Algorithmic Trading

[cosine]

There are three mathematical "effects" at play here (from simplest to more complex): gradient, divergence and curl. A former French poster in ET would acknowledge this smartly and thoroughly. The algorithms' propensities work inversly with respect to the importance of the market flow variations.

There are very few threads in ET that look into sizing up how market maths can be used to focus on more or less important things in profit making. To reach the compromise among the money making factors, it is an interesting consideration of fixed costs, anomolies and being on the real right side of the market. Optimization takes these out of the picture in the order listed. [/QUOTE]

I would like to see your maths and theory so I could aknowledge them smartly and thoroughly too.

 

[Drock409]

What I am trying to get at is that, imo, very few of the players can play these games, although three people that I know of on ET claim to be able to trade stocks 100% by computer, and no one in their right mind is going to tell you how they are making money doing that (if they are, which is a big IF)

THIS IS NOT TRUE>>>>>>>>>>>>>>>>


i personally know of 5 differnt individuls at my firm that run black boxes...100% automated trading boxes

the WORST of them is up 100k on his boxes this year, the others are up many TIMES that

obviously they are not out there tellin eveyone their stragies...quite opposite...2 of them are in dedicated rooms that NO ONE...and imean NO ONE can enter...period

we know they are out there....there is even "box wars" goin on...where there are boxes that look for other boxes to "trick" them..high bid, high bid...smack

anyone who trades nazzys will occoassionally get hit on 1 share while they are hidded in front of size of a thin issue......thats done purposely...its not grandpa billy buyin $1 share in his 410


In terms of reversion to mean theory...if you have UNLIMITED CAPITAL...( i know this doesnt make sense) ..but saying IF...then you could theoretically double down on INTC, QQQQ, etc....every say 10c...until you get a 10c bounce in your favor......u'll never have a losing trade (trust me ..i thought of doin this...but i konw eventually i'll get blown out in 1 trade)

its like sittin a casino and just bettin red ALL NIGHT
u'll walk out with cash...but ur pickin up peenies in front of bulldozers

 

[Free Thinker]

Quote from Drock409:

What I am trying to get at is that, imo, very few of the players can play these games, although three people that I know of on ET claim to be able to trade stocks 100% by computer, and no one in their right mind is going to tell you how they are making money doing that (if they are, which is a big IF)

THIS IS NOT TRUE>>>>>>>>>>>>>>>>


i personally know of 5 differnt individuls at my firm that run black boxes...100% automated trading boxes

the WORST of them is up 100k on his boxes this year, the others are up many TIMES that

obviously they are not out there tellin eveyone their stragies...quite opposite...2 of them are in dedicated rooms that NO ONE...and imean NO ONE can enter...period

we know they are out there....there is even "box wars" goin on...where there are boxes that look for other boxes to "trick" them..high bid, high bid...smack

anyone who trades nazzys will occoassionally get hit on 1 share while they are hidded in front of size of a thin issue......thats done purposely...its not grandpa billy buyin $1 share in his 410


In terms of reversion to mean theory...if you have UNLIMITED CAPITAL...( i know this doesnt make sense) ..but saying IF...then you could theoretically double down on INTC, QQQQ, etc....every say 10c...until you get a 10c bounce in your favor......u'll never have a losing trade (trust me ..i thought of doin this...but i konw eventually i'll get blown out in 1 trade)

its like sittin a casino and just bettin red ALL NIGHT
u'll walk out with cash...but ur pickin up peenies in front of bulldozers

if it is so easy to make money with automated trading why do prop firms still hire traders. why wouldnt they just program computers to do the trading?

 

[Scottsdale]

Quote from nitro:

Ok.

And what edge do you think you can have over machines that are basically making markets based on their current baskets/inventories and where the ES/NQ/YM are trading? In other words, even if you knew the exact algorithm by which these things were basing their trading decisions on, how would that make you a better trader?

What I trying to point out is that understanding the machine will only help you in programming another machine maybe try to do the same thing, but I doubt it would help you as a human being at all. The way you trade now is the only reasonable way, outside of technical analysis, that a human could trade.

There are only two ways to trade outside of arbitrage (statistical or otherwise), to take liquidity away from the maket and therefore pay the B/A spread (for whatever reason, breakout, etc), or to add liquidity by making a spread, which is mostly what computers acting as MMs are doing, except when they come in a buy/sell baskets for index arbitrage where they are then taking liquidity. The MMing is almost 100% the domain of well capitilized MMs.

People like Bright traders try to do pseudo MM type strategies like the Opening Strategy, or the Trade Through strategy but that is a huge patience game and is not for everyone.

What I am trying to get at is that, imo, very few of the players can play these games, although three people that I know of on ET claim to be able to trade stocks 100% by computer, and no one in their right mind is going to tell you how they are making money doing that (if they are, which is a big IF)

Most of the reason the markets seem so confused now is that there are so many different ways that stocks get kicked around by their derivatives, whether it be Futs on them, Futs that include them, Options on them, or ETFs that include them.

nitro

The edge I can gain over a machine is achieved when I figure out what that machine is reacting to. A simple example was trading the large cap nasdaq stocks off of the S&P and NDX futures back in the old SOES and SelectNet days. Because I knew that a huge amount of index arb was being done, I could trade in front of the arbitrageurs when cash and futures became out of line. By trading a few NDX stock which were highly correlated to the index, and through my superior order routing knowledge I was consistently faster than the arbs who were trying to buy or sell a much larger basket. Also my feel for the momentum allowed me to anticipate when programs would kick in before they actually did. The problem I encounter with today's nasdaq is that it's not clear what variables are triggering automated buy/sell decisions, and there is no advantage to being a highly skilled order router. However, I do believe that with the knowledge of what variables a machine is trading off of, my observation skills would allow me to anticipate the triggering of buys/sells, and I could then get in front of them.

 

[syswizard]

In terms of reversion to mean theory...if you have UNLIMITED CAPITAL...( i know this doesnt make sense) ..but saying IF...then you could theoretically double down on INTC, QQQQ, etc....every say 10c...until you get a 10c bounce in your favor......u'll never have a losing trade (trust me ..i thought of doin this...but i konw eventually i'll get blown out in 1 trade)

its like sittin a casino and just bettin red ALL NIGHT
u'll walk out with cash...but ur pickin up peenies in front of bulldozers

I coded that strategy once in Tradestation....
long term: didn't make any money
Good news: didn't lose much either.

 

[duard]

Quote from Drock409:


we know they are out there....there is even "box wars" goin on...where there are boxes that look for other boxes to "trick" them..high bid, high bid...smack

Indeed. At about 2:30 EST (1:30 Central) on the ES @ 1220 an ask for 10,500 lots appeared. Of course it was a spoof and was meant to "confuse" algorithmic boxes.

I rarely see that big a spoof. Of course the limit is 1,500 lots per trade and the 10K contracts were 2 ticks above the market but you get the point. Unfortunately this didn't yield any significant trade off the info mainly because today was consolidation.

 

[rufus_4000]

Quote from duard:

Indeed. At about 2:30 EST (1:30 Central) on the ES @ 1220 an ask for 10,500 lots appeared. Of course it was a spoof and was meant to "confuse" algorithmic boxes.

I rarely see that big a spoof. Of course the limit is 1,500 lots per trade and the 10K contracts were 2 ticks above the market but you get the point. Unfortunately this didn't yield any significant trade off the info mainly because today was consolidation.

I saw that too, however, only simple order book balance algorithms would get confused by such as size ask, it depends on if the algo maintains a theoretical price, so the size of the book is only one factor in one set of possible algorithms. Most black boxes I know takes a variety of algorithms and then select a statistical most probable fit ...

 

[nononsense]

Quote from Scottsdale:

The edge I can gain over a machine is achieved when I figure out what that machine is reacting to. ...

This is a reasonable statement if you talk about a particular machine that you happen to have some kind of knowledge about.

The newcomer 'machine-traders' in the market are likely pretty dissimilar. So your 'edge' over one particular player may not mean anything, excluding perhaps some weird frontrunning/size scenario.

One further hypothesis would be that many identical machines are trading in the market. This is as unlikely as many identical human players making identical moves based on fixed decision rules in machine-free environments. 'Anything that's known by many ain't worth a thing'.

Quote from Scottsdale:

... However, I do believe that with the knowledge of what variables a machine is trading off of, my observation skills would allow me to anticipate the triggering of buys/sells, and I could then get in front of them.

Here you kind of touch upon the cardinal belief & hope of all TA players, machines or not. We all try our best at this.

Quote from rufus_4000:

It is by no means easy, finding a profitable strategy from high volume trading is quite hard, and then it takes a fair bit of work to develop the automated system itself. It is not un-usual for such a system to take *years* and 3-10 people.
...

Pretty true rufus! And if you got it, better not talk too much about it!
PS: I have my doubts whether putting 10 people on it will bring you much.

 

[rufus_4000]

Quote from vhehn:

if it is so easy to make money with automated trading why do prop firms still hire traders. why wouldnt they just program computers to do the trading?

It is by no means easy, finding a profitable strategy from high volume trading is quite hard, and then it takes a fair bit of work to develop the automated system itself. It is not un-usual for such a system to take *years* and 3-10 people.

Most prop firms I know do not have the technical or the quantitative resources available. Surprisingly, individuals with expert knowledge of quant analysis and system are known to build entire systems by "themselves", but they have no incentive to share their work with anyone else.

The only few prop firms I know that have the pockets and infrastructure to compete are Wolverine, DRW, Peak6, to name a few. Not surprisngly, this came across this morning, even Goldman are thinking about getting rid of exchange presence, somehow I don't think it will be Peak6, having know their internal profitability over the last 1-2 years.

http://today.reuters.com/news/newsArticleSearch.aspx?storyID=271059+16-Aug-2005+RTRS

 

[Avalanche]

Quote from Drock409:

What I am trying to get at is that, imo, very few of the players can play these games, although three people that I know of on ET claim to be able to trade stocks 100% by computer, and no one in their right mind is going to tell you how they are making money doing that (if they are, which is a big IF)

THIS IS NOT TRUE>>>>>>>>>>>>>>>>


i personally know of 5 differnt individuls at my firm that run black boxes...100% automated trading boxes

the WORST of them is up 100k on his boxes this year, the others are up many TIMES that

obviously they are not out there tellin eveyone their stragies...quite opposite...2 of them are in dedicated rooms that NO ONE...and imean NO ONE can enter...period

we know they are out there....there is even "box wars" goin on...where there are boxes that look for other boxes to "trick" them..high bid, high bid...smack

anyone who trades nazzys will occoassionally get hit on 1 share while they are hidded in front of size of a thin issue......thats done purposely...its not grandpa billy buyin $1 share in his 410


In terms of reversion to mean theory...if you have UNLIMITED CAPITAL...( i know this doesnt make sense) ..but saying IF...then you could theoretically double down on INTC, QQQQ, etc....every say 10c...until you get a 10c bounce in your favor......u'll never have a losing trade (trust me ..i thought of doin this...but i konw eventually i'll get blown out in 1 trade)

its like sittin a casino and just bettin red ALL NIGHT
u'll walk out with cash...but ur pickin up peenies in front of bulldozers

This above is pretty on point and similar to my experiences with my own automated traded and that which i have seen over the last year.

Pertaining to early comments, i don't have any stats to back it up but most of the higher frequency strategies i have seen or heard about were mainly mean reversion.

This makes sense if you think about it. Market Makers and specialist are basically liquidity providers and lots of the boxes are set up to trade similarily.

As far as the "what happens when the market goes nuts or has a big trend day", well everything has a shut off switch. Generally the algrothims are robust enough to know what unusual is, and when "unusual" happens they either shut off or the algo adapts to trade differently (more conservatively).