• C++ Programming for Financial Engineering
    Highly recommended by thousands of MFE students. Covers essential C++ topics with applications to financial engineering. Learn more Join!
    Python for Finance with Intro to Data Science
    Gain practical understanding of Python to read, understand, and write professional Python code for your first day on the job. Learn more Join!
    An Intuition-Based Options Primer for FE
    Ideal for entry level positions interviews and graduate studies, specializing in options trading arbitrage and options valuation models. Learn more Join!

HFT's good or bad?

Quote stuffing is not HFT, although HFT does include quote stuffing.
 
HFT is a catch all for fast trade messaging technologies used for trading. It can be good or bad depending on how it's used. Just like a high speed car. It can be used to get you to the hospital faster or get you into an accident.

Hunsader is trying to sell his market data service -- btw dude, how about a haircut and shave before you appear on national TV. He doesn't know how trading is done, he's a market data guy not a trader.

A lot of the opposition to HFT is coming from the old guard who don't want to spend the money to upgrade their infrastructure.
 
But HFT's have routinely used market manipulation to sometimes layer the book with fake liquidity to make it look like the book has depth and then remove it in a flash.

This is just one example of how HFT's use their speed advantage to destroy the faith and trust of market participants. Especially algo's that try to manipulate the market into triggering momentum movements, or initiating stop hunts to trap short sellers.

All HFT strategies seem predatory and I firmly believe that they provide no value what so ever to the market and need to be removed.

http://www.zerohedge.com/news/interview-high-frequency-trader
http://www.nanex.net/aqck/2804.HTML
http://www.demos.org/publication/cracks-pipeline-part-two-high-frequency-trading


If you have the patience all of these articles highlight the problems with HFT's. Other than the profit being earned I really see no value, and a loss of trust with the general public has become an issue when you have algo's that can read the news faster than humans, requiring everyone to use algos to play the news
 
I also believe HFT does not give that much value to markets. Hope it becomes more regulated. Rules like a charge pier order cancelation would be great.
 
Harkkam said:
...
If you have the patience all of these articles highlight the problems with HFT's. Other than the profit being earned I really see no value, and a loss of trust with the general public has become an issue when you have algo's that can read the news faster than humans, requiring everyone to use algos to play the news
Click to expand...
I don't see why you even asked the question, you seemed to have made up your mind already.

Actually, what you're saying is really inaccurate because there are many different types of HFT algo, some of which add value, others which are predatory. Lumping them all into one category is a gross oversimplification.
 
I asked the question to get other people's opinion not mine.

But there are certain algo's that are not predatory and I understand that for example I know algo's that help institutions execute their buying near vwap in a more efficient manner, a human could never iceberg orders quickly and efficiently like a machine nor could a human actually create algos that the SPY's use for example to make sure they remain balanced with the index they track.

I understand that certain algo's are great for the market, they replace humans and execute their jobs faster like robots in a car factory. But the problem I have is these algo's they push other people out of the market and its these algos that need to be regulated and removed.

A majority of the HFT firms dont employ the "good" algos that provide value because they simply dont make any money. You can be sure its the predatory algo's used mostly by getco and optiver etc.

I want to be a quant because I've always enjoyed finance and math, I work at a prop firm right now. But I wouldnt want to use my skills to manipulate the market of ms of speed to gain an edge over a zero sum game.

I think its better if quants didnt try to create this arms race on wall street, and rather actually focused on creating better customized products for customers and monitoring risk. Real value in my opinion
 
Harkkam said:
I think its better if quants didnt try to create this arms race on wall street, and rather actually focused on creating better customized products for customers and monitoring risk. Real value in my opinion
Click to expand...
You game the system until the loophole goes away, whether by regulation or it being arbitraged away. Is it better to add value directly? Yeah sure, I think most of us agree with that.
 
Harkkam said:
I think its better if quants didnt try to create this arms race on wall street, and rather actually focused on creating better customized products for customers and monitoring risk. Real value in my opinion
Click to expand...
Well, those quants are creating value for their customers.
 
Yike Lu said:
You game the system until the loophole goes away, whether by regulation or it being arbitraged away. Is it better to add value directly? Yeah sure, I think most of us agree with that.
Click to expand...

Gaming the system should be illegal, thats my point. Quants shouldn't be helping wall street game the system. I think quants see the high salary and don't stop and think about what it is that they are really contributing to.

I would never find myself in a position to game the system, its a waste of my talent and those around us. There needs to be awareness to this subject. In fact you can even see this piece from optiver that tries to defend HFT

http://www.optiver.com/corporate/hft.pdf

Kind of ridiculous in my opinion
 
Harkkam said:
Gaming the system should be illegal, thats my point. Quants shouldn't be helping wall street game the system. I think quants see the high salary and don't stop and think about what it is that they are really contributing to.

I would never find myself in a position to game the system, its a waste of my talent and those around us. There needs to be awareness to this subject.
Click to expand...

There's no market in the USA that isn't rigged. If you consider it a waste of time, don't do it -- remain true to your principles. Everyone else here will continue doing it as long as they get paid or get a share of the swag. Moral lectures serve no purpose here.
 
bigbadwolf said:
There's no market in the USA that isn't rigged. If you consider it a waste of time, don't do it -- remain true to your principles. Everyone else here will continue doing it as long as they get paid or get a share of the swag. Moral lectures serve no purpose here.
Click to expand...

So its okay to keep doing something as long as its legal, as long as we get paid?

No wonder nobody trusts wall st. Keep playing the game, and watch equity dry up, what average joe fool will keep their money in mutual funds anymore, trust is already at all time lows. Then the algo's can have fun with each other eating each other up, wasting time just shuffling money from one hft account into the next.

Wall St. is suffering today, because it got too greedy for its own good and killed the goose that laid the golden eggs pre-market crash.

Now if you're smart, you can regulate the markets to some degree, and though in the short run it may seem to cut profits over the long run its better for the market, which means longer sustained profits for everyone.

This mentality really bothers me. Perhaps I'll start a new exchange free and open source like bitcoin is revolutionizing the currency market.

Then the hft's can have fun in their little sandbox called nasdaq or nyse when all the action is moving over to dark pools as insitutional buyers are getting fed up with hft bs, 20% of the institutional volume is alredy done on dark pools
 
Harkkam said:
So its okay to keep doing something as long as its legal, as long as we get paid?
Click to expand...

It might not even be "legal." Actually legality has stopped having any meaning as the largest players don't get prosecuted no matter what they do (except slap-on-the-wrist fines).
 
There you go, the market is already adjusting to HFT gaming by using more dark pools.

While you're certainly right from a governance/regulatory perspective, each individual player is playing to win, which is basic human nature. You can't really stop it by just saying "But it's so bad and adds no value." This is what governing bodies are for, to prevent the group from eating itself alive.

And if the market evolves to kill HFT profits, fine whatever. If they really don't add value, that should be the natural course of things.
 
A quick side question about another type of algo, the pairs trading algo.

This algo I think looks for correlation between two stocks in the same sector and if one stock, stock A starts going up the algo will immediately start buying the other stock, stock B that is correlated to stock A.

However since the volume that the algo can bring to bear on the market is so great, does it not start to create artificial correlation?

Take the fact that Stock A and Stock B have been historically correlated but an event in Stock A's corporate structure warrants a better outlook on Stock A causing it to rise. Now if the algo's were not there, Stock B would rise but by a lesser degree since the event only revolved around stock A.

But I was reading an article that claims because of algo's the markets have become much more correlated with each other. Algo's lartificially enhance the correlation just based on their past statistical correlation on Stock A and B without taking into account the real fundamental value of Stock B and whether or not it deserves a higher price.

basically the problem with just trading based on statistical correlation destroys the old Market portfolio theory of Markovitz that many investors use to protect themselves by diversifying their assets. The idea that assets that are non correlated will protect them from wilder swings in the market

But since algo's have so much volume behind them they can push prices of Stock B only because Stock A went up and they were historically correlated.

In the past Stock B would go up just on the amount the investor buying stock B, thinks this structural chance in Stock A would effect Stock B. The demand for Stock B would be real. Of course there would be human traders that would buy stock B because they know they have been historically correlated.

But with the amount of buying power some firms employing these algo's, they can make stock B more correlated than they have ever been.

So algo's that trade on correlations have the ability as a whole to make the market more correlated and unidirectional not based on real value and real interaction of different ideas of where price parity should exist but just based on statistical data.

So now knowing this I can exploit this, if I notice stock A rising after a major news event, I know the algo's are going to buy up stock B and I should get long stock B.

Maybe I have my logic backwards, just curious as to what you guys think about this type.

This article makes some mention of this

http://www.risk.net/energy-risk/feature/2136141/algorithmic-trading-energy-markets

In paragraphs 9 and 10
 
The more I educate myself on algorithmic trading the more that I come to believe that algorithms are a net negative for the markets and what the original purpose of a fair and orderly market is supposed to be.
 
That's the trouble with over-thinking -- it renders everything wrong/right, up/down, left/right all at the same time, which then leads to a kind of madness and/or paralysis. Sometimes you just have to dive right in and go with the flow.
 
pruse said:
That's the trouble with over-thinking -- it renders everything wrong/right, up/down, left/right all at the same time, which then leads to a kind of madness and/or paralysis. Sometimes you just have to dive right in and go with the flow.
Click to expand...


True
 
That specific pairs trading scenario you mention does increase correlation, but it also increases profits for fundamental traders who are willing to trade it. My hunch would be that the fundamental traders are far more likely to break the pairs algo's bank than the other way around (stop loss/leverage/margin call make the algo position fragile).

The other thing that has been misleading with the whole "HFT as market manipulator" line of thinking is that it is really expensive. HFT by and large are liquidity providers and if all that volume went to liquidity taking (which is required for really serious manipulation) all the profits would turn to losses.
 
Back
Top