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Topic Title: what is high frequency trading?
Created On Wed Apr 12, 06 09:20 AM

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Stutch
Member

Posts: 36
Joined: Oct 2006

Thu Jan 07, 10 02:16 PM

Skauf,
In FX you can place limit orders within the spread with some counter parties, however the spread does not operate on fixed boundaries. I don't know whether other counter parties will allow this with other instruments.

With any algo which uses a fixed set of parameters then you are assuming you can predict the future to some extent, that is, what is most likely to happen in the long run, this includes NN which load static weights.
(I don't have crystal ball, its just a cheap suit).

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skauf
Junior Member

Posts: 8
Joined: Sep 2009

Thu Jan 07, 10 03:20 PM

People trade HF in future/options, which are (heavily) price-quantized instruments. The spread is usually 2 ticks (and very commonly more), while the usual short-term price movement you can get is one tick => so the spread is at least X2 the movement. Looking at millisecond data, instruments move in multitick quantities only at frequencies way above those which HFT allegedly hold (that is, it takes much longer, say 5 seconds, for an instrument to depreciate 2 ticks than what people would call high frequency, say sub second).
How can this be? Honestly this is big puzzle for me right now.

I don't know how to simplify my question further or put it differently, but I'll try anyway:

I realize of course that any estimator is not a magical crystal ball with 100% success rate, and never claimed that this is a requirement for HFT or any strategy for that matter to be profitable. I simply tried to illustrate that even in the completely hypothetical best case that I COULD predict the market with complete certainty, the way I see it, if I limit myself to the tiny holding periods which have to be the domain of every HFT to make so many transactions a day - I would still not be able to produce a profit, because in all but a negligible number of times, during each of the times I hold a position, the market movement will be lower than the bid-ask spread. So again I ask - how can they make money from such positions?

1. Perhaps I'm wrong and though they trade 10K contracts a day, they somehow hold each position long enough say 5 seconds on average? (how does this add up?)
2. Maybe I'm wrong and they avoid paying the spread, entering at X and exiting at X+1, a few fractions of a second later? (how on earth can this be done?)
3. ??

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d138
Junior Member

Posts: 17
Joined: May 2007

Fri Jan 08, 10 06:42 AM

The answer to your question is simple:
>2. Maybe I'm wrong and they avoid paying the spread, entering at X and exiting at X+1, a few fractions of a second later? (how on earth can this be done?)
They avoid paying the spread by buying at the bid, not buying at the offer. If market don't move at all but I am buying at the bid and selling at the offer, I will make tons of money

Posts: 136
Joined: May 2005

Sun Jan 17, 10 01:44 AM

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Originally posted by: ExSan

Quant Hedge Funds Poised To Benefit From High-Frequency Trading

Contrary to popular misconceptions, high-frequency trading strategies are defined by the frequency of position holding, not by the speed of order execution.

Thanks for the link, ExSan, and also for a link that you posted previously:

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Originally posted by: ExSan

Geeks trump alpha males as algos dominate Wall St

High-frequency traders are practical, problem-solving people with an engineering background. "It's a very intellectually challenging field -- it's extremely exciting to develop a strategy, implement it and see it make money

I would like to share a few more links to website articles on high frequency trading:

Trading Shares in Milliseconds

(the above link is to a Google cache because the article is not free on the source website)

Other links are older:

Inquiry Stokes Unease Over Trading Firms That Shape Markets

The above article mentions commodity (oil) high-frequency trading, international aspects: traders in Amsterdam, exchange in Chicago, and a fine distinction between subtle influence on markets and equally subtle market manipulation that is hard to understand, not to mention to regulate, particularly when prop traders make markets.

Rewarding Bad Actors. By PAUL KRUGMAN

I seriously dislike Krugman. I think that, in least in his journalist incarnation, he is prostituting economics science and is intellectually dishonest. It is especially dangerous because of his genuinely high intellect, and recently also his Nobel status. However, what he says cannot ignored, no matter is it right or wrong, because it is a part of a public opinion - or at least an opinion of a big part of a public that has a lot of power.

The dash to flash

High-Frequency Trading Faces Challenge From Schumer

It is mostly about flash orders, that never constitute a big chunk of high-frequency trading, and to my understanding were prohibited recently. However, politicians, media, and general public reading the media (or even worse, watching TV) perceived high-frequency trading to be flash orders.

Hurrying Into the Next Panic? By PAUL WILMOTT

Our host warns about a potential danger posed by proliferation of high frequency trading, particularly using essentially the same strategies.

Stock Traders Find Speed Pays, in Milliseconds

A description for a general public, that includes a lamenting that it is unfair when some people use home PC for trading, while other use powerful computers and other hardware, and elaborated algorithms. As if it changed anything: as it was said long ago, "Stock market is the only segment of US economy where seasoned, educated full time professionals routinely compete against weekend amateurs" (sorry for a lack of attribution - I read something similar about 15 years ago, may be 20, and cannot recall where).

Arrest Over Software Illuminates Wall St. Secret

A developer of high-frequency algorithms was arrested for a theft of program codes when he left to another firm. He insists that copied the codes by mistake, together with open-source codes that he developed / contributed on the side. To make the case more important, persecutor told journalists that high-frequency is about market manipulating. Teh arrest happened several months ago; it looks now is it leads no nowhere.

Locklin on science. The three stooges of the high frequency apocalypse

A sarcastic article, quote:

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You�re paying for the immediacy (buy it now!) and liquidity (buy as many as you want!) provided by the store. This is a service which costs money. Joe Saluzzi wants all stores to follow the same shag-carpet era rules his little Two Guys operation does. Paul Wilmott apparently wants to make stores illegal, because stores might �distort the economy.� Chuck Schumer is peeved those guys with a shop in his state didn�t fork over the correct amount of campaign contributions.

Posts: 136
Joined: May 2005

Sun Jan 17, 10 04:32 AM

Sorry, a link to a Google cache in a previous post does not work

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ExSan
Senior Member

Posts: 518
Joined: Apr 2003

Thu Jan 21, 10 10:35 AM

Of course fast connection plays its role

NYT - How Fast is your web connection?0

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ExSan
Senior Member

Posts: 518
Joined: Apr 2003

Sat Jan 23, 10 01:55 PM

I want to be there !
Floored -For Some People Risking Everything is Nothing-

... AND NOW FACE EXTINCTION

" ... we had as much as 500 people when I was there in the eigthies, now there maybe fifty guys, a lot of the business is gone to electronic trading .
I`ve seen some of the most succesfull open up by floor traders move to the screen and have zero succes ..."

" In 1997, more than 10 000 people traded on the floors. Later that year, computer trading was born. Today 10% remain" _ THE TRANSITION _

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Floored: Standing in the Twilight of Open Outcry
Trading floor - research

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Edited: Sat Jan 23, 10 at 09:20 PM by ExSan

Posts: 136
Joined: May 2005

Sat Jan 23, 10 10:08 PM

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Originally posted by: ExSan
Quant Hedge Funds Poised To Benefit From High-Frequency Trading

- the above article (see link) is by Irene Aldridge

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The costs of computer hardware required in an automated high-frequency platform are often very reasonable, and certainly lower than those put forth in the media.

Media is mostly recycling teh same catchphrase: "a supercomputer that costs $20 millions".

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computer equipped to run today�s generation of online video games is perfectly suitable for running a high-frequency trading system, and will set you back only a few hundred dollars.

Do not mind trades - can you reliably download NYSE ticks to a gaming PC? and, by the way, where can I buy a gaming PC for "few hundred dollars"?

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Yet, the sky is always the limit as far as the technology costs are concerned, and some may prefer to buy advanced servers for several hundred thousand dollars apiece, although the marginal benefit of such expense cannot be justified in many cases.

but usually can. Especially if, when mentioning a setup that costs "several hundred thousand dollars", the author of the above article meant not a bare server, but a rack setup with several servers, storage boxes, switches, etc.

And, of course, because boys like to play with toys

a rich hardware may be a recruitment / staff retaining issue

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Co-location, a popular topic, can also be integrated into a trading platform without much expense. Many brokers now offer this service free of charge, hoping to profit from sell-side transaction revenues.

hmm... does colocation cost "few hundred dollars"? And just once, not every month? ...

On the other hand, is colocation needed so much as media says it?

hmm... network costs probably are so small that do not deserve to be mentioned ? Negligible comparing with "few hundred dollars"?

hmm... subscriptions to data feeds are not mentioned either. Are they free ?

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Perhaps the most costly component in building a high-frequency system is finding and retaining specialized staff capable of programming trading ideas.

definitely true

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Total compensation schedules for such personnel can run upward of $500,000 per year, and, worst of all, once someone lures them away with an even higher paycheck, their intellectual capital leaves with them. In response, some firms require strict non-compete agreements to discourage their employees from transferring their knowledge to other firms.

then it is not "upward". Any case, 500k was said to be about a maximum. What is a reasonable minimum? And, most important, how big staff is needed - a singe programmer would not be enough, would it?

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Others use brokers� �plug-and-play� solutions, where instead of building the whole infrastructure from scratch, traders extend the code offered to them by their trading counterparties. Some providers offer �drag-and-click� visual interfaces for building high-frequency trading strategies, although sophisticated strategies may still require expertise in a programming language.

it is a moment of truth. Two very different cases:

- trading using a broker's platform and algorithms
- building your own high-frequency trading platform and to trade on it

are not separated. The first actually can be done without a lot of investment, in least in theory...

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Given these technological issues, traditional hedge funds have been particularly cautious of the high-frequency tide. Those funds with existing quantitative strategies are likely to be ideally positioned to move into the high-frequency space: speeding up the portfolio holding periods is all it takes in many cases.

"funds with existing quantitative strategies" are not "traditional hedge funds"?

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Finding a profitable high-frequency strategy, therefore, may only be a few clicks of the mouse away.

tappal
Junior Member

Posts: 1
Joined: Feb 2010

Sun Feb 14, 10 08:41 PM

High Frequency Back-Test/Simulation
----------------------------------------------

I believe I have the trading rules/alpha generator - but had some questions regarding the implementation of the back-test/simulation.

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If my trading rule recommends a buy -
- how do I size the buy (kelly criterion ? or something
more adhoc)
- do I assume that it is filled fully if liquidity comes my way
- will I be causing any market impact - how
do I account for this in my backtest ? Given than
the historical TAQ quotes obviously does not contain
my trades

Assumptions on Transaction Costs ?
Stop Loss - how to generally implement this ??

Are there any matlab/R tools that I can use to simplify my
backtesting ?

At the forums I have picked up three additional recommendations:
a) Assume buy trades at ask market levels
b) Ignore small stocks with low adv
c) Ignore the first five minutes of data

Thanks in advance for any suggestions/recommendations

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giordanobruno
Member

Posts: 59
Joined: Jan 2010

Mon Feb 15, 10 09:23 PM

It's bullshit.

Bingo winners who think that if they bet in shorter horizon....probability changes only because of some "correlation"...only correlation is in their heads.
Bingo winners like Simons think it has soem merit - while it has not. There other "secret ways" to make money...like...Tom Cruise does...

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Magnus ab integro seclorum nascitur ordo: https://riselux.com

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ExSan
Senior Member

Posts: 518
Joined: Apr 2003

Mon Mar 29, 10 12:36 PM

NYT - Day Traders 2.0: Wired, Angry and Loving It

Could anyone make a living this way? And if the answer was yes, why were the rest of us suckers still holding down regular jobs?

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daveangel
Senior Member

Posts: 5137
Joined: Oct 2003

Mon Mar 29, 10 12:44 PM

Quote
Originally posted by: ExSan
NYT - Day Traders 2.0: Wired, Angry and Loving It

Could anyone make a living this way? And if the answer was yes, why were the rest of us suckers still holding down regular jobs?

its just a function of the mini-bull market we have

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Knowledge comes, but wisdom lingers.

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ExSan
Senior Member

Posts: 518
Joined: Apr 2003

Mon Apr 19, 10 09:45 PM

High-Frequency Trading - Where are the Regulators Who Will Regulate?

"Let's say that there is a buyer willing to buy 100,000 shares of Broadcom with a limit price of $26.40. That is, the buyer will accept any price up to $26.40. But the market at this particular moment in time is at $26.10, or thirty cents lower.

So the computers, having detected via their "flash orders" that there is a desire for Broadcom shares, start to issue tiny "immediate or cancel" orders - IOCs - to sell at $26.20. If that order is "eaten" the computer then issues an order at $26.25, then $26.30, then $26.35, then $26.40. When it tries $26.45 it gets no bite and the order is immediately canceled.

Now the flush of supply comes at $26.39, and the claim is made that the market has become "more efficient."

Nonsense; there was no "real seller" at any of these prices! This pattern of offering was intended to do one and only one thing - manipulate the market by discovering what is supposed to be a hidden piece of information - the other side's limit price!

With normal order queues and flows the person with the limit order would see the offer at $26.20 and might drop his limit. But the computers are so fast that unless you own one of the same speed you have no chance to do this - your order is immediately "raped" at the full limit price!

The presence of these programs will guarantee huge profits to the banks running them and they also guarantee both that the retail buyers will get screwed as the market will move MUCH faster to the upside than it otherwise would.

If you're wondering how Goldman Sachs and other "big banks and hedge funds" made all their money this last quarter, now you know."

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Edited: Mon Apr 19, 10 at 09:52 PM by ExSan

Posts: 49
Joined: Apr 2010

Tue Apr 20, 10 05:41 PM

I'm not sure I buy everything in this thread. Most consider me in the HFT space and you could do what I do manually if you focused on fewer stocks.

IMO the only reason why the UltraHFT space came out is because everyone with an automated system was put into the HFT bin. A large portion of Market Making strategies aren't even HFT and could be run on very simple (intel e8400) hardware without big money behind it. Market Making takes capital not processing power.

The only reason why massive computing has been brought into the equation is because of the amount of raw data that order flow and sub-second tick data has introduced.

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EShifman
Junior Member

Posts: 2
Joined: Jun 2008

Thu Apr 22, 10 09:27 PM

Has anyone had any luck using neural nets or genetic programming to predict short term price movements for HF data?

We want to predict short term tick movement using one of these two methods and I am at the beginning of our modeling curve.

Any words of wisdom to speed up our process would be great.

Thanks

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Looking forward to ordering books and reading articles on stat arb

Posts: 49
Joined: Apr 2010

Sat Apr 24, 10 01:54 AM

The key to HFT is loads of capital and speed. The shorter you hold the less you can make so providing liquidity is also a good thing. Sub-penny trading is going to bring a whole new definition to providing liquidity - think mil up 100shs and now the 10k shs 1mil back is adding.

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Originally posted by: EShifman
Has anyone had any luck using neural nets or genetic programming to predict short term price movements for HF data?

We want to predict short term tick movement using one of these two methods and I am at the beginning of our modeling curve.

Any words of wisdom to speed up our process would be great.

Thanks

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EShifman
Junior Member

Posts: 2
Joined: Jun 2008

Sat Apr 24, 10 07:04 PM

Where would you suggest I start my learning curve?

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Looking forward to ordering books and reading articles on stat arb

Posts: 136
Joined: May 2005

Sun Apr 25, 10 06:26 AM

Quote
Originally posted by: ExSan
High-Frequency Trading - Where are the Regulators Who Will Regulate?

"Let's say that there is a buyer willing to buy 100,000 shares of Broadcom with a limit price of $26.40. That is, the buyer will accept any price up to $26.40. But the market at this particular moment in time is at $26.10, or thirty cents lower. ...