High frequency trading strategies

[skauf]

Hopefully this is the right forum to post this question.

I hear and read about people, maybe some posting here, who trade futures with "high frequency" strategies.
Now, I've been looking at full-order-book tick-data, and I am very puzzled:

1. I assume, and correct me if wrong, trading HF means one holds positions for very-short time periods. Say half a second.
2. The usual price movement one normally observes over such a short period is one tick.
3. The bid-ask spread is usually 2 ticks (sometimes more). => so the spread is at least X2 the movement.

How can HFT strategies be profitable under such conditions? it seems impossible.

I only saw instruments move in multi-tick quantities at frequencies way above those which HFT allegedly hold (that is, it takes much longer [say 5 seconds] for an instrument to depreciate 3 ticks than what people would call high frequency [say sub second]).

So what am I missing here?

 

[nazzdack]

Quote from skauf:
So what am I missing here?

HFT systems have to be able to "churn" the market a few ticks in order to earn that one tick. You can't expect to passively bid and offer and not take any "heat".

 

[shortie]

Quote from nazzdack:

HFT systems have to be able to "churn" the market a few ticks in order to earn that one tick. You can't expect to passively bid and offer and not take any "heat".

don't have to take any heat as long as you are only placing bids (nowadays).

 

[nazzdack]

Quote from shortie:
don't have to take any heat as long as you are only placing bids (nowadays).

?......in a persistent bull market, sure! Sometimes, it's that "easy".

 

[skauf]

Thanks for the reply.

If this is true, how can you get your orders filled so quickly and so many times a day? What they teach us is that when you consume liquidity (in my example if you want to get rid of a position after the 0.5 seconds you've been holding on to it) - you gotta pay for it. That still leaves a HF trader with at least half the spread. Shouldn't even that alone make it impossible to generate a profit?

If you or anyone else could elaborate on this it'd be great.

 

[bigb]

Quote from skauf:

Thanks for the reply.

If this is true, how can you get your orders filled so quickly and so many times a day? What they teach us is that when you consume liquidity (in my example if you want to get rid of a position after the 0.5 seconds you've been holding on to it) - you gotta pay for it. That still leaves a HF trader with at least half the spread. Shouldn't even that alone make it impossible to generate a profit?

If you or anyone else could elaborate on this it'd be great.

Futures with two tick spreads? What are you trading? Anyways, they pick markets that will handle the size they are trading. The ES can handle substantial size with no spread

 

[saliva]

Quote from skauf:

If this is true, how can you get your orders filled so quickly and so many times a day? What they teach us is that when you consume liquidity (in my example if you want to get rid of a position after the 0.5 seconds you've been holding on to it) - you gotta pay for it. That still leaves a HF trader with at least half the spread. Shouldn't even that alone make it impossible to generate a profit?

If you're trading ES, which has ample liquidity as the above poster noted, you will need to capture at least one tick to recoup your commission. In reality, however, you're usually last in line and you will never score that 1 tick. In order to capture one tick, price must have moved by 2 ticks.

Be that as it may, it really boils down to your entry. If your timing is impeccable, you can capture a substantial sum within a short amount of time. But to flip positions every 0.5 seconds is downright ridiculous to say the least. There's no instrument that I know of which can move 2 ticks every 0.5 second or less.

 

[nazzdack]

Quote from saliva:
But to flip positions every 0.5 seconds is downright ridiculous to say the least. There's no instrument that I know of which can move 2 ticks every 0.5 second or less.

True, unless his pockets are deep enough to be able to "churn" whatever he is trading a few ticks to be able to "create" the fluctuation he needs instead of passively waiting for it to occur.

 

[rosy2]

the high frequency part means the processing of data and placing orders (cxl replace). you're always placing orders and if you get filled you place exits. maybe you exit in .5 a second but more than likely you hold the position for a while; for futures at least.

 

[tradeshark]

Much HF takes advantage of order flow arbitrage. Orders flow is constant. The quants who build that stuff have big companies and lots of other quants behind their efforts to scalp/clip changes in the flow.