold in the veins is another question): * Strats that are automatable vs non-automatable. * Strats that are unique (known to a few) vs well-known strats Automatable: Well-Known - This is where HFT becomes an engineering problem. It's also the easiest business decision to make. I hire some engineers + buy some computers and I can mint some money for a time. This is also a race to the bottom -- where there will be some easy money to be made at equilibrium, but it'll be unsustainable for HFT firms at the margin. I would say manual trading has 0 impact here -- and they'll likely get crushed. Unique - These are strategies that only a small set of firms know. Eventually these strategies become well-known as people move around companies. There must be some secret strategies, though. Otherwise, why would Rentech & Citadel sue their own employees (unless we are to believe Simons & Griffin are simply vindictive). I think manual trading could work here if there is a strategy that simply haven't been discovered by the HFT & quant. It's might be hard, but not impossible. These secrets aren't anything you'll find online or in some trading forum, though. Or perhaps they are, but no self-respecting quant would go there (lest they become laughing stocks in their fund). Non-Automatable: Well-Known - PE is an example of one. In terms of liquid assets, maybe penny stocks are another area. If a group of "manual" traders couldn't get permission to delve there... it's probably even harder for a quant fund. It's also the territory of insider info and rumors. Unique - Maybe being there for the liquidity crashes I stated earlier is a good example. But there are certainly non-automatable unique strats around. Depending on how much gold you believe is in the veins, all strategies are heading towards automatable & well-known. However, in the interim, I can see manual traders still making money (even with a sharpe > 1). In fact, I would say there are well-known strats you can execute manually (in say, your PA, that return sharpe ~0.8ish).
AndrewKemendo 12y ago
They aren't competing against it though, they are riding the same wave. Competition would assume that HFT's or stat arbs are market makers, doing pump and dumps, which is not the case based on HFT reserve holdings - the antithesis of arb. Is it less efficient? Yes. It is also orders of magnitude easier to get into. You need PhD mathematicians, computer scientists/engineers to build real hardcore HFT systems. The manual stuff takes what, a high speed internet connection as its infrastructure.
- yummyfajitas 12y ago
  Stat arb is usually not a market maker. The simplest stat arb trade is a pairs trade, so let me use that as an example. Suppose you do want to market make on a pair A,B. You notice they are out of whack so you open an ALO order to sell A and buy B. The market moves and both stocks go up in sync. You've now opened a short position on A with no offsetting position in B. Oops. If you want to save part of the spread, you can often do add liquidity, then the minute you get a fill you can cancel and take liquidity on the other side. I've tried this but I haven't made it work, though my strategies are pretty amateur (I only trade as a hobby).
notastartup 12y ago
statistical arbitrage should come with a general surgeon warning. "may cause hair loss, not actually risk free"

by consz 12y ago

Tyrant505 12y ago

I also think it's an important lesson to learn... I'd rather gain that young then older.

throwaway7808 12y ago

Now you are just bullshitting. A 130k is a huge loss and a phenomental outlier. You've never had even a 100k loss on your strategies. And by current standards your strategies are not even HFT. I've seen you talking milliseconds. Nowadays people are talking sub-microseconds.

consz 12y ago
okay
- throwaway7808 12y ago
  Duh. Common. Describe me just one automated strategy for which $130k would not be a phenomenal outlier. And you were talking multiple strategies...
  - consz 12y ago
    I was talking about 130k in any one strategy. I'm sorry you misunderstood me. A single strategy is easily capable of losing that much. Any bond futures or cash bond strategy post-FOMC. Any equity index futures strategy during Twitter "flash crash". Any strategy taking large size in a big future during early-mid October this year. Any strategy taking large size in a big future during August 2011. Any Nikkei futures strategy right after the recent QE announcement from Japan. All of those are easily capable of dropping 130k in a day.
sillysaurus3 12y ago
Sub-microsecond transactions seem impossible unless you're physically jacked in to the trading datacenter's network. If you try to transfer a message (like a string buffer) as quickly as possible from program A running on core 0 to program B running on core 5 on your server-grade computer, the best benchmarks I could achieve were "99% of measurements executed in fewer than 150 nanoseconds." And I worked hard on this problem. It seems like maybe you could execute a trade in ~400 nanoseconds at best, if you have a server that's connected with 10GigE directly to a NASDAQ (or whoever) box and you're bypassing how Linux normally does packet handling, but I wouldn't be surprised if the overhead of the other party's server pushes that to at least 1 microsecond in all cases. But... now that I've examined the facts, I admit what you say may be true. Are HFTs really operating in sub-microsecond time for trades nowadays?
- throwaway7808 12y ago
  Yes, you are correct. On an average Linux box to have a single cache line data transfer between the cores under 150ns 99% of the time is about the best that you can get. Especially if you are running stock kernel that eats this 1% and creates huge outliers ;). There is some talk though, about crazily-expensive switches with integrated FPGAs...
  - foobarian 12y ago
    Light moves at 1 ft per nanosecond... I sure hope you're close to the NASDAQ data center :)
    - sillysaurus3 12y ago
      It's 1ft/ns in a vacuum, but my understanding is that it's closer to 0.5ft/ns in a wire, so what you say is doubly true. But I think HFTs are running on servers close to the NASDAQ datacenter, and that people pay buckets of money for such privileges.
      - steven2012 12y ago
iaw 12y ago
I worked at a prop shop where my teams worst 2-day losses totaled more than $2MM. The worst period for any team on the firm was a $30MM loss with an additional $60MM of risk over the course of 5 days. No one was happy about it, but it was part of the job and considered reasonable volatility for a portfolio of our (middle) size. While I wasn't a fan of Consz's tone, his numbers check out from my personal experience at a trading firm. Not HFT, but in the end it's all about return on capital and the P&L's should be similar.
smrtinsert 12y ago
People are downvoting you, but as someone who only worked on a FIX application in a tiny finance shop, microsecond was barely acceptable. The comment rings false with me as well.
- theyoungestgun 12y ago
  What do you mean that 'microsecond as barely acceptable'? That was too long for what? I'm skeptical that there are really that many players out there who are in a position where a single microsecond would really make a difference. There are definitely companies out there in this situation, but not many.
kasey_junk 12y ago
One of the big problems about conversations around "HFT" is that there is no definition of what that actually is. I like to put computerized trading systems on a scale of 3 different things: 1) trade volume 2) latency sensitivity and 3) human interaction. So for instance, I've worked on systems that were "fairly" latency sensitive (~tens of micro seconds in latency budget), not very high volume (100s of trades a day) and had virtually no human interaction. I've also worked on systems that were "not very" latency sensitive (co-lo'd but never actually measured tick to trade times, which were assumedly in the tens of milliseconds), high volume (10s of thousands of trades a day) and had a team of clerks looking over it. I would call both of those systems HFT systems, but some people wouldn't consider either of them HFT. In both of those cases a 130k loss would be an outlier, but not a phenomenal one. I've worked with people who have lost millions of dollars in seconds and it blew up the group. I've met others that million dollar swings on a given strategy was par for the course (and there hedge funds doing manual trades that won't notice that trade in a graph). That is, the world of computerized trading is pretty varied. If you are going to say someone is or is not HFT, let them know what your definition is first, as that is the only way the discussion can move forward.

mynameishere 12y ago

It sounds so amateur hour. Amateur hour? The traders could be monkeys, since it's only the salesman who matter. When you bet other people's money, the strategy is fairly simple: Go long (or short). Somebody at another company goes short (or long). One wins, one loses (it's guaranteed) and the winner gets a percentage of the "win". This is why they love volatility so much, as it determines the size of the profits, even in a zero-sum game. Sure, mathematicians can beat the house. Doesn't matter to these guys. Other people's money? Flip a coin.

consz 12y ago
Prop shops don't have salesmen (at least, none that I've ever seen).
lmartel 12y ago
Prop stands for "proprietary," it means that they trade their own money.
- harmegido 12y ago
  Correction: it means they trade private money. This could be their own money, but more often than not, it's the owner's/partner's money.
  - mlrtime 12y ago
    The exact definition of proprietary trading is trading with the firm's own money. Public/private is an entirely different dimension. There are no sales reps with prop trading, it isn't an agency. http://en.wikipedia.org/wiki/Proprietary_trading http://en.wikipedia.org/wiki/Proprietary_trading

peterkto2 12y ago

Hey Consz, I'm glad you laughed, as I tried my best to make it humorous. You're absolutely right, it is total amateur hour. Sometimes I can't believe this is how I make money! Price-action based trading can be so intellectually vapid. And that is why I feel so blessed to have this job and to be able to make it work. I don't try to pretend to be anything more than what I am. I don't make 7-figures but I make consistent, steady, low drawdown thousands that add up to a 1%-er income. I'm only 25 so I like to think there's room for improvement too. If you're doing better than that, congratulations. 130k is just a number in the middle of the drawdown that I arbitrarily referenced to give some context. You'll have to read the rest to see what the final number was when the full loss was realized. Well, I'm getting "stop submitting too quickly" msgs and I'm sure there will be no shortage of people telling me this will never work, it's all random, no edge when backtesting, etc. So I'm done debating for the night, best of luck to you guys, hope you read part II!

tjradcliffe 12y ago
I'm in the "technical analysis is nonsense" camp but enjoyed your story. You write an entertaining line and I look forward to reading the rest of it.

lzhou 12y ago

I'm not sure that's completely true. 1) Are there places / markets that ST Arb and HFT won't go because it's too illiquid or too idiosyncratically volatile? 2) Are there edges so small that you won't chase? 3) Are there one-off opportunities (2010 flash crash, UST flash crash recently, etc.)? 4) Is there a set of strategies that manual traders know (which they should probably transfer to HFT strategies) that the HFT/ST arb shops don't know? I think the answer to all of those questions is "yes". They probably take on a lot more risk per trade. They would also be better served by automating their strategies. But I think it's not as cut and dry as you state. Each individual trader might be "amateur" -- but the firm as a whole might end up with a decent return / risk.

dhammack 12y ago
#4 is the only one which I would say does not hold. I'd be very surprised if a firm of manual traders could consistently outperform the market (or beat a Sharpe of 1).
- lzhou 12y ago
  I think 4) holds. We have 2 spectrums for all known strategies (the amount of gold in the veins is another question): * Strats that are automatable vs non-automatable. * Strats that are unique (known to a few) vs well-known strats Automatable: Well-Known - This is where HFT becomes an engineering problem. It's also the easiest business decision to make. I hire some engineers + buy some computers and I can mint some money for a time. This is also a race to the bottom -- where there will be some easy money to be made at equilibrium, but it'll be unsustainable for HFT firms at the margin. I would say manual trading has 0 impact here -- and they'll likely get crushed. Unique - These are strategies that only a small set of firms know. Eventually these strategies become well-known as people move around companies. There must be some secret strategies, though. Otherwise, why would Rentech & Citadel sue their own employees (unless we are to believe Simons & Griffin are simply vindictive). I think manual trading could work here if there is a strategy that simply haven't been discovered by the HFT & quant. It's might be hard, but not impossible. These secrets aren't anything you'll find online or in some trading forum, though. Or perhaps they are, but no self-respecting quant would go there (lest they become laughing stocks in their fund). Non-Automatable: Well-Known - PE is an example of one. In terms of liquid assets, maybe penny stocks are another area. If a group of "manual" traders couldn't get permission to delve there... it's probably even harder for a quant fund. It's also the territory of insider info and rumors. Unique - Maybe being there for the liquidity crashes I stated earlier is a good example. But there are certainly non-automatable unique strats around. Depending on how much gold you believe is in the veins, all strategies are heading towards automatable & well-known. However, in the interim, I can see manual traders still making money (even with a sharpe > 1). In fact, I would say there are well-known strats you can execute manually (in say, your PA, that return sharpe ~0.8ish).

AndrewKemendo 12y ago

They aren't competing against it though, they are riding the same wave. Competition would assume that HFT's or stat arbs are market makers, doing pump and dumps, which is not the case based on HFT reserve holdings - the antithesis of arb. Is it less efficient? Yes. It is also orders of magnitude easier to get into. You need PhD mathematicians, computer scientists/engineers to build real hardcore HFT systems. The manual stuff takes what, a high speed internet connection as its infrastructure.

yummyfajitas 12y ago
Stat arb is usually not a market maker. The simplest stat arb trade is a pairs trade, so let me use that as an example. Suppose you do want to market make on a pair A,B. You notice they are out of whack so you open an ALO order to sell A and buy B. The market moves and both stocks go up in sync. You've now opened a short position on A with no offsetting position in B. Oops. If you want to save part of the spread, you can often do add liquidity, then the minute you get a fill you can cancel and take liquidity on the other side. I've tried this but I haven't made it work, though my strategies are pretty amateur (I only trade as a hobby).

notastartup 12y ago

statistical arbitrage should come with a general surgeon warning. "may cause hair loss, not actually risk free"