Fighting the HFT algos... daytraders and floor traders vs. HFT traders

[walterjennings]

Quote from candletrader:

If a select number of market participants could see market action 15 minutes before the majority, you would not deem that as fair...

HFTs don't quite get a 15 minutes headstart on us.... but a supercomputer running an HFT algorithm only needs a few milliseconds to front run orders in order to exploit the imminent market flow...

This is not fair...

If you are banned from having the same set up as them, I agree its not fair. If everybody has the option to trade in that time frame, I think its fair. Much like the person sitting at the front of an auction hall will hear the auctioneer milliseconds before the people at the back, there is no getting around the limitations of our physical universe. Someone will always see broadcasted information slightly before someone else.

But what it boils down to, the value they are harvesting from the market as HFTs is extremely different than the value you are harvesting from the market as a manual trader, trading on longer time frames. They are in the realm of liquidity providing, market making and stat arbitrage. Their trading should only improve the prices you are getting trading large swings (if you are trading MKT orders, if you are trading LMT, don't complain that you are suddenly competing with experienced liquidity providers. because at that point, you are trying to take their business)

If once upon a time you were able to extract a little extra money from your large swing or directional trading by tapping into a bit of the value which exists at the micro level, I don't think you have any place to complain that other traders are coming in and trading that micro level much faster. They are not unfairly harvesting that value now, the other sides of those trades will always go to the best price, you are no longer able to offer the best price in that time frame.

I really have no sympathy for any businessman who complains when their market becomes more competitive and yet they want to be able to run as inefficiently as always. As for truly unfair practices, I agree they have to go, but that doesn't involve faster computation or faster reactions.

I think people look at the market and only see one business, where in reality, there are many levels and ways to make money in the market, by either providing service or capital gains. It shows lack of understanding when there are complaints which blur the lines between those businesses and call for forced less efficient business practices (which hurt liquidity removing market participants from slower reactions and worse prices) to allow home traders a chance at highly competitive, highly lucrative and highly technologically advanced business practices.

 

[LEAPup]

Quote from candletrader:

I think it would be more profitable to exploit HFTs who attempt to exploit us i.e. a buy the low program kicks in is a chance to go long with the HFT for a quick scalp and then go short when the orderflow reaches an inflection point.... in effect you are making money twice, not just once...

Ok, I understand where you're coming from with the tax on the transactions.

I'm just not big into government taxing anything they want rid of out of existence.

 

[candletrader]

Quote from walterjennings:

If you are banned from having the same set up as them, I agree its not fair. If everybody has the option to trade in that time frame, I think its fair. Much like the person sitting at the front of an auction hall will hear the auctioneer milliseconds before the people at the back, there is no getting around the limitations of our physical universe. Someone will always see broadcasted information slightly before someone else.

But what it boils down to, the value they are harvesting from the market as HFTs is extremely different than the value you are harvesting from the market as a manual trader, trading on longer time frames. They are in the realm of liquidity providing, market making and stat arbitrage. Their trading should only improve the prices you are getting trading large swings.

If once upon a time you were able to extract a little extra money from your large swing or directional trading by tapping into a bit of the value which exists at the micro level, I don't think you have any place to complain that other traders are coming in and trading that micro level much faster. They are not unfairly harvesting that value now, the other sides of those trades will always go to the best price, you are no longer able to offer the best price in that time frame.

I really have no sympathy for any businessman who complains when their market becomes more competitive and yet they want to be able to run as inefficiently as always. As for truly unfair practices, I agree they have to go, but that doesn't involve faster computation or faster reactions.

First of all, I don't buy into the liquidity argument in anything but the strictest of definitional senses... to have a stop gunned down to way more than your 1R loss because of HFT frontrunning key levels affects MY timeframe, which is most certainly not the micro level (fwiw, I trade between the 1 min and 15 minute timeframe, but take cues off level 2 -- something more difficult with HFTs)...

In the good old days, stops could be maintained with minimal losses... now the "slippage" resulting from HFT frontrunning the key levels forces traders to position size off increased stop-out levels, distorting the intraday R:R ratio and making for lower R-multiples... to counteract this reduction in R:R, one has to increase % of account risked per trade on longer timeframes, but this adversely affects the volatility of the equity curve...

HFTs do indeed trade on the microlevel, but their impact is felt on most intraday timeframes...

 

[LEAPup]

Quote from walterjennings:

Does the person running the HTF have less of a right to make a living in the market than you do? If you don't like how they operate, petition of your representative in government and ask them add some regulations. If your suggestions are fair and well minded, ie they prevent people from performing illegal actions, such as insider trading (trading on privileged knowledge) or front running, they might make it into law. I think the market should be fair for all participants. But that does not mean artificially handicapping someone who can out perform you. You'll never see the government come in and sanction Walmart to help small businesses, thats just not how a 'free market' society works.

I'm all about being a free country with free markets. (Well, what's left of freedom in America anyway... )
I'm Libertarian, and want what our founding fathers intended restored.

As a RIA, it is ILLEGAL for me to front run. HFT's are clearly front running.

 

[walterjennings]

Quote from LEAPup:

I'm all about being a free country with free markets. (Well, what's left of freedom in America anyway... )
I'm Libertarian, and want what our founding fathers intended restored.

As a RIA, it is ILLEGAL for me to front run. HFT's are clearly front running.

All HFT is front running? Thats quite a broad statement and I think everybody who actually has worked with HFT systems would disagree. Faster reactions != Front running.

 

[candletrader]

Quote from walterjennings:

All HFT is front running? Thats quite a broad statement and I think everybody who actually has worked with HFT systems would disagree. Faster reactions != Front running.

I don't think you understand that low latency due to exchange co-location in effect means front-running... albeit by milliseconds...

Would you trade against a person who knew the orderflow before you with a reasonable degree of certainty? No, you wouldn't would you?

 

[walterjennings]

Quote from candletrader:

First of all, I don't buy into the liquidity argument in anything but the strictest of definitional senses... to have a stop gunned down to way more than your 1R loss because of HFT frontrunning key levels affects MY timeframe, which is most certainly not the micro level (fwiw, I trade between the 1 min and 15 minute timeframe, but take cues off level 2 -- something more difficult with HFTs)...

In the good old days, stops could be maintained with minimal losses... now the "slippage" resulting from HFT frontrunning the key levels forces traders to position size off increased stop-out levels, distorting the intraday R:R ratio and making for lower R-multiples... to counteract this reduction in R:R, one has to increase % of account risked per trade on longer timeframes, but this adversely affects the volatility of the equity curve...

HFTs do indeed trade on the microlevel, but their impact is felt on most intraday timeframes...

Id first start by saying, if you don't want your stops to be hit, don't use them. The market will go wherever its pushed, and should oscillate around fair value. Agreed that back in the day, stops worked better, thats because the market was slower and the liquidity providers were slower, less efficient, effective. There is nothing about the market that says you are guaranteed a specific price unless you have an order waiting on the books and it trades through.

And yes I agree there is impact on the intraday level from HFT trading, the first impact as I said would be more accurate / faster price levels, the second would be more competitive prices for the people who remove liquidity (investors, traders, non market makers). As soon as you attempt to play the spread with limit orders to try to get better fills, you are now competing with the liquidity providers and will probably lose without the proper equipment and knowledge, if that is where your value came from in the past.

I think 'larger' time frame traders are just a bit sore because they cant compete anymore to get that micro value.

 

[walterjennings]

Quote from candletrader:

I don't think you understand that low latency due to exchange co-location in effect means front-running... albeit by milliseconds...

Would you trade against a person who knew the orderflow before you with a reasonable degree of certainty? No, you wouldn't would you?

By the same logic, a person manually trading from the east coast is front running a person manually trading on the west coast. That is not what front running is.

 

[candletrader]

Quote from walterjennings:

I think 'larger' time frame traders are just a bit sore because they cant compete anymore to get that micro value.

Being unable to compete because of lack of skill is one thing...

Being unable to compete because HFT algos get tomorrow's WSJ today is another thing altogether...

 

[LEAPup]

Quote from walterjennings:

All HFT is front running? Thats quite a broad statement and I think everybody who actually has worked with HFT systems would disagree. Faster reactions != Front running.

Not a broad statement at all when that's what they are in the busines to do.

Btw, candletrader answered your question with "I don't think you understand that low latency due to exchange co-location in effect means front-running... albeit by milliseconds...

Would you trade against a person who knew the orderflow before you with a reasonable degree of certainty? No, you wouldn't would you?"

I agree with candletrader