High frequency trading strategies
- Thread starter skauf
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Spot on Rosy!
I thought a lot of the business of HFT was collecting rebates from the exchanges for making liquidity. So even if they buy and sell at the same price, they can still make money from the rebates. They may increase liquidity, however unlike market makers or specialists they don't have the obligation to make liquidity, so they can turn it on and off at will, which could have a detrimental effect if the markets ever go haywire.
Take a look at Joe Saluzzi's rants / articles / interviews. He's from Themis Trading in NJ, and he's been highly critical of HFT for a while on CNBC, Bloomberg, etc.
His view is that HFT creates the illusion of liquidity, while making the bigger market participants pay for it via larger slippage on entries and exits as the HFT detects buy and sell orders and front runs them, all the while presenting the theory that it is generating liquidity. Thats why dark pools got so popular with the bigger traders, is because of HFT.
The naive user of a trading system or discretionary trader may discover that the 10 million shares traded on a stock per day are only traded amongst other HFT players, or different versions of their own HFT strategy, and that when they want to put in a 500,000 share sell order, they end up driving the stock down 5%. Here, HFT are not exactly creating liquidity....
So you might call this liquidity arbitrage- fooling people into thinking that its liquid, when its not at all. HFT as a rule has also abandoned small caps, and moved to large cap stocks exclusively, creating a big hole for small caps.
HFT also do latency arbitrage- say they have a 50 millisecond connection the the exchange, whereas someone else has a 200 millisecond connection by the time their old VB system triggers a buy/sell order, the HFT has already got in front of it. And as decimal based trading picks up.. HFT makes money here as well.
His view is that HFT creates the illusion of liquidity, while making the bigger market participants pay for it via larger slippage on entries and exits as the HFT detects buy and sell orders and front runs them, all the while presenting the theory that it is generating liquidity. Thats why dark pools got so popular with the bigger traders, is because of HFT.
The naive user of a trading system or discretionary trader may discover that the 10 million shares traded on a stock per day are only traded amongst other HFT players, or different versions of their own HFT strategy, and that when they want to put in a 500,000 share sell order, they end up driving the stock down 5%. Here, HFT are not exactly creating liquidity....
So you might call this liquidity arbitrage- fooling people into thinking that its liquid, when its not at all. HFT as a rule has also abandoned small caps, and moved to large cap stocks exclusively, creating a big hole for small caps.
HFT also do latency arbitrage- say they have a 50 millisecond connection the the exchange, whereas someone else has a 200 millisecond connection by the time their old VB system triggers a buy/sell order, the HFT has already got in front of it. And as decimal based trading picks up.. HFT makes money here as well.
I don't think any of these arguments are valid. Let me try to argue with them.
>>Thats why dark pools got so popular with the bigger traders, is because of HFT.
>>HFT as a rule has also abandoned small caps, and moved to large cap stocks exclusively, creating a big hole for small caps.
These two arguments are simply contradictory.
>>The naive user of a trading system or discretionary trader may discover that the 10 million shares traded on a stock per day are only traded amongst other HFT players, or different versions of their own HFT strategy
This trading can't be profitable due to different fees.
>>when they want to put in a 500,000 share sell order, they end up driving the stock down 5%. Here, HFT are not exactly creating liquidity....
If the managers are stupid enough not to realize that 0.5M shares order will move the stock 5%, that's their problem.
>>HFT also do latency arbitrage- say they have a 50 millisecond connection the the exchange, whereas someone else has a 200 millisecond connection by the time their old VB system triggers a buy/sell order, the HFT has already got in front of it.
Better technology gives better results. That happens every day in every aspect of our life. What's wrong about it.