What are algos actually doing?

Quote from rdg:

A huge amount of the arbs in futures are against similar products, not the 'true' arbs. When gold got bombed a few weeks ago, the bots instantaneously arbed it against silver and copper. Now from a human perspective everything moves at the same time and there's much less advantage to watching correlated markets if you're trading from home.

I think that's a big reason ES is such a pain in the ass to trade. Since it's spread against everything under the sun, every time it goes bid, it's a deal for a seller somewhere against something else.
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true words of wisdom about current market behavior..
 
Most people think of market making HFTs when you say "algos". They simply post a bid/ask before anyone else after the price moves, and then they are on both sides, so people buying at market are buying from and selling to them, thus they make a marginal profit with very low (or no) commissions.

Then there are arb algos which try to determine real prices of instruments and buy/sell if there are inefficiencies. For example an algo will look at the S&P 500 stocks (tick by tick, high speed) compute them together and determine a realistic price that the ES (e-mini) should be at. They shift the price sometimes by 1 tick or so, very marginal. It doesn't make much difference for algo design if it's futures, stocks, forex or any other market, the principle is the same.

There are also MFT algos which trade in the n-minute time range. Those are simply automated strategies that use a huge range of tactics for predicting prices. There is virtually an unlimited number of variations on what they do and what people come up with, but they in essence try to buy low and sell high.

Most money spins in the faster ones, but some hedge funds survive with MFT and others even slower on a daily basis, etc. I haven't seen a real statistic saying how much each of those is being used and by whom, but that's approximately how it is.
 
Quote from braincell:

Most people think of market making HFTs when you say "algos". They simply post a bid/ask before anyone else after the price moves, and then they are on both sides, so people buying at market are buying from and selling to them, thus they make a marginal profit with very low (or no) commissions.

Then there are arb algos which try to determine real prices of instruments and buy/sell if there are inefficiencies. For example an algo will look at the S&P 500 stocks (tick by tick, high speed) compute them together and determine a realistic price that the ES (e-mini) should be at. They shift the price sometimes by 1 tick or so, very marginal. It doesn't make much difference for algo design if it's futures, stocks, forex or any other market, the principle is the same.

There are also MFT algos which trade in the n-minute time range. Those are simply automated strategies that use a huge range of tactics for predicting prices. There is virtually an unlimited number of variations on what they do and what people come up with, but they in essence try to buy low and sell high.

Most money spins in the faster ones, but some hedge funds survive with MFT and others even slower on a daily basis, etc. I haven't seen a real statistic saying how much each of those is being used and by whom, but that's approximately how it is.
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Thanks! Good explanation :)
 
Ive been calling the market a giant arb for many years. Do I get a prize?

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The original
 
There are literally hundreds of strategies that are employed. Also, with the advent of ETFs and ETNs, the possibilities have really expanded lately.
 
Quote from booked:

Hey guys,

Obviously algos/bots are a big talking point in the markets now, and some are for it, some are against it. But I was thinking today, some traders probably would like to make their own algo, but I thought what do they actually do? I was trying to think of it today......like, explained in real basic terms, what ideas do these HFT firms have that they turn into algos? Especially that basically eliminates human scalpers?

How do they program that into a computer, so that its effect is to eliminate the human scalper(basically the end result, not like they go out at have that in mind obviously). So do they program it to have the best bid/offer(where the real speed HFTers come in, colocation etc.) or do they somehow know when an order is a real person and so its programmed to squeeze it against them a few ticks, have some bid/offers there for when they puke out or what?

Or....is it much more advanced than that, as in massive calculations and formulas based on statistics, standard deviations, mean reverting, relative value formulas or something?

It amazes me that they can actually program something to scalp.......AND that it's actually profitable, sure whoever is fastest can because they will be able to get the inside bid/offer I guess, but then the guys/firms that are fractions of a second behind wouldn't be able to do the same thing surely? So then they would have to come up with some other "Push it against the previous move X ticks until a rush of activity in which it actually is entering on" type thing.

Curious to know more about what they actually program into these things that makes it so humans are no longer a force. (talking about futures here btw, not stocks).

Any info would be great to hear, if anyone knows anything about the details, it's no doubt all very secretive.
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Buy at bid sell at ask.

Buy side

Sells receive the bid, buys receive the ask

Sell Side

Sellers at the bid are paid through buying on the bid, the sell side buyer at the bid then sells to the buyer of the ask.

You can make between 0.0001 to 0.05 in some cases with fighting typically in between the best bids and asks.

Do that 100,000,000 times all day everyday and you'll make money. HFT.
 
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