Alan Kohler's Take on High Frequency Trading

[cogs]

High-frequency trading is cuckoo

Alan Kohler

Published 6:40 AM, 11 Apr 2012 Last update 6:40 AM, 11 Apr 2012
inShare



In the Australian Stock Exchange’s Sydney data room, which is about the size of a big lounge room, there are six “cuckoos”. These are the banks of servers installed by high frequency traders.

They sit against the wall opposite the ASX servers and each is connected directly into the host by a fat fibre optic pipe. Each cable is precisely the same length by agreement with the ASX so that none gets an advantage; if one server is closer to the input, its cable is looped around to lengthen it.

Think about that: one less metre of optic fibre carrying data at 299.8 million metres per second would give one share trader an unfair advantage over the rest. It suggests that something pretty quick is going on.

The question is whether it’s fair to the rest of us; whether those six parasites with their suckers fastened directly into the heart of the ASX should be allowed to get away with it.

The ASX is no longer a regulator, just a business, so it says that if the practice is legal and it pays a fee – not to mention a handy rent in the data room – then it can’t and won’t stop them.

Cont' in his article http://www.businessspectator.com.au/bs.nsf/filterSpectatorsc?openview&restricttocategory=Alan Kohler

Nothing new, but regulation of sorts needs traction for the sake and well being of general investors.

 

[MrBurns]

Trade parasites feeding at the heart of the ASX

In the Australian Stock Exchange's Sydney data room, which is about the size of a big lounge room, there are six "cuckoos". These are the banks of servers installed by high-frequency traders.

They sit against the wall opposite the ASX servers and each is connected directly into the host by a fat fibre optic pipe. Each cable is precisely the same length by agreement with the ASX so that none gets an advantage; if one server is closer to the input, its cable is looped around to lengthen it.

Think about that: one less metre of optic fibre carrying data at 299.8 million metres per second - that is, the speed of light - would give one share trader an unfair advantage over the rest. It suggests that something pretty quick is going on.

The question is whether it's fair to the rest of us; whether those six parasites with their suckers fastened directly into the heart of the ASX should be allowed to get away with it

http://www.abc.net.au/news/2012-04-11/kohler-high-frequency-trade-parasites-at-heart-of-asx/3943052

 

[Boggo]

Re: Trade parasites feeding at the heart of the ASX

Play the video on the link below for an explanation of the reality of what is happening.
Very interesting !

http://www.mtpredictor.us/2099/correction-came-but-how-deep/

 

[Trembling Hand]

What do the computers and their algorithms do? Well, as my relatively low-frequency brain can understand it, these machines constantly monitor order flow into the ASX servers, and the sophisticated programs can pick up patterns that indicate when a reasonably large order has been placed. What they then do, in effect, is "front-run" – that is, they buy ahead of the order and make a small spread selling into it.

What a complete idiot this guy is. He is simply guessing at what they do. And he is way off.

Anyone that pays or listens to a fool is a bigger .........

 

[So_Cynical]

What a complete idiot this guy is. He is simply guessing at what they do. And he is way off.

Anyone that pays or listens to a fool is a bigger .........

Not that i have a clue but...if the HFT's are only day trading then they would have to buy first and then sell to make money, sort of micro trend following i would think.

I like Alan Kohler

 

[tech/a]

Not that i have a clue but...if the HFT's are only day trading then they would have to buy first and then sell to make money, sort of micro trend following i would think.

I like Alan Kohler

Did you look at the video?
Try 1.2 million trades in 7 minutes.

 

[Trembling Hand]

I like Alan Kohler

Why?

He is just making it up. They don't front run large orders like his stated to make out they are robbing your super fund. Just clueless BS his made up because he has no idea what they do.

How can a financial journalist get away with this rubbish?

Then of course you get the 100 comments like that article has attracted about how it should be banded and how its evil just like short selling etc etc.

All from an article with NO research and no facts as to what it actually does. If I was a HFT bot I would be suing for slander.

c:

 

[CanOz]

I was waiting all day for you to comment on that TH...Figured you have a better idea what the bots do than Alan Kohler!

Sounds like he's got his knickers in a twist....the bots got his super!

CanOz

 

[So_Cynical]

Did you look at the video?
Try 1.2 million trades in 7 minutes.

Yep watched the video...and to make money they still have to sell XYZ for more than they paid for it.

And cant see anything wrong with a 1 minute minimum holding period.

 

[doctorj]

Is Kohler describing trading or sky net? It's hard to decipher much more than the fact we should be afraid, very afraid. He portrays these machines as god-like things able to guess what will happen in the near future and get ahead of it, robbing you of money. Great for getting Mum and Dad excited, but not so good for a financial journalist's credability.

There are so many things he could of criticised about HFT without sounding like a lunatic - for example a lack of regulation or understanding by any regulators or how the oft-used argument in support of HFT (more liquidity) only applies when markets are behaving nicely and quickly disappears when you need it the most.

There's no doubt that HFT needs to be better understood than it is, but he's not helping!

 

[Starcraftmazter]

Yep watched the video...and to make money they still have to sell XYZ for more than they paid for it.

And cant see anything wrong with a 1 minute minimum holding period.

Seems reasonable - but then they'd do the same thing, and just hold for a minute. They would still identify the opportunities before everyone else does and be out before everyone else does.

The best solution is to regulate HFTers out of discounts and special deals with the ASX. If they had to pay $20 per trade, they'd be out of business. Problem solved.

 

[doctorj]

Seems reasonable - but then they'd do the same thing, and just hold for a minute. They would still identify the opportunities before everyone else does and be out before everyone else does.

The best solution is to regulate HFTers out of discounts and special deals with the ASX. If they had to pay $20 per trade, they'd be out of business. Problem solved.

I don't think its right to regulate them out of existence. They don't have an advantage that isn't open to anyone else with the money to pay the fees. I think what is important is to understand how they work (if I recall, the US authorities have asked to review the code behind some HFT bots) and how they're likely to behave under different market conditions. I don't see a problem in a bot hitting the bid or ask (isn't this just what a market maker does, but more efficient?), but you want to limit opportunities for market manipulation, you probably want to also manage how they behave during multi-deviation events and you want to establish standards to limit potential for the so called 'flash crashes'.

The EU is looking at compelling HFT bots to provide liquidity even as the market is crashing which is obviously crazy and will never happen, the US is looking at studying it better, but I can't see why you'd want to get rid of them completely.

As an interesting aside, check out - http://blog.themistrading.com/more-hft-and-insects-algobots-on-amazon/ for an interesting look at how bots get their tentacles into some places you might not expect.

 

[Trembling Hand]

If they had to pay $20 per trade, they'd be out of business. Problem solved.

What problem?

Its a market? If trading smarter than someone else is a problem then we are in serious trouble!!

 

[Punta]

I don't really know anything about institutional HF trading, but my latest trading bot that I'm trying to get going for the SPI has an average hold time of 40-secs. I get 5-sec bars for my "live" data feed, and I place a new limit order every 5-secs. Often my limit is hit, but I don't get filled, because my order is not close enough to the front of the queue, I guess.

My guess is that the proper HF guys place a whole load of limit orders slightly away from the current bid/ask, and when the market moves, they are first in line, and so they are able to get filled first, and scalp the market; buy at the bid and sell at the ask. Or market making, whatever you want to call it.

You need a proper fast data feed to track the market in real time, and submit your orders accordingly. At the moment a punter like me with IB is limited to 5-sec real time bars, which is nowhere near fast enough to write a market making algo.

You could bemoan the fact that it comes down to an arms race, and the guys with fat fiber optics connected to the exchange have an advantage that is not available to us punters, but really, I think it's all just shades of grey - the guy at home in Sydney with a fast computer and internet connection probably has an advantage over the guy in Timbuktu with a Spectrum 128 and a dial up connection. It doesn't seem to make sense to legislate data feeds/trading behaviour to some arbitrary playing field based on what the average punter in Sydney/New York is comfortable with.

 

[Trembling Hand]

Yeah thats correct Punta. Its a bloody market!! The commies want every Mum & Pop to win. And every Mum & Pop want someone to blame for their loses.

I see no propblem making sure they don't destablise the market in adverse events similar to the restrictions they placed on Bot selling after the 87 crash. But to make up BS like Kohler has just done IS the problem not the HFT.

On a side note I'm surprised you can find a algo that can trigger that many times on the snail pace SPI. Have you had a look at some faster markets like HSI, K200 or STW?

 

[Punta]

On a side note I'm surprised you can find a algo that can trigger that many times on the snail pace SPI.

Well with a market making algo (which mine isn't really), you're always going to want to buy a little lower than the market, or sell a little higher, so you will submit a limit order as often as you can get market data (5-secs in my case). Mostly they don't get filled, because they are only active until you receive the next piece of market info.

Have you had a look at some faster markets like HSI, K200 or STW?

I haven't mate - the SPI is my first foray into futures trading. The "to do" list includes getting historical data for other contracts, and testing my algo on them. Getting a year of 5-sec bars from IB takes a few days per contract though, so it's a bit of a drawn out process. Thanks for the heads up though - will make sure I look at the contracts you suggest.

 

[Starcraftmazter]

I don't think its right to regulate them out of existence.

What problem?

Its a market? If trading smarter than someone else is a problem then we are in serious trouble!!

It's not really trading smarter than someone else, so much as having a distinct advantage over everyone else.

In my view HFTers disrupt and impede the functioning of the stock markets - which is to efficiently allocate capital to the highest quality investments. In fact, they do not allocate any capital to anyone

Normal traders at least aid in price discovery and are very much on even footing with everyone else in terms of what is available to them and what they can do. They do not manipulate the market and cause crashes. This is not the case with HFTers.

 

[motorway]

http://www.cmegroup.com/education/steidlmayer-volume-strips-video.html

Worthwhile listening to this.

A view of how market dynamics have changed over time and his current thinking on how to deal with it.

well worth the effort to listen through ... it will take a little effort.


==>Steidlmayer Volume Strips: A New Method to Analyze the Markets
J. Peter Steidlmayer has been a Chicago Board of Trade member for over 40 years. He developed a mainstay of market analysis, Market Profile, and has been a thought leader in how markets behave. Steidlmayer presents his recent research discussing the importance of understanding how price and volume databases as tools for market analysis have changed with the advent of electronic trading, and how these changes effect trading methodology. He discusses:

Why the Market Profile legacy analysis of price and time has changed
How electronic market order flow contrasts to open-outcry order flow
Analyzing volume and price
How the influence of supply (volume) effecting price is the new paradigm


Motorway

 

[Trembling Hand]

It's not really trading smarter than someone else, so much as having a distinct advantage over everyone else.

In my view HFTers disrupt and impede the functioning of the stock markets - which is to efficiently allocate capital to the highest quality investments. In fact, they do not allocate any capital to anyone

Normal traders at least aid in price discovery and are very much on even footing with everyone else in terms of what is available to them and what they can do. They do not manipulate the market and cause crashes. This is not the case with HFTers.

You say they " disrupt and impede the functioning" but can you back up this statement with any proof other than market myth?

 

[sinner]

You say they " disrupt and impede the functioning" but can you back up this statement with any proof other than market myth?

Seriously?

Check here! http://www.nanex.net/FlashCrash/OngoingResearch.html

http://www.nanex.net/aqck/2816.HTML
http://www.nanex.net/Research/QuoteStuffingBanned/QuoteStuffingBanned.html
http://www.nanex.net/20100506/FlashCrashAnalysis_Part4-1.html
http://www.nanex.net/aqck/2970.html
http://www.nanex.net/StrangeDays/06082011.html
http://www.thetrader.se/2012/02/14/crude-hft/

Quote stuffing, subpennying, order spoofing, flash trades, exchange flooding with spoofed orders then flooding with cancels, stub quotes, etc.

My own training in systems theory sets off all sorts of alarm bells when I hear about the things HFT has been in trouble with CME and other exchanges for (NYMEX crude algo anyone?), are working systemic instability into the market microstructure.