Anyone?
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How do HFTs screw small hidden limit orders posted inside the spread?
- Thread starter Maverick2608
- Start date
I don't have a direct response, but I love this topic so I'll make a few comments to hopefully keep the thread going with good posters ...
1. Nyse has a rule that allows floor brokers and DMMs to detect your hidden liquidity when it's not NBBO ... they say the effect of exposing your orders is just a side effect of the "d-quote" order type; I'm skeptical.
2. HFTs detect your hidden liquidity at the NBBO (without execution pinging) by using ALO orders ... probably the "secret" main point of the ALO type - ?? designed and delivered by the exchanges specifically to cater to the HFTs in this respect ??
3. HFTs detect your liquidity and simultaneously torture you to death by pinging you with 1-10 share executions ... I've had 1-3 share pings go off as many as 30-40 times on one order. Happens all the time these days with non-hidden as well as hidden orders ... I suspect that for non-hiddens the main point (or one main point) is to sniff out icebergs.
That's all I know that is verifiable ... the REALLY bad stuff I could only speculate about ... as the saying goes, "it's not paranoia if they are really out to get you."
1. Nyse has a rule that allows floor brokers and DMMs to detect your hidden liquidity when it's not NBBO ... they say the effect of exposing your orders is just a side effect of the "d-quote" order type; I'm skeptical.
2. HFTs detect your hidden liquidity at the NBBO (without execution pinging) by using ALO orders ... probably the "secret" main point of the ALO type - ?? designed and delivered by the exchanges specifically to cater to the HFTs in this respect ??
3. HFTs detect your liquidity and simultaneously torture you to death by pinging you with 1-10 share executions ... I've had 1-3 share pings go off as many as 30-40 times on one order. Happens all the time these days with non-hidden as well as hidden orders ... I suspect that for non-hiddens the main point (or one main point) is to sniff out icebergs.
That's all I know that is verifiable ... the REALLY bad stuff I could only speculate about ... as the saying goes, "it's not paranoia if they are really out to get you."
I don't have a direct response, but I love this topic so I'll make a few comments to hopefully keep the thread going with good posters ...
1. Nyse has a rule that allows floor brokers and DMMs to detect your hidden liquidity when it's not NBBO ... they say the effect of exposing your orders is just a side effect of the "d-quote" order type; I'm skeptical.
2. HFTs detect your hidden liquidity at the NBBO (without execution pinging) by using ALO orders ... probably the "secret" main point of the ALO type - ?? designed and delivered by the exchanges specifically to cater to the HFTs in this respect ??
3. HFTs detect your liquidity and simultaneously torture you to death by pinging you with 1-10 share executions ... I've had 1-3 share pings go off as many as 30-40 times on one order. Happens all the time these days with non-hidden as well as hidden orders ... I suspect that for non-hiddens the main point (or one main point) is to sniff out icebergs.
That's all I know that is verifiable ... the REALLY bad stuff I could only speculate about ... as the saying goes, "it's not paranoia if they are really out to get you."
Despite all of the above, I assume hidden orders inside the spread still perform better on average than a lit limit order if you are not in a hurry to get your order filled?
Apparently, HFTs now construct entirely new order types by combining existing order types: " ... in ARCA you can combine Adding Liquidity Only (ALO) Order with Mid-Point Passive Liquidity (MPL) Order to jump to the front of the line (hidden) and get the posting fees. Very little risk in a high-volume penny-spread security."
http://blog.themistrading.com/themis-calls-for-sec-moratorium-on-approving-exchange-order-types/
I did a big experiment with hidden orders a year or two ago, back when IB first coded them up correctly. For several months I used a large proportion of hiddens inside the NBBO, along with non-hiddens and compared the results, both with recent performance of my trading system with no hiddens, and comparing hidden and non-hidden performance during the experimental period. Experimental data points were mainly daily p&l and number of executions, so this was not a detail-rich experiment, but it was somewhat controlled. We're talking about on the order of 100,000 hidden orders.
Results: I noticed no significant performance difference (one way or the other) between hiddens and non-hiddens. The trading was a little different at the microstructure level, but overall results were essentially unchanged. If I had to lean one way or the other I would say performance with hiddens was somewhat worse (as you can imagine there were huge numbers of trade-throughs, along with excessive numbers of trade-ats where I got nothing).
My results are stale and coarse ... would love to hear from other elitetraders with more timely comments, or more specific data.
See my post above: My personal opinion is that "hiddens" are not hidden at all, unless it so happens that for a particular order nobody cares about sniffing you out. If anybody wants to sniff you out, they know all about your pathetic hidden order and are laughing at you.
Results: I noticed no significant performance difference (one way or the other) between hiddens and non-hiddens. The trading was a little different at the microstructure level, but overall results were essentially unchanged. If I had to lean one way or the other I would say performance with hiddens was somewhat worse (as you can imagine there were huge numbers of trade-throughs, along with excessive numbers of trade-ats where I got nothing).
My results are stale and coarse ... would love to hear from other elitetraders with more timely comments, or more specific data.
See my post above: My personal opinion is that "hiddens" are not hidden at all, unless it so happens that for a particular order nobody cares about sniffing you out. If anybody wants to sniff you out, they know all about your pathetic hidden order and are laughing at you.
If you're talking about trades going through your hidden orders in general, then the largest culprit is probably internalization/payment-for-order-flow by "wholesalers": retail brokerages selling their order flow to Knight, Citadel, etc. These orders generally get a "price improvement" of $.0001 per share (that's 1 cent for a 100-share order), when your hidden order would have given it 1 cent PER SHARE (100 TIMES the price improvement, if not 200 times, etc.). After the wholesaler takes the trade, they can then "lean on" the order of the person displaying the visible order, or trade with your hidden order and pocket the $.0099+/share as an instant bonus. Rinse and repeat millions of times per day, and it adds up to something. Unfortunately, someone is losing in this equation, and it's you, as well as the investor who wanted to conduct the trade on the other side.
The proportion of stocks that are sub-pennied has gone up dramatically over the last couple of years, particularly for microcaps, some of which trade virtually no volume on the lit markets. This in turn has contributed to spreads becoming so wide for some stocks that they now trade only "by appointment". And that, of course, becomes very profitable for the brokers, whether they overtly desire this or not. Then they can make the retail investor pay whatever spread they'd like.
The proportion of stocks that are sub-pennied has gone up dramatically over the last couple of years, particularly for microcaps, some of which trade virtually no volume on the lit markets. This in turn has contributed to spreads becoming so wide for some stocks that they now trade only "by appointment". And that, of course, becomes very profitable for the brokers, whether they overtly desire this or not. Then they can make the retail investor pay whatever spread they'd like.
I have somewhat similar question-developed system that works Ok with few high priced , fairly liquid ETFs, but if I change in my backtesting entry at midpoint or buy at bid, sell short at ask(I know, silly me)-results are obviously became significantly better. Question-what retail trader with IB account can do ti improve his chances of getting filled?
Thank you!
Thank you!
I don't have a direct response, but I love this topic so I'll make a few comments to hopefully keep the thread going with good posters ...
1. Nyse has a rule that allows floor brokers and DMMs to detect your hidden liquidity when it's not NBBO ... they say the effect of exposing your orders is just a side effect of the "d-quote" order type; I'm skeptical.
2. HFTs detect your hidden liquidity at the NBBO (without execution pinging) by using ALO orders ... probably the "secret" main point of the ALO type - ?? designed and delivered by the exchanges specifically to cater to the HFTs in this respect ??
3. HFTs detect your liquidity and simultaneously torture you to death by pinging you with 1-10 share executions ... I've had 1-3 share pings go off as many as 30-40 times on one order. Happens all the time these days with non-hidden as well as hidden orders ... I suspect that for non-hiddens the main point (or one main point) is to sniff out icebergs.
That's all I know that is verifiable ... the REALLY bad stuff I could only speculate about ... as the saying goes, "it's not paranoia if they are really out to get you."
1. What is the rule? Is this for hidden orders from any exchange?
2. How does an ALO achieve this?
I did a big experiment with hidden orders a year or two ago, back when IB first coded them up correctly. For several months I used a large proportion of hiddens inside the NBBO, along with non-hiddens and compared the results, both with recent performance of my trading system with no hiddens, and comparing hidden and non-hidden performance during the experimental period. Experimental data points were mainly daily p&l and number of executions, so this was not a detail-rich experiment, but it was somewhat controlled. We're talking about on the order of 100,000 hidden orders.
Results: I noticed no significant performance difference (one way or the other) between hiddens and non-hiddens. The trading was a little different at the microstructure level, but overall results were essentially unchanged. If I had to lean one way or the other I would say performance with hiddens was somewhat worse (as you can imagine there were huge numbers of trade-throughs, along with excessive numbers of trade-ats where I got nothing).
My results are stale and coarse ... would love to hear from other elitetraders with more timely comments, or more specific data.
See my post above: My personal opinion is that "hiddens" are not hidden at all, unless it so happens that for a particular order nobody cares about sniffing you out. If anybody wants to sniff you out, they know all about your pathetic hidden order and are laughing at you.
Was your strategy a profitable intra-day strategy? Were the stocks impacted by news action?
If that is the case, the lower speed of execution associated with hidden orders must in itself imply lower profit.
Orders get filled at other exchanges at better prices, because the hidden orders do not interact with orders at other exchanges and because the lit orders have higher priority at the same price leading to what you describe as âhuge numbers of trade-throughs, along with excessive numbers of trade-ats where I got nothing.â
The trading through or at your limit price = slower speed of execution imply that some of the inherent profit of your strategy was left on the table. Your P&L may then stay the same.
However, my case is different. I will accumulate throughout the day in stocks impacted by no news action and keep the positions over many days. There is no urgency. I am just looking for a cheaper entry and exit.
I will get traded through and at my limit on other exchanges. But at the exchange were my order resides, I assume the game will be less rigged against me. I noted your three points above and I also experience the pinging where HFTs try to expose my hidden orders, but still I feel less molested compared to posting regular limit orders.
When I use regular limit orders, I immediately enter an arms race against other bids that increases the bid - often to the point that I have to pay the full spread. Compared to that it feels like a blessing entering hidden orders that just sit there and nothing happens and I can roll back and forth with the market. It will of course take longer to get the fill, but urgency is not an issue.
I will of course apply rigorous testing.
I have somewhat similar question-developed system that works Ok with few high priced , fairly liquid ETFs, but if I change in my backtesting entry at midpoint or buy at bid, sell short at ask(I know, silly me)-results are obviously became significantly better. Question-what retail trader with IB account can do ti improve his chances of getting filled?
Thank you!
I don't know about with IB, but with dark pool routes you can often trade at midpoint. Also break your orders up into 100 share increments will give you better luck. Beyond that ... you are trying to grab the same pennies that HFT is going for, and you're not likely to win at that game.
1. What is the rule? Is this for hidden orders from any exchange?
2. How does an ALO achieve this?
I'm asking to get flamed because my knowledge is so stale, but ok:
1.
To the best of my knowledge, only for NYSE d-quotes where the floor broker or DMM has a pegged order back behind the BBO ... the rules include the behavior that the pegged quote knows about the NYSE hiddens, so if a hidden goes in or gets price modified at the peg level the (visible) d-quote will jump ahead of the hidden, thereby exposing that there is hidden liquidity at that level. This is not just a rumor or speculation; you can actually observe it yourself (against your own hidden orders) for symbols with market depth static enough so there is no confusion. Also, I found out about this by actually calling NYSE technical support and they described the details to me.
2.
At 10:00:000, HFT decides it wants to uncover the hidden BBO at an exchange. At 10:00:001, HFT sends a blizzard of hidden ALO orders (tiny size, canceled instantly) up and down the price ladder inside the visible BBO. At the price level where an ALO is canceled by the exchange, that's where the hidden market is. At 10:00:002 the HFT knows the hidden BBO.