The Arms Race in High Frequency Trading

[libertad]

High frequency trading ....will do well in highly populated markets....no matter what the label....

The more populated the better....

Thus one would focus on the lowest transaction cost, highest populated ....

And perhaps most importantly....the most diverse base set of cheerleaders....

 

[bottompicker]

Quote from libertad:

High frequency trading ....will do well in highly populated markets....no matter what the label....

The more populated the better....

Thus one would focus on the lowest transaction cost, highest populated ....

And perhaps most importantly....the most diverse base set of cheerleaders....

But what happens when high frequency traders gradually kill off the population - take Bund/Bobl and Schatz on Eurex and 10/30yr on CBOT, not so long ago they were THE place to be but high frequency algos with deep pockets have cleaned out the smaller people - now daily volumes are pathetic and it's like watching a load of computer programmes battle it out. I actually don't even consider it trading, just very scummy and detrimental to market volumes and growth.

 

[risktaker]

Then it just becomes a casino. It'll take a long time to bring back the 'real' players.

Quote from bottompicker:

But what happens when high frequency traders gradually kill off the population - take Bund/Bobl and Schatz on Eurex and 10/30yr on CBOT, not so long ago they were THE place to be but high frequency algos with deep pockets have cleaned out the smaller people - now daily volumes are pathetic and it's like watching a load of computer programmes battle it out. I actually don't even consider it trading, just very scummy and detrimental to market volumes and growth.

 

[risktaker]

On a related note, does anybody think the "re-introduction" of the uptick rule will throw a monkey wrench into a lot of these HFT/black boxes? Slow 'em down?

 

[Trader KGB]

Quote from MGJ:

Managed futures also did quite well.

And yet they received very little press for their efforts it seemed. Many trend/momentum CTAs had home runs in '08.

 

[stock777]

I think they should ban co located boxes and all the other crap these guys use.

I'm still waiting for a real life example, not jack 'the obfuscator' hersheys doubletalk.

This guy does it better anyway.

Take lessons jack


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[lolatency]

Quote from stock777:

I think they should ban co located boxes and all the other crap these guys use.

I'm still waiting for a real life example, not jack 'the obfuscator' hersheys doubletalk.

This guy does it better anyway.

Take lessons jack

Banning the colo would do nothing. The MMs would just look for the next ISP/network provider that's closest and play the same games.

No one posts real-life examples because the strategies are simple enough and because it boils down into orderflow prediction models and technical competence in the area of speed.

 

[stock777]

They are so simple no one can give an example?

Order flow prediction?


Oh yeah, that's trivial.

Why am I not surprised that posturing is in high supply but actual information is not?

 

[lolatency]

Quote from stock777:

They are so simple no one can give an example?

Order flow prediction?


Oh yeah, that's trivial.

Why am I not surprised that posturing is in high supply but actual information is not?

It is trivial, and there are microstructure effects that can be capitalized upon. See Olsen's book on high frequency trading, and Roll's paper written in 1984 on modeling the behavior of the bid-ask spread and the bounce between them.

 

[black diamond]

I know overshoots are part of the market. I was saying I don't think your argument that more HFT get prices closer to a step function is always correct - maybe this can magnify the overshoots instead of getting prices to the next step faster.

I firmly believe there is price-insenstitve trading by funds. For example, when funds have big outflows they are price takers - you can find lots of statistical and anecdotal evidence of this if you care to look. VWAP strategies do not save you when you need to move a large part of the daily volume in a hurry. I also have personal experience with a firm that analyzed the pricing of their target assets to death, but were totally price insenstive to their hedging instruments even though they were a big part of that market. Maybe not the best way to operate but the point is that behavior exists and didn't put them out of business.

I don't see where your example of staying still while getting run over is relevant. Of course liquidity gets scared out of the book when a big traders intentions are clear, the question is how this changes when HFTs are active. I think it happens earlier when the big trader is being front run, and the front runner gets to pick off the stragglers that the big trader would otherwise get. IOW, how much worse will you do on your 5000 strangles when HFTs snifff you out and get ahead?

Finally I do not stay awake at night worrying about mutual funds getting worse prices and I think legal front runners are entitled to what they can get, but an earlier post brought up social welfare. When policymakers think about social implications of market design they are concerned with the "initial buyer", not liquidity for HFTs! If the perception that HFTs are hurting initial buyers instead of improving liquidity and price discovery gets too strong then rules like a transaction tax are more likely.

Based on some of your earlier posts I got the impression it would be interesting to exchange ideas about this. But it sounds like you are more into winning the point so I guess I'll agree to disagree.

Quote from nitro:

Well, sure. Overshoots are part of markets, and the effect is that on an overshoot, the people that are responsible for bringing back prices to "FV" will step in and take risk that prices are out of whack.

As far as a mutual fund that is insensitive to price, they will not be in business for very long if that is the way they continue to do business, imo. Every place that I have ever been in uses VWAP or TWAP or some other sophisticated method of acquiring an asset to minimize their own effects on liquidity. They are not perfect, but they are a far cry from "insensitive to price."

I don't think there is less liquidity at all. There is only possibly less liquidity to the initial buyer, not to the traders that bring things back inline on overshoots. Further, who do you think is on the other side of the trades of the mutual funds? MMs more often than not. Who do you think notices that they are getting lifted? So you want them to take note of the fact that someone is trying to run them over as cheaply as possible, and stand there and take it? That does happen to some extent in super liquid assets like ES, ED and equities like MSFT that have huge size deep into in the book, but on anything but A tier stocks? Come on. I would love it if anytime I wanted a fill on 5000 strangles the other side would sit still for me too.

All markets participants anticipate and react, and mutual funds are the sardines for the sharks, dolphins, whales, birds, etc. Maybe mutual funds should hire traders? Novel.