6 ms·
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 t
by 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 agoWhen 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 agoReg 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.
- tptacek 11y agoSure. But, after interviewing a bunch of HFT developers over the last 6 months (because: reasons), the understanding I've developed is that "latency arbitrage" --- which is what you seem to be describing --- is no longer particularly profitable, or the focus of what most "HFT firms" do. Is my understanding broken? (I am not a trader or an HFT dev.)
- fixxer 11y agoNo, the market evolved as it always does. But, so much of the "HFT is evil" belief stemmed from the subprime era and with respect to fair play at the time, you can't ignore the impact of NMS. I went back to grad school in 2010 and had to be careful to whom I told my background, else I'd get roped into some morality debate with a 26 year old Occupy activist who didn't know what a market order was. Nowadays, I really don't see much edge in trading at all. I would love to know what those traders you've spoken with think is profitable. I see my old bosses at Rom near the CME almost every Friday and I haven't heard a positive line from them in 5+ years.
- nvarsj 11y agoI've been out of the industry for a year now. But when I left, simple latency arbitrage strategies were not profitable. They became an arms race.
- sseveran 11y agoHe could be saying but if so its not true. RegNMS trading is a thing. Latency arbitrage is also a thing. There are also a wide variety of strategies that may exploit the idiosyncrasies of a specific exchange. Multiple venues, while useful and common, are not needed in all HFT strategies.
- fixxer 11y agoI would argue that the HFT that gets all the negative press are those systems taking advantage of Reg NMS. I think the regulations that caused it should be removed. If you're looking for a black & white definition to satisfy the age old quest to define high frequency trading, you could pick worse. There are other strategies that get a lot of bad press, of course, but they are not novel with respect to strategy, only speed. Deception is par for the course. And sometimes, products are just poorly designed. Leveraged ETFs, for example.
- noname123 11y agoHello fixxer, thank you for your reply. My understanding is the reason you advocate for long gamma vs. short gamma because unhedged short gamma trade (e.g., short straddle) could cause theoretical unlimited loss. Long gamma trades like long straddle or long option hedged with delta-neutral stock, you are facing daily theta decay and you are betting for either a rise in implied vol or realized vol. However, the missing ingredient/secret sauce is (1) you have to figure out at price point you're going to take profit in your scalp; and (2) when implied volatility is considered cheap for the particular ticker you're trading. Much appreciated for your insight and let me know if I'm missing anything.
- fixxer 11y agoYou've got some model of richness/cheapness. From that, you have your raison d'etre and, when combined with your view on utility and expectations, a money management strategy. Putting all that together is your business. My only opinion on the matter is that you should try to stick with leading from long gamma. You can sell vol, but you'll survive longer if you keep net long gamma. As soon as you get gamma'd, you're out of business. It can go so far against you before you even realize what happened.