7 ms·

Quick question, I don't work in the HFT field (I trade only options for fun on the side) but would anyone in the field care to comment whether a startup fund sa

Quick question, I don't work in the HFT field (I trade only options for fun on the side) but would anyone in the field care to comment whether a startup fund say, with a back-tested strategy would still be able to compete with the likes of HFT firms, provided that they have (1) sufficient capital, >$500K, (2) sponsored access/co-location to markets by proxy, e.g., Lightspeed, Lime Brokerage that provides the lower fee-structure plus the rented rack-space on the exchange data-centers, (3) historical and realtime quote feeds for forward and back-testing. I imagine HFT entities who are broker-dealer agencies have even lowered fee structure; but it sounds like simple market-making on equities is no longer an easy business to be in due to the lowered spreads and crowded competitors. So I'm wondering if a startup funds with the rented access could compete with the big boys in the options, futures, other derivatives and even bonds space where the latency still haven't caught with the equity market yet.

fasteo 11y ago
This is something that comes to my mind every time there is a press release talking about HFT and the milliseconds advantage they use to make a profit. I would love some comments from a seasoned HFT (tech) guy.
- kasey_junk 11y ago
  There exist in the trading space entities that look essentially like what the OP is suggesting. They are called prop trading firms, or quantitative trading firms, etc. There are even entities that act like incubators for those entities.
lordnacho 11y ago
There's a fairly big question of what human capital comes along with this. You will need some guys who are good at low latency programming. Some strategies that I've seen also depend on having good agreements with brokers, ie you may see an opportunity in the data, but the costs of trading tip you into the red if your guy is margining you in a different way. I don't know what Lime et al charge you, but they aren't a likely name among the people I know. There's also a question about what exactly you'll be doing in those markets. There are guys who make money market making options over the phone, without relying on colo for anything. Sometimes they'll have a quote machine that needs to be quick to pull, but they don't see it as anything other than a bit of extra money. Other options guys are totally different, relying entirely on speed to make their dough. Also keep in mind you are only competing with HFT in as far as what you're doing is similar, ie there's a high chance you'll both want to grab the same trade.
fixxer 11y ago
HFT represents a spectrum of strategies when described in the news. For the most part, I would argue you are describing a "quant trading shop" and would avoid the HFT label since it doesn't apply (HFT really means that you're gaming Reg NMS). The type of shop you're describing might be able to compete, assuming you've identified a niche product with a margin that will still exist in 6 months. Backtesting is useful, but it is so bloody hard to accurately incorporate liquidity that I place little value on simulated results when it comes to short duration trades. You really have to jump in and test live, which represents the largest barrier to entry: established shops have the infrastructure & capital to try new ideas. When I was trading, we tested half a dozen new ideas every month in addition to "production trades". High frequency, IMO, should really be used to identify hardware intensive strategies co-located at the exchanges and utilizing telecommunications strategies not readily available to the market. For example, FPGA and dedicated microwave towers. Lime is excellent, btw, but you really need some volume to justify them. For options at your level of capital, Interactive Brokers and long gamma trades look more attractive to me. Many would disagree and people do starve waiting for long gamma, but my memory is biased after seeing the little group next to me lose $40m in a week on a stupid short gamma "sure thing" based on back tests and other such nonsense. Oh, what a fun time that was.
- tptacek 11y ago
  When you say "HFT really means that you're gaming Reg NMS", are you saying that true HFT strategies all rely on multi-venue arbitrage?
  - lorenzhs 11y ago
    Reg NMS requires that brokers fulfill orders at the lowest possible rate first. So if an HFT shop sets a trap for you on one exchange (offering 100 stocks a tiny bit cheaper), your broker would have to trade in that first. The HFT would then front-run you to the other exchanges, buy up what it can, and sell it back to you a bit higher. They can do this because they have lower latency. Add dark pools to the mix and the opportunities become even bigger.
    - 11y ago
deleted 11y ago
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thibautx 11y ago
I would say that even options/futures/and other products markets are just as hard to market make compared to the equities markets. In my opinion, you need some sort of edge not through hardware but through your model or your market outlook, combined with market-making/hft/statistical-arbitrage in order to be profitable and compete. 1) Capital in the magnitude of >$500k seems reasonable for a small operation 2) Lime Brokerage (a friend has started a hft strategy with a professor on campus and has tested out lime) is okay, I'd look into some other execution services as well 3) Yes you should be backtesting on tick-level data from multiple exchanges ideally. Be wary of lookahead bias and try to build some sort of execution model to account for how your executions might actually be filled and how your orders might affect the market microstructure Ultimately, I wouldn't rely on pure hft and latency sensitive strategies...latency is always important but you should try to find your edge elsewhere.

fasteo 11y ago

This is something that comes to my mind every time there is a press release talking about HFT and the milliseconds advantage they use to make a profit. I would love some comments from a seasoned HFT (tech) guy.

kasey_junk 11y ago
There exist in the trading space entities that look essentially like what the OP is suggesting. They are called prop trading firms, or quantitative trading firms, etc. There are even entities that act like incubators for those entities.

lordnacho 11y ago

There's a fairly big question of what human capital comes along with this. You will need some guys who are good at low latency programming. Some strategies that I've seen also depend on having good agreements with brokers, ie you may see an opportunity in the data, but the costs of trading tip you into the red if your guy is margining you in a different way. I don't know what Lime et al charge you, but they aren't a likely name among the people I know. There's also a question about what exactly you'll be doing in those markets. There are guys who make money market making options over the phone, without relying on colo for anything. Sometimes they'll have a quote machine that needs to be quick to pull, but they don't see it as anything other than a bit of extra money. Other options guys are totally different, relying entirely on speed to make their dough. Also keep in mind you are only competing with HFT in as far as what you're doing is similar, ie there's a high chance you'll both want to grab the same trade.

fixxer 11y ago

HFT represents a spectrum of strategies when described in the news. For the most part, I would argue you are describing a "quant trading shop" and would avoid the HFT label since it doesn't apply (HFT really means that you're gaming Reg NMS). The type of shop you're describing might be able to compete, assuming you've identified a niche product with a margin that will still exist in 6 months. Backtesting is useful, but it is so bloody hard to accurately incorporate liquidity that I place little value on simulated results when it comes to short duration trades. You really have to jump in and test live, which represents the largest barrier to entry: established shops have the infrastructure & capital to try new ideas. When I was trading, we tested half a dozen new ideas every month in addition to "production trades". High frequency, IMO, should really be used to identify hardware intensive strategies co-located at the exchanges and utilizing telecommunications strategies not readily available to the market. For example, FPGA and dedicated microwave towers. Lime is excellent, btw, but you really need some volume to justify them. For options at your level of capital, Interactive Brokers and long gamma trades look more attractive to me. Many would disagree and people do starve waiting for long gamma, but my memory is biased after seeing the little group next to me lose $40m in a week on a stupid short gamma "sure thing" based on back tests and other such nonsense. Oh, what a fun time that was.

tptacek 11y ago
When you say "HFT really means that you're gaming Reg NMS", are you saying that true HFT strategies all rely on multi-venue arbitrage?
- lorenzhs 11y ago
  Reg NMS requires that brokers fulfill orders at the lowest possible rate first. So if an HFT shop sets a trap for you on one exchange (offering 100 stocks a tiny bit cheaper), your broker would have to trade in that first. The HFT would then front-run you to the other exchanges, buy up what it can, and sell it back to you a bit higher. They can do this because they have lower latency. Add dark pools to the mix and the opportunities become even bigger.
  - 11y ago

deleted 11y ago

[deleted]

thibautx 11y ago

I would say that even options/futures/and other products markets are just as hard to market make compared to the equities markets. In my opinion, you need some sort of edge not through hardware but through your model or your market outlook, combined with market-making/hft/statistical-arbitrage in order to be profitable and compete. 1) Capital in the magnitude of >$500k seems reasonable for a small operation 2) Lime Brokerage (a friend has started a hft strategy with a professor on campus and has tested out lime) is okay, I'd look into some other execution services as well 3) Yes you should be backtesting on tick-level data from multiple exchanges ideally. Be wary of lookahead bias and try to build some sort of execution model to account for how your executions might actually be filled and how your orders might affect the market microstructure Ultimately, I wouldn't rely on pure hft and latency sensitive strategies...latency is always important but you should try to find your edge elsewhere.