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Thread: High Frequency trading

  1. #1 High Frequency trading 
    Forum Masters Degree DianeG's Avatar
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    Sometimes the relationship between Wall street and the public reminds me of microbiology. In the same way that microorganisms are constantly exploiting new niches or develop drug resistance, Wall street keeps finding advantageous loop holes in regulation, inventing new unregulated financial activities (as with credit default swaps), or other ways to stack the deck in their favour.

    Yesterday NPR interviewed Micheal Lewis about his book Flash Boys. "Flash Boys is about the form of computerized transactions known as high-frequency trading, in which the fastest computers with the highest connection speeds get the information first, and make the trade before anyone else can."

    That doesn't sound so sinister - what's wrong with having good equipment and better, faster access to information? But it's not access so much as interception. Here is a description of how it works:

    ...when he looks at his trading screens, his screens will tell him, say, that there are 10,000 shares of Microsoft offered at $30 a share if he wanted to buy them. And normally, up to this point in his life, if he hit his button and said "buy," he'd get the shares for $30 a share. But all of a sudden, when he hits the button on his computer terminal, the shares disappear. It's like someone knows he's trying to buy Microsoft and the price of Microsoft goes up before he can get it. He doesn't understand why this is happening, and that's the beginning of the story.


    .....When he pushes the "buy" button, the signal from his computer travels up the fiber optics along the west-side highway of Manhattan and through the Lincoln Tunnel. On the other side of the Lincoln Tunnel is one of the 13 stock exchanges, called the BATS Exchange founded by high-frequency traders. They're sitting there, and they get the signal that he wants to buy first. ... They can see what he wants to do. They discern his desire to buy Microsoft, and they have faster connections to the 12 other exchanges that are scattered across New Jersey, and they race him to the other exchanges, buy all the Microsoft in front of him, and sell it back to him at a higher price....."


    What do you think?

    Here is a link to the show if you want to listen to it. On A 'Rigged' Wall Street, Milliseconds Make All The Difference : NPR


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  3. #2  
    Forum Radioactive Isotope cosmictraveler's Avatar
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    I've always thought that Wall Street was a rigged business for anyone can, at anytime , do insider trading which those inside the system can do very easily and never get caught.


    When the power of love overcomes the love of power the world will know peace.
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  4. #3  
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    The reason the above tactic usually wouldn't work is because most of the time the people buying Microsoft shares at 30 dollars a share are only planning to buy a few of them at that price. If a computerized prepurchaser wanted to buy all the shares at 30 and then reoffer them at 32, they'd end up making a few sales but not many.

    Also if there is any kind of a fee involved in the purchase, the slight gain might not even be worth it.

    Anyway, if your strategy is to take advantage of very slight changes in price, you're not going to get rich very fast. There are ways around it. You can use put options to automatically buy a stock after it rises to a certain level (or sell if it falls.) Since the put option is a pre-arranged agreement between you and the owner of that stock, there is no way for anyone to step in the middle and steal it. But you have to pay them for giving you that option even if you don't buy it, so it's only a good idea if you are very confident the stock will rise/fall/whatever.
    Some clocks are only right twice a day, but they are still right when they are right.
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  5. #4  
    Forum Professor river_rat's Avatar
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    Quote Originally Posted by DianeG
    Sometimes the relationship between Wall street and the public reminds me of microbiology. In the same way that microorganisms are constantly exploiting new niches or develop drug resistance, Wall street keeps finding advantageous loop holes in regulation, inventing new unregulated financial activities (as with credit default swaps), or other ways to stack the deck in their favour.


    The problem here is that regulation is being ignored by the exchanges (Rule 603 to be exact). Latency arbitrage is nothing new, Nathan Rothschild was doing just that way back at the battle of Waterloo (pigeons beat horses in the news race of the day) but you were not forced into collusion with the market houses just to play the game back then.

    Quote Originally Posted by kojax View Post
    The reason the above tactic usually wouldn't work is because most of the time the people buying Microsoft shares at 30 dollars a share are only planning to buy a few of them at that price. If a computerized prepurchaser wanted to buy all the shares at 30 and then reoffer them at 32, they'd end up making a few sales but not many.
    This is not the case for institutional purchases, these guys are regularly trying to cross large volumes per day to re-balance their portfolios. Remember this is a problem for other professional traders, your average retail traders order flow never makes it to the exchange network but is rather matched internally by your broker. However, the top of book volume is quite small now a days so any reasonable order size being excecuted manually will have to be routed between the multiple liquidity venues available and thus is open to HFT snipping.

    Also if there is any kind of a fee involved in the purchase, the slight gain might not even be worth it.
    You earn a rebate for supplying liquidity to the market in this case - so just doing the trades without the market moving makes you money.

    Anyway, if your strategy is to take advantage of very slight changes in price, you're not going to get rich very fast. There are ways around it. You can use put options to automatically buy a stock after it rises to a certain level (or sell if it falls.) Since the put option is a pre-arranged agreement between you and the owner of that stock, there is no way for anyone to step in the middle and steal it. But you have to pay them for giving you that option even if you don't buy it, so it's only a good idea if you are very confident the stock will rise/fall/whatever.
    The seller of the put option has to buy the shares though, so you have merely moved the problem one level down.
    As is often the case with technical subjects we are presented with an unfortunate choice: an explanation that is accurate but incomprehensible, or comprehensible but wrong.
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  6. #5  
    Forum Cosmic Wizard
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    Yeah, and Brad Katsuyama quit working for Royal Bank of Canada and started his own stock exchange designed to eliminate the problem.
    Canadian Brad Katsuyama in spotlight over 'rigged' markets allegation - Business - CBC News

    And it seems to be doing well.
    Goldman Sachs Endorses IEX Stock Market Built to Fight Predators - Bloomberg
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  7. #6  
    Forum Professor river_rat's Avatar
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    IEX is a bit of a weird case, they add 250 microseconds of latency into the order stream but that just physically collocates everyone exactly the same difference from the matching engines (so no real difference actually in terms of latency). The major differences there are the simple order structure (the normal 9 odd order types instead of 2000), no rebates and no distribution of private data to select members of the exchange. Its the last three that are the bigger problems, not really the first one.
    As is often the case with technical subjects we are presented with an unfortunate choice: an explanation that is accurate but incomprehensible, or comprehensible but wrong.
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  8. #7  
    Forum Freshman Laurieag's Avatar
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    Quote Originally Posted by DianeG View Post
    Yesterday NPR interviewed Micheal Lewis about his book Flash Boys. "Flash Boys is about the form of computerized transactions known as high-frequency trading, in which the fastest computers with the highest connection speeds get the information first, and make the trade before anyone else can."

    That doesn't sound so sinister - what's wrong with having good equipment and better, faster access to information? But it's not access so much as interception. Here is a description of how it works:
    Hi DianeG,

    The Nanex people have a different perspective with regards to HFT algorithms, nobody presses a button in HFT it's computerised trading.

    Nanex ~ 25-Apr-2013 ~ HFT Broke the Stock Market

    Nanex ~ Research Pages

    Nanex - Ongoing Research - Market Events and Phenomena

    Ongoing Research - Market Events and Phenomena

    Our business is supplying a real-time data service comprising trade and quote data for all US equity, option, and futures exchanges. We havearchived this data since 2004 and have created and used numerous tools to help us sift through the enormous dataset: over 5 trillion quotes and trades as of March 2013. The flash crash (May 6, 2010) had approximately 7.6 billion trade, quote, and depth records.
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    I heard about the interview and it was really interesting in fact that time i was thinking to follow my plan on hiring risk management service or riskienhallinta but it is stop because of the interview.
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  10. #9  
    Forum Freshman Laurieag's Avatar
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    Quote Originally Posted by DianeG View Post
    That doesn't sound so sinister - what's wrong with having good equipment and better, faster access to information? But it's not access so much as interception. Here is a description of how it works:

    ...when he looks at his trading screens, his screens will tell him, say, that there are 10,000 shares of Microsoft offered at $30 a share if he wanted to buy them. And normally, up to this point in his life, if he hit his button and said "buy," he'd get the shares for $30 a share. But all of a sudden, when he hits the button on his computer terminal, the shares disappear. It's like someone knows he's trying to buy Microsoft and the price of Microsoft goes up before he can get it. He doesn't understand why this is happening, and that's the beginning of the story.
    Here's a very good breakdown of what is actually going on in the couple of milliseconds or so it takes to make a trade.

    Nanex ~ 15-Jul-2014 ~ Perfect Pilfering



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  11. #10  
    Forum Radioactive Isotope zinjanthropos's Avatar
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    There's certain stock I keep a very close eye on during the day. Recently I can't help but notice how many more price fluctuations there are in a day now. Up and down in good size increments by the minute (which would also mean seconds). I can't help but feel the stocks are being manipulated. However in the case of a blue chipper there is a tendency to only let it fall so far or keep gains respectable enough that it all appears legitimate. These fluctuations occur even when there is little or no impact worthy news happening. It seems as if in previous years that stocks had no where near the movement they have today. Barring a catastrophe, blue chip stocks still seem to inch upwards. It's still like handicapping a horse race, you still need to pick a winner, even a fixed winner.....gambling.
    All that belongs to human understanding, in this deep ignorance and obscurity, is to be skeptical, or at least cautious; and not to admit of any hypothesis, whatsoever; much less, of any which is supported by no appearance of probability...Hume
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