High Frequency Trading

Anyone know what kind of Algo’s HFT firms use? Not asking about exact algo’s, but more broadly speaking, what kind of inputs/ variables these things use to determine when to buy and when to sell. Also curious as to how they are built and maintained. Any literature out there that might provide a more detailed insight into these things? All I’ve really found are articles about the broad strokes.

Given that HFT is basically legalized fraud, I doubt you are going to find much in the way of literature explaining how the fraud occurs. The main inputs would be certain price and volume trends. You can see it when the algos come in during highly liquid, highly controversial stocks where the volume goes through the roof. PLUG and WTW were some recent examples. I suspect they also look at short interest and try to exacerbate short squeezes. If a stock is trading more than 100% of its float in one day, you can be sure the algos are involved.

quantiopian.com is a junior version for algo trading. You can make your own and explore some of theirs, I use it for research. It is more of a hands on learning process. There are lots of lectures on some of the algo stratigies and how to build them.

Bromion- Touche, very sketchy part of the industry…sure not many are willing to reveal their secrets on this

Ric_N-Thanks for website, this looks great. Going to read through this now

Bromion, so… you support Sanders 50c tax propsal or what?

I don’t listen to anything Sanders says so I hadn’t heard that. But I support some kind of prohibitive tax / fee that eliminates HFT from the market. It does not add liquidity, it just exacerbates adverse price movements and steals money from legitimate investors during normal trading.

but how do you define HFT? When you route ourder lets say to DB to buy 50m shares and DB executes it using VWAP algo, is it HFT?

Doesn’t HFT only cause intra day excess volatility? On the whole, and over time true price discovery trumps the dips and pops caused by the machines. The grand example would be Aug 24th. In which case just as many people made money that as lost it. That rediculous drop was the opportunity of the year! Thanks HFT! If you are a trader losing money due to nonsence volatility caused by these things then perhaps you should retool your strategy. Who is really losing money based on these movements and if so… why can’t they just adapt to the new norm? Seems like if the problems are caused by algorithms, then the ability to read into price behavior to recognize machine exaggeration would be feasible. One way to not get robbed by HFT… don’t sell!

No, because DB is not located on the exchange with the explicit goal of ripping out a fraction of a penny millions of times for trades held for a millisecond, they are just executing an order.

The machines create really excessive volatility despite what the HFT people claim. It gets more noticeable every year. I’m buy and hold so it impacts me less than most people in the market. But it’s still theft, even if we’re talking about a rounding error. What the machines have done is make it much, much harder for the average idiot day trader. That guy is obsolete now. I actually think the machines help me because they create significant dislocations in small caps. Look at the huge spike in OMER (stock scam) in August when the stock traded almost 100% of its shares outstanding. The puts were a nearly immediate 3x return. Thanks machines, you make it easy.

So was the market more liquid and efficient when bid/ask spreads were measured in 1/8 of a dollar compared to getting fills out to 4 decimals?

The machines are programs created by humans to make more money. There is no reason some day trader deserves the profits compared to a computer scientist.

Additionally, there are a decent amount of HFT strategies that rely on location to either the exchange or to DC where news is disseminated.

Regulating or taxing these activities is not going to make the market more efficient. You want to talk about actual theft? Start right there. If an exchange itself wants to implement their own policies in the name of fairness to attract traders, they have that right. The best ones will survive.

In the meantime, adjust your strategies accordingly if you think they’re affected by HFT. The market changes everyday, complaining that some other guy is making money that should be yours is going to get you nowhere.

No one’s saying the day trader deserves to profit. They are as bad as the machines at creating vol, they just aren’t as good at the game.

"Additionally, there are a decent amount of HFT strategies that rely on location to either the exchange or to DC where news is disseminated. "

That’s my point, it’s theft, not a legitimate strategy. It’s essentially insider information. The exchanges are in on the gig because they profit from it.


This is very true. Its phantom liquidity it dries up when it is needed the most and rushes in when it isn’t. Volume would be down if we did something to eliminate HFT but what you would see is the true volume of the market not all this smoke and mirrors.

How is that theft? Information is released at a set time and disseminated to everyone. It’s akin to getting the news immediately on the internet vs. reading it in the newspaper a day later, just on a far greater scale. If it’s profitable to get that information soon via technology, people will do their best to take advantage of this. The trades would occur regardless.

Why do you hate markets?

This quantopian site is kinda interesting. But you gotta wonder if every time there is a strategy with a nice Sharpe ratio and reasonable drawdowns, the code gets copied and sent to someone else for analysis.

A lot of people don’t understand why insider trading is illegal. From one perspective, why would it be illegal for a CEO to dump all of his shares a few days before announcing a big earnings miss? He has the information first, why should it be illegal to enter legal transactions to take advantage of it.

For the same reason, using deep pockets to sit next to an exchange and take advantage of a 1/2 second head start on information isn’t an illegal or immoral act from the individual perspective, but it isn’t really healthy for an economy to be based on finding ways to set up what are effectively toll bridges to trading. People are just sitting there squeezing rents out of the exchanges and not actually adding value to the economy. It’s one thing if someone builds a bridge and then charges tolls to pay for it and its maintenance; its another thing if someone finds a path already in existence and sets up a toll booth so that travelers have to pay them. In one, a productive activity was financed and paid for; in the other, one’s just tried to extort money out of people. It’s not illegal in most cases, but it’s also not healthy.

I personally don’t care all that much about high frequency trading because the time frame of my investments is generally long-term enough that the volatility washes out (except in things like flash crashes), but it is exceedingly frustrating to see companies making money hand over fist without doing much of anything of value to earn it.

The reason markets are *supposed* to be good is that price signals lead people to do things that are productive and useful and meet the needs of others in the economy. They’re good because it’s often an efficient coordinating mechanism. Lots of market activities do that, but how is HFT useful to anyone other than the people making 1/2 cent per trade on buying X and immediately selling it again? They *say* they provide liquidity, but it’s seldom there when you actually need it. And is that worth the fact that these people can then pay off the exchanges to provide them even more opportunities to widen their advantage that the rest of us have to pay. Plus, occasionally the machines get into a positive feedback loop and generate a flash crash.

I find the strategies that are designed to sniff out where people’s stop-losses are and make money by forcing them to bail and then buy back their stocks are really distasteful. Again, not illegal, but it’s like the kid on the playground that interrupts a game by grabbing the ball and then says they’ll give the ball back for $10. You don’t mind that there’s playing on the playground, but that kid is a douchebag in training and the rest of us would be better off without them.

this is the precise issue.

  1. you want to BUY 1m shares. you check the L2 depth and decide a market order will be fine. it gets executed at a price 50c higher than you expected.

  2. you do the same again, this time you know a little better, so you place a LIMIT BUY at the current midpoint.only a fraction of the order is filled, the stock goes up in the following days and you missed the opportunity.

  3. you decide VWAP is the way forward. but those HFT still screw you and they can detect your order pieces and work the market in their favor.

It not only screws the little guys, they also win the arms race.

This basically sums up the issue imo. You have two groups here. The HFTs and exchanges themselves who make a killing off this, and everyone else. There is absolutely no way to get the latter group to care 1/1 millionth as much about this as the former. Joe blow couldn’t care less if he loses fractions of a penny on trades that he doesn’t even know are being made on his behalf. But encroach upon the former’s money machine and see what happens. Reminds me of the guy from one of the exchanges who got in the shouting match with Michael Lewis on CNBC after his book was released (fwiw, his company later issued a statement saying he lied and fired him). Speaking of Lewis, his book isn’t nearly the best (nor first) on the topic. There’s others that talk about how the exchanges have literally created order types for the HFTs just to win their business. But again, I don’t see anyone caring nearly enough anytime soon about this for change. No ones going to avoid a trade purely because of the fractions of a penny they may or may not be scalped.

Big mutual funds should care, or hedge funds. They frequently place orders in the $tens of millions, they should care about 1/1millionth. For the average individual investor, that makes very selective decisions, it doesn’t matter much. That is because the individual investor probably places an order very infrequently.

Mutual funds should be all over this, it is their battle more than anyone’s. Perhaps day traders should be all over this too, but as far as I know day traders are HFTs. The human way of doing day trading becomes very very difficult (if not impossible).

As far as liquidity is concerned, I think that is the biggess BS that they say. As soon as anything weird happens they pull out of the market.

This should be a big boys battle… which is the fun part when you watch from the sidelines