short in HFT?

[Rationalize]

Quote from LeeD:

Making market usually comes with an obligation to provide bid and offer on the instrument at all times, including periods of high volatility. Even larger HFT shops prefer to avoid the obligation. Instead they prefer to trade via CFDs using the privilege on another market maker.

I have seen the opposite of this.

The edge being in receiving the spread & the obligation being only for a percentage of the day. Also, the massive trading fee discounts MMs get make it worth while.

Have never seen a profitable HF strategy paying a CFD spread.

And, trading on a market makers price is not a privilege .. it's a last resort.

 

[LeeD]

Quote from Rationalize:

The edge being in receiving the spread & the obligation being only for a percentage of the day. Also, the massive trading fee discounts MMs get make it worth while.

Then it is not so bad. As long as the firm can switch off algorithms on a day when these don't work well and there is no penalty or fine is manageable, it should work.

Quote from Rationalize:

Have never seen a profitable HF strategy paying a CFD spread.

And, trading on a market makers price is not a privilege .. it's a last resort.

Perhaps, I didn't explain well what I meant by trading CFDs.

Leading execution firms such as Goldman or UBS are usually market makers in a number of markets.

Any orders an HFT firm places would be sent directly to the exchange and never executed directly via market maker (unless the firm requests it). However, all the positions opened this way will be in the name of the market maker without the beneficial interest attached. What the firm receives instead is a CFD contract with the price at which the lots was actually traded at on an exchange plus commission. So, there is no CFD spread (unlike trading via a spread-betting firm).

 

[LeeD]

Quote from rmorse:

I hate to correct people here, but all equities settle in T+3 unless the trade was negotiated differently. If the seller is long or short, there is no difference. Also, just because you received a locate, you're not except from being bought in. You can be bought in by your margin department at anytime after failure. Even two weeks later, if you're still short , but they lose their borrow and can't replace it, you can get a buy in notice

When you short stocks, you assume the hard to borrow rate can change, and you can be bought in on any of these securities. It's a cost of doing business from the short side.

What you say is true. However, I stand by my comment that it is totally irresponsible to delay delivery of the stock one sold indefinitely. (I called people who do this "crooks" in my earlier post.)

A trader usually has some sort of horizon for a short position. So, if the horizon is, say, 7 weeks, a responsible trader will borrow the stock for the whole 7 weeks or even for 2 months to be sure. Besides the fact that the lender can't request the stock back for the term of the repo contract, this way borrowing is usually also cheaper. Relying on rolling overnight borrowing for a long-term position is dangerously irresponsible.

In the above scenario there is still a problem that you failed to mention. The lender may fail to deliver the stock on time. However, if the stock is on a hard-to-borrow list the risk of non-delivery is high anyway. So, a responsible thing to do is to wait for delivery before selling the stock.

Currently in the US, non-delivery is considered pretty much a normal thing. There are lots of reasons a delivery may fail including honest mistake in the back office and another seller failing to deliver to you. So, fines are set at a relatively low level on the assumption that failing to deliver is not an offence and merely delivers inconvenience to the buyer/borrower.

The consequence of these rules is when the cost of borrowing a stock exeeds the fine for non-delivery a number of market participants find it acceptable to refuse to buy back or borrow the stocks they sold and fail to deliver for weeks or months straight.

The above anomaly is what the piece of legislation referred to in the opening post in this thread is looking to address...

 

[losemind]

Are margins calculated daily (eod) or intraday?

I mean, for HFT, which may need a large volume of shorts intraday, do margins also spike intraday?

 

[Rationalize]

Quote from LeeD:

Then it is not so bad. As long as the firm can switch off algorithms on a day when these don't work well and there is no penalty or fine is manageable, it should work.

Perhaps, I didn't explain well what I meant by trading CFDs.

Leading execution firms such as Goldman or UBS are usually market makers in a number of markets.

Any orders an HFT firm places would be sent directly to the exchange and never executed directly via market maker (unless the firm requests it). However, all the positions opened this way will be in the name of the market maker without the beneficial interest attached. What the firm receives instead is a CFD contract with the price at which the lots was actually traded at on an exchange plus commission. So, there is no CFD spread (unlike trading via a spread-betting firm).

So effectively the HFT is on swap with their broker in this example .. with the broker holding their actual positions, and taking credit risk against the HFT, in so far as the swap obligations are concerned. Sounds expensive for the HFT in terms of txn costs, exp whatever margin the swap desk is adding on for the privilege of talking to them.

The HFT MMs I am aware of are exchange members with external clearing. No broker / swap bs involved.