New book on how traders are beating the HFT guys

[austinp]

So let me get this straight, the Russell 2000 and crude oil have both DOUBLED in price since you started trading them and you couldn't (or cannot) make money because of these... "no-good" high frequency traders?

You must be joking, right? I mean this is serious Seinfield material, Austinp.

what correlation is there between notional price of the underlying then versus now? Ten years ago the ER2 cleared 200,000 to 300,000+ contracts daily, and most of it was real accumulation - distribution. Current volume today averages about 1/3 that and is mostly HFT churn. Does it matter if Russell Index is at 2,500 level a year from now but daily volume is 50,000 contracts?

Now let me ask you a question: how long have you been profitably trading mechanical systems? I was writing spot FX systems in 2002 and trading them live. I'll also point out the fact that you are merely regurgitating the "FX is most liquid market in the world" mantra without knowing any more than that.

FX is as liquid or illiquid as the underlying futures market is. Doesn't matter how many spot contracts you can fill if the usdjpy or eurusd chop for two days or rip-spike 100 pips on a fat finger. Your spot position is hit the same.

There are guys reading this thread who've made millions of dollars trading and have written more systems than you & I put together. What you continue to spout here sounds a lot like book read theory and not years of entrenched real-money experience. Nothing personal, but that's how it sounds.

 

[austinp]

The rather odd comments on this website about HFT not affecting trading, have lead me to believe that MOST people who comment on ET are not experienced traders. It is not that they disagree - I don't mind that at all, it's that theircomments show an ignorance that is hard to explain. Maybe it is me?

No it's certainly not just you.

 

[austinp]

Adapt or die and to adapt one has to know one's enemy first.

The common "enemy" per se is a distinct change in price behavior across many/most markets in shorter-term timeframes, specifically intraday.

In order to succeed at day trading one needs markets that move and ability to fill trades in a manner that they can be held thru general market noise. At this present time, many of the former markets that offered ample liquidity to fill and methodical price movement no longer offer one or both of those factors.

A solution in some cases is lengthen time frames traded away from intraday to longer-term holds, and in many cases that means switching instruments traded.

In some cases, day trading will not be or no longer currently is viable in places where it used to be. Simple as that. The choices of adaptation vary from there.

 

[Bob111]

Interview With A High-Frequency Trader

http://www.zerohedge.com/news/interview-high-frequency-trader

here we go..if there a special tags attached to the order that allow one to recognize if it's a retail or not(forget about such deep details-if it's a same guy)-this thing alone gives other side huge advantage. and one more time-if SEC is interested at all to help the public-they can say-all orders are anonymous. data stored on exchanges,but not available to anyone. nope..

 

[austinp]

http://www.zerohedge.com/news/interview-high-frequency-trader

During that same time, I started to notice odd price movements on my charts, ones that I had never seen before. Prices would randomly spike in amounts and directions that made no sense. When I dug deeper, I realized the movements were too fast and too uniform to be human. Computers caused them.

I came to the conclusion that, because of HFTs, our markets are broken and fragmented. I left my old firm in mid-December, took my own money and started running my own shop, based on this premise. My strategy uses software to exploit the dislocations caused by HFT.

TCR: What made you think that high-frequency trading was behind those strange price movements you were seeing?

GARRETT: For one, the movement didn’t look like anything I’d seen in the past. It didn’t match human action. It was too fast, too consistent.

Anomalies would randomly pop up on my screen. A particular stock would drop 10% in one second, then run right back up a second later. I asked colleagues what these movements were and where they were coming from, but no one had an answer. Even the shortest-term charts, in which every data point represents one second and the data is extremely granular (or so I thought) didn’t yield any answers.

Eventually, through my own research, I realized that there was something more going on inside these one-second data points - something you can’t see on a standard chart. That’s where the HFTs operate – in milliseconds.

TCR: So you’ve made a career of exploiting the dislocations caused by HFTs. What’s your answer to the question on everyone’s mind: does high-frequency trading affect the average retail investor?

GARRETT: Absolutely, although the impact varies based on what type of investor you are. For a short-term trader, someone who makes many trades per month, the effects are huge.

===

Straight from the source. What else is there to wonder?

Markets have changed on a short-term basis, so we change too. One simple solution is to stretch intraday trades to larger profit targets, including overnight holds. Other choices exist, too

 

[austinp]

So let me get this straight, the Russell 2000 and crude oil have both DOUBLED in price since you started trading them and you couldn't (or cannot) make money because of these... "no-good" high frequency traders?

TCR: Many defenders of HFT claim that it is a net-positive force in the market because it provides much-needed liquidity and tightens the spread between bid and ask. Are those claims true?

GARRETT: As I said earlier, there are many different HFTs that do many different things. But in my experience, in the aggregate, both of those claims are false. High-frequency trading will reduce liquidity when we need it most, and will flood the system with nonsense at other times.

Case in point, computers regularly withdraw liquidity just before news releases. Oil is a great example. The other day, there was a status report scheduled at 10:30, and around 10:28-10:29, the buy orders on USO (United States Oil Fund, an ETF that aims to track oil) dried up. That doesn’t happen with human traders.

So anyone who wants to get out of USO before the news release is out of luck; they can either take a bad price or wait until liquidity comes back.

Contrast that with the end of most trading days, when HFTs are unwinding their positions; I actually turn my platforms off for the last 10 minutes of the day because the action is confusing and useless. Sure, there’s plenty of liquidity as the HFTs unwind, but the action is just nonsensical. There’s no new information being introduced, no price discovery. It’s just scalping.

The whole liquidity argument is just a justification. On net, HFTs hurt liquidity more than they help.

===

read this article, and learn something about the realities of trading for yourself.

 

[Maverick74]

Austin, has it occurred to you that years back from the period of 1995 to about 2002 that that period was the anomaly, not now. We had a huge influx of really stupid dumb paper money that made discretionary point and click trading really easy. And now, the markets are very efficient, the dumb money has been washed out and all you have left are highly programmed algos that can price things down to a fractional of a tick within a fraction of a second the very minute some news item hits the tape in Singapore and the key word triggers a Bloomberg text reading algo.

Look, I've got bad news for ya. Grandma is no longer daytrading her IRA like she was in 2002 so those schmucks who lifted offers and hit the bid and provided a sea of dumb money to swim in are gone. There is no more meat on the bone. You can rail against HFT all you want, but their existence is organic. Meaning they exist because they are a natural byproduct of what was suppose to happen to this market once it became this efficient. It's the same reason Walmart can sell shit for below wholesale cost and put everyone out of business and make billions doing it. And yeah, there are a lot of people whining about that too. Mom and pop retailers are pissed they can't sell soap for 300% over cost anymore. The irony is it was probably the same mom and pop that gave daytrading a try back in 2002.

 

[xelite777]

Grandma is no longer daytrading her IRA like she was in 2002 so those schmucks who lifted offers and hit the bid and provided a sea of dumb money to swim in are gone.

Maverick74, you really made my day, that was hilarious and true at the same time!

 

[QuantWizard]

There is a new book out about how current day traders are beating HFT. It is titled “Traders of the New Era: Interviews with a Select Group of Day and Swing Traders Who are Still Beating the Markets in the Era of High Frequency Trading and Flash Crashes”

http://www.amazon.com/Traders-New-Era-Interviews-Frequency/dp/8591671309/ref=tmm_pap_title_0

It is very appropriate with all the talk about how HFT is ruining trading. I just got done reading it and found it very informative. All the traders interviewed are long time traders that have adapted to the new world of HFT. For me, the highlight is Eric Scott Hunsader who discusses how the new HFT structure affects everyday traders. I have already made a few changes in my trading based on it.

It is a quick read and similar to Market Wizards, except the author interviews veteran day traders, not hedge fund manager.

My only complaint is that it could have been edited a little better.

What's the big deal? You only have problems if you try to compete with them, i.e. at sub second frequency. Most HFTs are market makers and hence ADD liquidity.

 

[ehsmama]

Austin, has it occurred to you that years back from the period of 1995 to about 2002 that that period was the anomaly, not now. We had a huge influx of really stupid dumb paper money that made discretionary point and click trading really easy. And now, the markets are very efficient, the dumb money has been washed out and all you have left are highly programmed algos that can price things down to a fractional of a tick within a fraction of a second the very minute some news item hits the tape in Singapore and the key word triggers a Bloomberg text reading algo.

Look, I've got bad news for ya. Grandma is no longer daytrading her IRA like she was in 2002 so those schmucks who lifted offers and hit the bid and provided a sea of dumb money to swim in are gone. There is no more meat on the bone. You can rail against HFT all you want, but their existence is organic. Meaning they exist because they are a natural byproduct of what was suppose to happen to this market once it became this efficient. It's the same reason Walmart can sell shit for below wholesale cost and put everyone out of business and make billions doing it. And yeah, there are a lot of people whining about that too. Mom and pop retailers are pissed they can't sell soap for 300% over cost anymore. The irony is it was probably the same mom and pop that gave daytrading a try back in 2002.

One way to look at HFT algos is to consider them as the grandmas of 2000.
After all these Algos are just stupid pieces of hardcoded logic. Once you have a general understanding how they work, it is easy to take advantage of them.
So stop complaining and start thinking of ways to take advantage of these dumb Algos.