HFT Myths

hft · May 11, 2013

Quote from MoreLeverage:

What are your thoughts on exchanges giving structural advantages to certain groups - DMMs, floor brokers, super high rebate tiers, naked short selling exceptions, etc? How much to do you think these things help for HFT compared to a startup HFT shop without any of those advantages?

Do you know what level you need to go entirely self-clearing for US equities and avoid all the per share fees?

I strongly feel that structural advantages are fine they are open to anyone having to meet certain obligations to obtain them. For instance, if anyone is allowed to obtain DMM status if they agree to quote X ticks wide for Y% of the time, in return for lower fees, I'm fine with that.

It's when exchanges have some closed-off advantages that I have a real problem with. For instance, we had a case where an exchange offered a fast beta system access for some period of time (it was short, like a week or 2), but only limited access to a few members for the beta testing period. You can see how that's unfair.

It does create a barrier of entry for HFT startups. The systems can be improved, but there will always be sources of irregularities when you have such a fragmented, global industry.

I don't know too much about the break-even level for self-clearing equities. Doing a quick search, seems like others on this forum might have more thoughts on it than I do.

luisHK · May 11, 2013

Interesting thread, thanks for the input HFT.

Are you acting on behalf of your company, or of the HFT community as a PR move, rather than on your own desire to inform about hft ?

Quite informative anyway.

trade2live · May 11, 2013

Quote from hft:

The range is really too wide to quote an average. 500% ROC could be considered normal - say making $100M/yr on $20M in working capital.

I really don't know for certain what kind of return the best firms make since I don't work at one. I've heard of firms making $4M/day, and I'd be shocked if their capital requirements were over $100M.

Honestly though, ROI's aren't at the top of HFT firm's worries. We're more worried about return vs. risk, where risk can be very hard to measure since it's more operational and anomaly risk than positional risk.

You are saying 500% per year is average or normal ? I guess some firms make that kind of returns but I can't see how this would be the norm. After all many hedge funds run HFT strats now and they aren't anywhere near those numbers. Also I was just reading excerpts from a book on HFT (more like a journalist investigation into the phenomenon) and it said one of the first experiment in HFT was a desk run by SG and they made like 5K a day with a lot of capital, obviously they ramped it up later on, but it also mentioned what a firm named Tower Group (if I am not mistaken) made and that was around 20 Mil /year that the HFT operation contributed to the firm.

I believe HFT is just a more sophisticated daytrader, and the long term survival rate should be around the same as for other professioanl traders such as HF and CTA's. And you are no different than the SOES bandits 20 years ago, so don't say you provide a service, the "service" perhaps is a by product of the liquidity you bring but markets were doing just fine before you came along. Actually it was better , because one can argue that HFT ruined markets . I am not even talking about flash crashes, spoofing etc. but about the new regs HFT brought about such as circuit breakers for stocks and trading halts which are a nightmare for any investor or trader.

And about choosing your career, my message is that unfortunately too many finance grads and expecially people looking to work in HFT and HF are
the embodiment of greed, perhaps that's why we had the subprime crisis. gmst answer was symptomatic of that : big deal if we blow up, by that time we'll be rich and can only get hired elsewehere, pathetic. The so called quants not only rarely showed an interest in finance before big salaries were offered to them but they have skills that could be used in much more productive ways for society and they end up in this industry, it's a bit of a shame. You should leave the markets to regular people, who won't blow it up !

gmst · May 11, 2013

Quote from trade2live:

gmst answer was symptomatic of that : big deal if we blow up, by that time we'll be rich and can only get hired elsewehere, pathetic.

Actually, I don't disagree with meat of your point!

That poster mixed two things - his personal belief/hatred towards hft in general and the illogical statement saying HFTs and PhDs are bound to blowup. As I said - I have no problem with whatever his personal beliefs are. But to say that HFTs and PhDs are bound to blow up sooner or later is pure nonsense. My contention is that a retail trader is at least 10 times more likely to blow up compared to a profitable established HFT firm or systematic trading firm made up of PhDs.

Btw, I am not a PhD, and I know some PhDs who are not that smart either

But, to make a blanket statement that being a PhD means he is bound to blow up sooner or later is pure nonsense.

gmst · May 11, 2013

Quote from hft:

Believe me I've considered it. You can get a pretty decent operation going for $500K - $1M. But big firms realize this too. Payouts are commonly approaching 50% for highly supported operations, and up to 80% for capital backing. And it's so easy to double what you're making with full connectivity vs. trying to keep 100% for yourself with a small operation that it doesn't make sense to go out on your own if you're highly technology-sensitive.

Can you please elaborate on this statement:
"Payouts approaching 50% for highly supported operations and 80% for capital backing."

1) What kind of support you talking about. Are you saying if an employee makes 2mm, he walks away with 1MM if all the infrastructure is of hft firm?
2) What is the meaning of capital backing? Who is backing with capital and who is getting backed? A HFT firm is backing a new trader with capital or when someone starts a new HFT firm, he is raising capital from somewhere and keeping 80% of it?

Thanks.

CPTrader · May 11, 2013

Quote from trade2live:

You are saying 500% per year is average or normal ? I guess some firms make that kind of returns but I can't see how this would be the norm. After all many hedge funds run HFT strats now and they aren't anywhere near those numbers. Also I was just reading excerpts from a book on HFT (more like a journalist investigation into the phenomenon) and it said one of the first experiment in HFT was a desk run by SG and they made like 5K a day with a lot of capital, obviously they ramped it up later on, but it also mentioned what a firm named Tower Group (if I am not mistaken) made and that was around 20 Mil /year that the HFT operation contributed to the firm.

I believe HFT is just a more sophisticated daytrader, and the long term survival rate should be around the same as for other professioanl traders such as HF and CTA's. And you are no different than the SOES bandits 20 years ago, so don't say you provide a service, the "service" perhaps is a by product of the liquidity you bring but markets were doing just fine before you came along. Actually it was better , because one can argue that HFT ruined markets . I am not even talking about flash crashes, spoofing etc. but about the new regs HFT brought about such as circuit breakers for stocks and trading halts which are a nightmare for any investor or trader.

And about choosing your career, my message is that unfortunately too many finance grads and expecially people looking to work in HFT and HF are
the embodiment of greed, perhaps that's why we had the subprime crisis. gmst answer was symptomatic of that : big deal if we blow up, by that time we'll be rich and can only get hired elsewehere, pathetic. The so called quants not only rarely showed an interest in finance before big salaries were offered to them but they have skills that could be used in much more productive ways for society and they end up in this industry, it's a bit of a shame. You should leave the markets to regular people, who won't blow it up !

Can you please share the name o fthe book you refer to above that you are reading. Thank you.

vicirek · May 11, 2013

Quote from trade2live:

so don't say you provide a service, the "service" perhaps is a by product of the liquidity you bring but markets were doing just fine before you came along. Actually it was better , because one can argue that HFT ruined markets . I am not even talking about flash crashes, spoofing etc. but about the new regs HFT brought about such as circuit breakers for stocks and trading halts which are a nightmare for any investor or trader.

Look at the big picture; compare market capitalization 20 years ago and now; compare how much new paper has been issued over 20 years, stocks, bonds and derivatives - there is no MM or Specialist to provide continuous liquidity for orderly markets. You picked wrong target. Target those that issue worthless paper by the truckload not those that try to manage flow of this mountain of paper and make some profit in the process.

toolazy · May 11, 2013

Quote from gmst:

Actually, I don't disagree with meat of your point!

That poster mixed two things - his personal belief/hatred towards hft in general and the illogical statement saying HFTs and PhDs are bound to blowup. As I said - I have no problem with whatever his personal beliefs are. But to say that HFTs and PhDs are bound to blow up sooner or later is pure nonsense. My contention is that a retail trader is at least 10 times more likely to blow up compared to a profitable established HFT firm or systematic trading firm made up of PhDs.

Btw, I am not a PhD, and I know some PhDs who are not that smart either But, to make a blanket statement that being a PhD means he is bound to blow up sooner or later is pure nonsense.

if history is any guide HFT & PHD do not live long in world of trading. ego thing makes phd less than useless.

hft · May 11, 2013

Quote from gmst:

Can you please elaborate on this statement:
"Payouts approaching 50% for highly supported operations and 80% for capital backing."

1) What kind of support you talking about. Are you saying if an employee makes 2mm, he walks away with 1MM if all the infrastructure is of hft firm?
2) What is the meaning of capital backing? Who is backing with capital and who is getting backed? A HFT firm is backing a new trader with capital or when someone starts a new HFT firm, he is raising capital from somewhere and keeping 80% of it?

Thanks.

1) Yes. Infrastructure meaning hardware, trading capital, exchange memberships, network lines, historical data, etc. You get some basic software like exchange connectivity and market data. You bring the software that does the trading logic.

2) Capital backing just means you trade with the company's money. The higher payouts like 80% come from places that only give you exchange membership and money to trade with and you have more to handle on your own, and lack of good network connectivity between colocations. 80% is pretty rare, typically you're talking 50-70% for places that don't give you as much for free. These places aren't too common, but HTG is an example of one.

hft · May 11, 2013

Quote from luisHK:

Interesting thread, thanks for the input HFT.

Are you acting on behalf of your company, or of the HFT community as a PR move, rather than on your own desire to inform about hft ?

Quite informative anyway.

I'm definitely not acting on behalf of my company.

I am in part doing it as PR for HFT. Kind of started on a whim to see what kind of views were out there from real traders as opposed to just the media and dispel some myths about how HFT's supposedly cheat everyone.

At this point, I'm just trying to steer clear of philosophical arguments about HFT and simply provide facts, though I've led myself astray in that regard several times already.