Overnight Experts In High Frequency Trading

[Joey Buttafueco Jr]

http://fridayinvegas.blogspot.com/2009/07/...understand.html

[xux42]

http://fridayinvegas.blogspot.com/2009/07/...understand.html

Dunno if it works or not but the system is broke if people can make a good living just by skimming small amounts from other traders.

What are these people putting into the system? What is their contribution to society?

[Joey Buttafueco Jr]

Dunno if it works or not but the system is broke if people can make a good living just by skimming small amounts from other traders.

What are these people putting into the system? What is their contribution to society?

"but the system is broke if people can make a good living just by skimming small amounts from other traders"

Why? Are the traders banned from doing something similar?

[interestrateripoff]

I assume this is a response to all the GS allegations going around?

Who does KD work for? Do we know?

[Joey Buttafueco Jr]

I assume this is a response to all the GS allegations going around?

Who does KD work for? Do we know?

"I assume this is a response to all the GS allegations going around?"

Yes

"Who does KD work for? Do we know?"

Krispy Kreme

[interestrateripoff]

"Who does KD work for? Do we know?"

Krispy Kreme

Not GS then

If so it's all a conspiracy by the lizards.

Fish & chips?

[Bloo Loo]

high frequency trading? with themselves? how does that make money?

or is it front running real trades between parties?

[fluffy666]

http://fridayinvegas.blogspot.com/2009/07/...understand.html

Of course I fear what I don't understand, when it's my money, ultimately, they are playing with. And since finance is effectively a zero sum game - how could it be otherwise? - it's my pocket that their profits come from.

Their claimed advantages seem to be improved bid/ask spreads and huge amounts fo liquidity.. neither of which are vitally important to someone investing on a 50-year time scale. I'm certainly not sure why 'liquidity is king'.. I suspect it's a last-resort justification. Some liquidity is required, yes, but we are talking diminishing returns.

For the record, I'd prefer to see as much trading as possible done via computers, given complete transparency of algorithms and trades, and sufficient fees to dampen feedback and volatility. This would at least make the financial system extremely boring and low-profit, which is exactly how it should be.

[Joey Buttafueco Jr]

Of course I fear what I don't understand, when it's my money, ultimately, they are playing with. And since finance is effectively a zero sum game - how could it be otherwise? - it's my pocket that their profits come from.

Their claimed advantages seem to be improved bid/ask spreads and huge amounts fo liquidity.. neither of which are vitally important to someone investing on a 50-year time scale. I'm certainly not sure why 'liquidity is king'.. I suspect it's a last-resort justification. Some liquidity is required, yes, but we are talking diminishing returns.

For the record, I'd prefer to see as much trading as possible done via computers, given complete transparency of algorithms and trades, and sufficient fees to dampen feedback and volatility. This would at least make the financial system extremely boring and low-profit, which is exactly how it should be.

"And since finance is effectively a zero sum game - how could it be otherwise? -"

Aren't we talking about the stock market here?

[interestrateripoff]

"And since finance is effectively a zero sum game - how could it be otherwise? -"

Aren't we talking about the stock market here?

I thought we where talking about fish and chips?

[Guest tbatst2000]

Their claimed advantages seem to be improved bid/ask spreads and huge amounts fo liquidity.. neither of which are vitally important to someone investing on a 50-year time scale. I'm certainly not sure why 'liquidity is king'.. I suspect it's a last-resort justification. Some liquidity is required, yes, but we are talking diminishing returns.

Well, when you come to sell your holdings in 50 years time, you'll be pleased that someone has been providing liquidity because, without it, you don't actually know what your shares are worth, pretty much like houses. Now, the difference between being able to get your order filled in 10 ms vs 10 minutes is kind of irrelevant but 10 minutes vs 10 days - which is the kind of difference seen in smalll and mid-cap stocks over the last 10 years as the program trading desks have gradually started looking at smaller stuff - is seriously relevant. It's one of those cake and eat it situations really.

[xux42]

"but the system is broke if people can make a good living just by skimming small amounts from other traders"

Why? Are the traders banned from doing something similar?

Not the point is it? Where is the value added in anyone skimming anyone else?

Rewards should stem from innovation that leads to genuine valued added and old fashioned graft. Shouldn't they?

Haven't we been complaining about they money for nothing culture of some traders and bankers on here for years? Or is the real gripe of posters that they personally missed out on the gravy train?

I've occasionally made modest 3-figure gains myself from medium term share trading but I don't think its a positive thing for society like proper long term investing for example.

[VedantaTrader]

Dunno if it works or not but the system is broke if people can make a good living just by skimming small amounts from other traders.

What are these people putting into the system? What is their contribution to society?

It is a good article, and I would say a good explanation of something which is shrouded in mystery and a subject which the general public are quite ignorant of, apart from some emotionally, politically ladened article they have read in the Daily Mail Business section.

Contribution is that they are part of a much larger aggregate of people (all market participants) who are in the price discovery business. Everyone has free choice at what price they buy something, the spreads are extremely tight these days, and for the retail investor/trader he has now access in his own house to what was only available 10-20 years ao to banks and wealthy individuals...

Here is how I see crying over a fractions of a few cents or pennies...One can argue you are not getting a fair price, over some very small amount which will have no bearing on 90% of investors who will have much longer time preference than these guys.

You go down to your local Tesco and buy your milk, and pay x amount of pence for it. You are assuming that this is the price, which it is of course. Is it not possible that somewhere in this production line, that the company who provides the milk could get everyone to work a little faster each day to make more milk and hence reduce the price by 1pence? Price is a very arbitrary objective, and I would add that in products you buy everyday the price could be changed by very small amounts by making changes in the production chain. This is not the best example, but I m just making the point that you could make the point for anything being a fraction of pennies cheaper than the price you buy.

[fluffy666]

"And since finance is effectively a zero sum game - how could it be otherwise? -"

Aren't we talking about the stock market here?

Yes.

[Joey Buttafueco Jr]

I thought we where talking about fish and chips?

I'm going off Fish and Chips

[Joey Buttafueco Jr]

Yes.

Drift

[VedantaTrader]

Not the point is it? Where is the value added in anyone skimming anyone else?

Rewards should stem from innovation that leads to genuine valued added and old fashioned graft. Shouldn't they?

Haven't we been complaining about they money for nothing culture of some traders and bankers on here for years? Or is the real gripe of posters that they personally missed out on the gravy train?

I've occasionally made modest 3-figure gains myself from medium term share trading but I don't think its a positive thing for society like proper long term investing for example.

I don't see how you can say this. If everyone took this attitude where would we be. Its also a load of rubbish. A company needs investment, or it needs to form capital to invest in channels of production. So a company gets capital formation, by issuing bonds and shares.

The investors (who take the risk) will be rewarded for this risk in the form of growth in the company and hopefully a dividend payment. The price of a company today is not influenced by what has happened but the aggregate hopes and expections of how the company will be in the future.

A company will produce a product or a service, which will be consumed or used by people in society. If enough people use the service the company will make a profit and reward investors in the form of an increased share price dividend payment.

The company may well take these profits and reinvest them in expansion or new products, thus creating more employment and new products. It is the free choice of the consumer to purchase these products or not. If the company makes a profit then who has the right to say consumers should not buy that product?

So without capital formation companies would never get off the ground, or be able to expand.

Infact the very computer you are most likely to reply to this on is a product of people investing in the vision of an entrepreneur.

How do drugs get produced, through research and development etc etc...If you don't see anything positive in investing then next time you are at the doctors don;t take the prescription...

If you have kids, take their ipods and playstations from them or whatever gadgets they have and tell them they have been produced by immoral means...you shouldn't have them.

The share price is the barometer or a function of a companies future viability...with this information, what yardstick do we use to allocate capital to enable companies to expand? How do companies get capital without some form of reward for people who risk money they have worked for?

[xux42]

I don't see how you can say this. If everyone took this attitude where would we be. Its also a load of rubbish. A company needs investment, or it needs to form capital to invest in channels of production. So a company gets capital formation, by issuing bonds and shares.

The investors (who take the risk) will be rewarded for this risk in the form of growth in the company and hopefully a dividend payment. The price of a company today is not influenced by what has happened but the aggregate hopes and expections of how the company will be in the future.

A company will produce a product or a service, which will be consumed or used by people in society. If enough people use the service the company will make a profit and reward investors in the form of an increased share price dividend payment.

The company may well take these profits and reinvest them in expansion or new products, thus creating more employment and new products. It is the free choice of the consumer to purchase these products or not. If the company makes a profit then who has the right to say consumers should not buy that product?

So without capital formation companies would never get off the ground, or be able to expand.

Infact the very computer you are most likely to reply to this on is a product of people investing in the vision of an entrepreneur.

How do drugs get produced, through research and development etc etc...If you don't see anything positive in investing then next time you are at the doctors don;t take the prescription...

If you have kids, take their ipods and playstations from them or whatever gadgets they have and tell them they have been produced by immoral means...you shouldn't have them.

The share price is the barometer or a function of a companies future viability...with this information, what yardstick do we use to allocate capital to enable companies to expand? How do companies get capital without some form of reward for people who risk money they have worked for?

?

I think investment is necessary too. Please read my post a bit slower, I beg to suggest that you assessed it a bit hastily?

Investment is a good thing but how does banging £200k into a share and taking it out 10 minutes later having netted £1000 or so contributes to the common good? Can't see any benefit to the company and certainly none to the person on the other side of the bargain who's dropped a k. Broker gains of course.

I have wondered from time to time whether shares should have a minimum period before they can be sold on - say 7 days.

But it wouldn't work cos some prize A-hole would immediately conjure up a derivative to get round it.

[Charterhouse]

The FT ran a column in Lex on the topic which laid out its stall pretty clearly - claiming that there is a difference between lightning fast program driven trading, and front running. I'm not so sure. The practice of "flashing prices" which allows dealers to discover whether there is liquidity to buy or sell stock at a certain price without having to execute any size, seems pretty close to front running to me, given that it deliberately seeks to indentify and pick off institutional orders being executed algorithmically. One analyst quoted in the FT today cites a cancellation rate on these types of orders of "as high as 99 per cent". It might not be against the letter of the law, but it definitely is against the spirit of the law and has now attracted the attentions of the SEC. The last thing Wall Street needs right now is another reason for retail investors to distrust it.

[VedantaTrader]

?

I think investment is necessary too. Please read my post a bit slower, I beg to suggest that you assessed it a bit hastily?

Investment is a good thing but how does banging £200k into a share and taking it out 10 minutes later having netted £1000 or so contributes to the common good? Can't see any benefit to the company and certainly none to the person on the other side of the bargain who's dropped a k. Broker gains of course.

I have wondered from time to time whether shares should have a minimum period before they can be sold on - say 7 days.

But it wouldn't work cos some prize A-hole would immediately conjure up a derivative to get round it.

I understand your point, and sorry if I came across as being hard or harsh. I would understand this point if it was one short term trade in isolation, however it needs to be noted that this is all part of the price discovery method, as it is the constant balancing between buyers and sellers over long periods which leads to the price. We can say there is shortterm noise, but if you like you smooth the price out with an average and you will see that these price fluctations deviate above and below an average, but generall an average will show (with hindsight) what the aggregate expectations are of that company.

As I say these trades are not in isolation, they are strung together with fluidity over long periods of time which leads to a consenus on price...

Also you are assuming that the person on the other side is a direct contrarain to the person on the other side of the trade so they must be losing. How about if the person on the other side is taking an investment of the table which he has held for months or years? He might be down 2k, but the fund, company, indivdual could be taking this off the table a few years later at a large profit minus the 2k. If someone is losing 2k in 5 minutes, then it could be assumed the owner ship oif the stock is large, and should not equate to the bottom line too much.

Allowing a minumum holding period? Is this fair? As as been moves of 30-40% can happen in days...aka HBOS, or yesterday there were companies that moved 10%...A move of this size must been some new development that will effect the outlook for the company at least in the near term. Is it ethical to make someone sit out a double digit loss on a stock as they have to wait 7 days?

Also remember in your example of someone on the other side losing 2k to someone elses gain, well remember the price was accepted by that person. They were not forced to take that price. They entereed into a trade/investment and for whatever reason decided to sell to someone who was willing to buy. There was price agreement. Can we dictate what is exactly the right price for someone to sell at...

If someone entered into an investment they should know that prices move, and move alot all the time, at least during trading hours...they cannot expect price to stay static.

No one has anyright to assume what is the time preference of any individual on anything. Remember anyone buying a stock is doing it for some benefit, just as you buy any item online or on the highstreet. They have chosen to buy at that price in that moment in time. Can we legislate that they cannot do this, that the price is wrong for them, that they have not the free choice to chose the price based on their own motives?

Essential point to remember is this. It is by every investors free choice that they bought into a market or share at some perceived value. No one told them they must do it or they will go to jail. So should it not be their free choice to choose a price to sell?

If you take liquidity away, ie, the engine oil (speculators) the people who are willing and able to take the other side, the counter party away from a market, then people wanting to sell will not be able to get the price they want to sell at.

As an example here is a OTC stock in the US...Anglo American

take a look at this chart...You see the huge gaps in price? Do you see the gap in March from 14-18? The lack of liquidity in that market means that it would be very difficult to get out at the price forecast or level you wanted. And that is a daily chart so the intraday liquidity is non-existent.

Now take this example of a stock with lots of buyers and sellers...Barclays

This is Barclays chart right now, a 3min candle chart with alive feed from the London Stock Exchange. Do you notice how the price on the right side is fractionalised where you can trade at increments in the 1/4 penny range? The engine oil and greece of the system are speculators, who enable this fine pricing mechanism to play out and take place. Spreads are tight.

So at every increment between say 295 to 304, buyers and sellers of their own free choice have the freedom to buy and sell this stock in seconds, milliseconds if you like. Does I care if I miss out on a penny or a fraction of a penny?

In the other non liquid, non speculative OTC stock, I would be not able to get the price which is good for one one...

If you want to introduce a minimum holding period and make markets illiquid then you will have price gaps where the price is not available with jumps from 302-306 pence without the freedom to choose inbetween. Sometimes it is better the devil you know.

Edited July 29, 2009 by VedantaTrader

[CokeSnortingTory]

You go down to your local Tesco and buy your milk, and pay x amount of pence for it. You are assuming that this is the price, which it is of course. Is it not possible that somewhere in this production line, that the company who provides the milk could get everyone to work a little faster each day to make more milk and hence reduce the price by 1pence? Price is a very arbitrary objective, and I would add that in products you buy everyday the price could be changed by very small amounts by making changes in the production chain. This is not the best example, but I m just making the point that you could make the point for anything being a fraction of pennies cheaper than the price you buy.

Don't see what this analogy has to do with front running.

A better analogy is that when you take the milk to the check out, it is run through the bar coder twice, firstly at the sale price, which is quoted to the supplier, and secondly at 1p more, which is what you pay.

[kagiso]

"And since finance is effectively a zero sum game - how could it be otherwise? -"

Aren't we talking about the stock market here?

No Noel, the whole finance industry is, or should be, a zero sum game. This is your problem, you seem to believe finance and financial innovation exist as of their own right.

Get any basic book on finance and start at the beginning, and it makes a clear difference between real assets and financial assets.

So lots of people, mostly the wealthy middle aged, have surplus money they wish to invest, while industrialists et al have profitable ventures they wish to run, but need money to buy buildings, equipment, etc, before they can realise a return.

So the finance industry steps in to connect one with the other via pension funds, bonds, shares, etc.

Similarly, young people have little savings, need houses, but have a good long term prospect of income. So the finance industry borrows money from older people and lends it to youngsters via mortgages.

The finance industry is simply an agency function. All it does is move money from one place to another.

It does not create wealth directly.

It only creates wealth indirectly, it does this in three ways:

1. It should act as a market and allocate capital effectively, where it will get the best return.

2. It should pool risk, so reducing individual and overall risk.

3. It should act competitively to reduce margins.

Over the last twenty years, while the real economy has grown slowly the financial industry has roughly doubled in size, while using precious resources in the form of large numbers of numerate graduates, contriving wonderful new financial gizmos such as CDS's, MBS's and high frequency trading.

So what has this done to the three items above?

1. Capital allocated haphazardly and badly (eg. housing, commodity bubbles), and no longer being allocated at all as it is being stashed away by banks to try and staunch their extraordinary losses. Meanwhile businesses in the real economy going bankrupt. And we the taxpayer has had to stump up to prevent systemic meltdown.

2. Individual and system risk through the roof. ditto above re taxpayers.

3. Finance industry doubled, real economy not. QED finance industry margins have doubled their drag on the real economy.

It is the real assets that are the ones that generate wealth. Financial innovation needs to be looked on in that light.

So the concept of a CDS for a bond holder is one that I find eminently sensible, providing that the ultimate insurer fully understands the systemic risk, and doesn't expect a taxpayer bailout a la AIG.

On the other hand naked CDS's serve no function other than incentivise the holders to bankrupt perfectly good businesses.

I am most certainly no expert on HFT, but I struggle to see the utility of offering bid prices for 3 microseconds in allowing the useful transfer of capital from Jo Blogg's pension fund to John Smiths Metal Bashers Ltd.

Liquidity, yes, is a very useful thing, but when two thirds of trades are HFT automated one has to wonder. And if it was just automatic matching of prices, there wouldn't be much to worry about.

But casual observation suggests that HFT just isn't like that. Historically, liquidity providers were under strict instructions to 'maintain an orderly market', ie, in return for the bid-ask profit margin, they were required not take advantage of the customers, the real players from the real economy who want to reallocate their capital. People who's pensions are in shares, companies that need money to invest in machinery.

The circumstantial evidence from HFT, most noticeably the multi-billion dollar daily mid-aftenoon prods to the S&P to gull in the momentum investors and create one of the most bizarre long term contra fundamental rallys ever seen, strongly suggest that the HFT players are gaming the system to an extraordinary degree.

Most of the sensible members of this forum, having been burnt on a few shorts have got out and are watching from the sidelines with horror. But when the next down leg comes, and ordinary investor realise how GS et al have suckered the shareholding public as a bunch of patsys, things are going to get very interesting.

Other things about HFT are also worrying, it is effectively an arms race, he who wants to win is the one who can spend the most money on the best quants, clearly making a vicious circle toward monopolistic practices. To enable full speed HFT you need to be co-located in the Exchange (it is that fast), again giving monopolistic rights.

Finally, as a risk manager, and somebody who has spent a bit of time studying reactions of autonomous agent systems, HFT seems like an accident waiting to happen.

With an increasingly over priced market, very low volumes as serious traders are pushed out of the system they can no longer compete with, the whole thing seems set up perfectly for a worse case combination of a 1928-1987 type event.

Lets just pray that the circuit breakers do their stuff.

[VedantaTrader]

Don't see what this analogy has to do with front running.

A better analogy is that when you take the milk to the check out, it is run through the bar coder twice, firstly at the sale price, which is quoted to the supplier, and secondly at 1p more, which is what you pay.

I m not justifying frontrunning...I was responding to the point that there is nothing positive about making money from short term gains

My point is that it is negligible on the bigger scale fractions of a penny make. And my point was that you could take any part of any chain in the production line and probably shave a fraction of the price.

[VedantaTrader]

But casual observation suggests that HFT just isn't like that. Historically, liquidity providers were under strict instructions to 'maintain an orderly market', ie, in return for the bid-ask profit margin, they were required not take advantage of the customers, the real players from the real economy who want to reallocate their capital. People who's pensions are in shares, companies that need money to invest in machinery.

The circumstantial evidence from HFT, most noticeably the multi-billion dollar daily mid-aftenoon prods to the S&P to gull in the momentum investors and create one of the most bizarre long term contra fundamental rallys ever seen, strongly suggest that the HFT players are gaming the system to an extraordinary degree.

Most of the sensible members of this forum, having been burnt on a few shorts have got out and are watching from the sidelines with horror. But when the next down leg comes, and ordinary investor realise how GS et al have suckered the shareholding public as a bunch of patsys, things are going to get very interesting.

Other things about HFT are also worrying, it is effectively an arms race, he who wants to win is the one who can spend the most money on the best quants, clearly making a vicious circle toward monopolistic practices. To enable full speed HFT you need to be co-located in the Exchange (it is that fast), again giving monopolistic rights.

Finally, as a risk manager, and somebody who has spent a bit of time studying reactions of autonomous agent systems, HFT seems like an accident waiting to happen.

With an increasingly over priced market, very low volumes as serious traders are pushed out of the system they can no longer compete with, the whole thing seems set up perfectly for a worse case combination of a 1928-1987 type event.

Lets just pray that the circuit breakers do their stuff.

The part I have highlighted in bold. Just curious how this is one of the most bizarre contrarian rallys ever seen...and what is the circumstantial evidence from HFT that made this bizarre rally? And also how are you quantifying "strongly suggest" that they are gaming system to extraordinary levels...?

I just don't understand this statement. Or at least I don't know how you have arrived at making these statements.

Dow Jones after the 1929 crash of 50%, the market, unemployment rising, fundamentals were terrible, banks were going bankrupt, house prices falling...Yet there was many many rallys much larger than the one today which is only just nearing 38%. SO these rally's during the 1930's of 40-50%, how can these be explained? Could these also be described as bizarre contra rallys'?There were no such computer systems doing the trading in those days...I see your statement as complete postulation and mere conjecture.

How about the 78% rally 1974-1976?

I m no fan of the banks or the likes of GS etc etc, and I agree taxpayers should not be on the line. We would not have been, as all the banks should have been allowed to fail, and liquidated the bad debt. However, I just don't see how daily price is being drastically altered by any of these innovations.

Edited July 29, 2009 by VedantaTrader

[Guest_chris c-t_*]

what this amounts to is that THE BIG BOYS ARE OPERATING IN YOUR "FUTURE"; they can see price movements before you and hit bids or offers on BATS to make a risk-free profit using the delay.

The 'highfrequency' stuff is all a sham - of course the trades to make a risk free profit are high frequency, and probalby take out the bid/offer side in increments to make sure they don't get left hanging, resulting in large numbers of trades very quickly.

I recall a chinese couple were murdered last year because they were involved in a betting scam which operated on the same principle - a delay to the Peoples Republic of China used the same concept; they were able to make bets before the delayed feed got to a bookmaker.. Same thing as a delay to BATS trading platform.

found a link...

http://www.telegraph.co.uk/news/uknews/256...tes-murder.html

Police are examining theories which have appeared on the internet suggesting Mr Yang was involved in betting scams...

The recruits would watch games before feeding goals and results through to operatives in China where the live action is broadcast one minute behind real time.

Edited July 29, 2009 by chris c-t