High Frequency Trading - Hype or Substance?

I find it hard to believe that there is $5k a day sitting there doing that kind of arb, but I guess I should never say never...

nitro
Quote from dersu:

Hi guys,
We are into it :).

My company developed a high-efficiency market depth processor for stock/index arbitrage. We deploy it for interlisted arbitrasge trading - by human traders and machines. Basically, it is high-frequency scalping. We developed it (as a part of our trading system) because market data providers fail to delivery necessary quality of market depth we need, especially for Island and Arca ECNs (we tried Reuters, eSignal, Realtick, etc - all they suck). Anyway, our market depth processor has latency less than 1/10 of milisecond and it runs on a cheap single-CPU PC with throughput up to 100,000 messages a second. For example, currently for all Island stocks CPU load is less than 3%. Processing includes parsing direct feed, sorting of depth (with optional aggregating) and sending it into a network for distribution. In terms of money we have traders who quite often are making 5K a day because of the superior speed of the solution. Machines are making 7-10K daily. To summarise : without high-quality data (what implies minimum latency) high-frequency trading is impossible
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You just can not imagine what a talanted trader can do. I know guys making 20K or regular basis doing prop interlisted arb (US-CANADA). For sure, you need a technology for this, but human factor is very important too. I saw guys making 60K a day on interlsited arb (not every day though)
 
Interesting...

nitro
Quote from dersu:

You just can not imagine what a talanted trader can do. I know guys making 20K or regular basis doing prop interlisted arb (US-CANADA). For sure, you need a technology for this, but huma factor is very important too. I saw guys making 60K a day on interlsited arb (not every day though)
More...
 
I do some high frequency trading. Nothing huge like the big guys though. No arbitrage. Basically trend following on a minute level on the FX markets. Seems to work for me pretty well. The only problem is that the computer gets slow as hell due to all the processor power used up by the systems.
 
I would call it medium-frequency trading :).

In our concept high-frequency means 15000 trades a day for machine and 1000 trades a day for human trader.
 
Hi, first post :)

To my knowledge, reference to high frequency *analytics* is mostly of interest to academics and researchers, who can now study market microstructure matters on a tick-by-tick scale, which result in new implications for risk management, dynamic hedging, agents behavior, etc.

High frequency *trading*, however, is mostly of interest to hedge funds and banks which separate their operations between low frequency ones and high frequency ones. Low frequency usually implies heavier/deeper analytics. The edge is in the numbers, not in the trading. High frequency implies more simple analytics, but the timing and the volume are crucial. They rely more on market microstructure than on acurate solving of PDEs. Yet it does not mean easier to execute. The arbs are risky because you can get stuck on only one leg, and information can turn against you within a second. Unclosed arbs are your loss.

High frequency trades can go from statistical arbs (most commonly heard), to volatility frequency trades/price mean reversals. Most simple arbs, like mergers, correlation triangle arbs, and such, are executed at high frequency because they go vapor quickly.

There would be many other examples I cant think of at the moment. But that should give a good picture. To my belief, HF vs. LF is not about how many trades you shoot per day, but what your strategy is about. HF has been there for a long time. But it's only recently, because of the required skills that distinguish them from low frequency/deeper analytics trades, that a separation has been made. Mostly in hedge funds.

So of course not hype. There would be no market without them.

Hope this helps.
 
Forgot most important - programs

Index vs. basket programs are typical HF arbs. Because they go vapor quickly, that is true. But most of all because the execution is what brings in the green bills.

Information structure on constituants and index are not the same. That is what makes the index arbs so lucrative. And of course, that is why they are the most typical HF trades, and why funds hire statisticians and information/signal theorists for these matters.
 
Quote from cosine:

Forgot most important - programs

Index vs. basket programs are typical HF arbs. Because they go vapor quickly, that is true. But most of all because the execution is what brings in the green bills.

Information structure on constituants and index are not the same. That is what makes the index arbs so lucrative. And of course, that is why they are the most typical HF trades, and why funds hire statisticians and information/signal theorists for these matters.
More...


Welcome cosine!

Good post.

You raise the issue of "information risk" which is a very key risk. I raised this issue earlier on this thread and another posted made comments that seemed to negate the validity of this risk.

Care to share more on what you think about "information risk"?
 
Of course information risk exists!

Information risk is why trading is "expensive". Homogeneous information explains liquidity, and heterogeneous information explains market frictions and trading gridlocks. The more heterogeneous the information is, the highest the informational cost of a trade will be. This informational cost is translated into the bid/ask spread. This is the basis of market microstructure information models.

This is why most of day traders who think they can make money with "trends" get screwed. While they think their trades only cost them broker commissions, they are actually affected by a much higher cost: that of superior information.

Using limit orders on markets does not avoid you the cost of the bid/ask spread. Bid and ask quotes are values conditional to trades based on the information structure of the market. Placing a limit order will only get you hit by traders potentially having superior information, and leave you screwed with losses.

In terms of informational value, technical trading models are not far higher than placing blind trades at random on a market on which vultures with accurate insider information or arbitrage models are waiting for their lunch.

Hope this was of any help...

cosine
 
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