Alan Kohler's Take on High Frequency Trading

[Trembling Hand]

And how did you see what I posted before I edited it? Are you actually a mod in disguise?

I'm a bot and can see the future.

 

[skyQuake]

Heh they may not call it that but I understand you can still pay asx a hefty fee

proof? Link would be very nice.

to have access to order book level information, hence be able to see orders develop before everyone else and "see the future". It doesn't have to be like the Nasdaq style flash orders where for 30 milliseconds the prices are frozen while they try to find a seller/buyer on the other side following a quote. On the press releases asx say they run some sort of "preorder filter" through their order books to prevent "market manipulation and front-running" but this seems more like a PR exercise to booster retail investor's confidence in the integrity of the market rather than any real effort

"pre-order filters" as you call it are broker side controls. No-one sees them, your broker's algo may see them to determine whether its looks ok or you've missed decimal dots. Its more to stop fat fingers going through and a complicated mess to sort through afterwards.
Link to specific press release? ASX website hopeless

because similar claims have been made by other exchanges with very little difference and if they really want to put a stop to this sort of behavior they could simply impose a minimum size threshold to screw up their algorithms and that would make this sort of behavior uneconomical.

Min size threshold? How would that hurt algos?

As long as there's differences in and between the orderbooks, HFT firms will find a way to profit from it, and I doubt asx will do much about it since there's a conflict of interest in that HFT firms are such a gold mine in revenue.

I don't see a problem here, if someone wishes to put an order on a less liquid exchange its up to them (Chi-X etc). Algos are simply arbing.

I guess the real proof is in the pudding, in that HFT firms around the world are still in very much in profit even after all the negative publicity after the flash crash and all that rhetoric about putting bans on flash trading. It just means the firms aren't using strategies that take advantage of the 30 millisecond window and have moved onto something else.

Or maybe there weren't that many players on the flash trade bandwagon anyway.

Another thing to consider is that even though the flash crash happened in 2009, on asx statistics since then the average order size have been going down while the actual number of trades have been shooting up (just like before), suggesting even more players have been hopping on this bandwagon and that the volume is big enough to noticeably influence the asx statistics on ALL trades.

Agree there, lots of big orders are now being done with some algo behind it instead of a simple iceberg or a chunky limit order.

By consolidated market depth 4.05 bid, 4.06 ask, I assume you mean the NBBO? That's just the aggregate. Orderbook level pricing occurs before this phase and in fact alot of HFC strategies involve manipulating the orderbook bid/ask price to influence the NBBO.

I would say what you define as regular algo bots and HFT bots are basically the same thing. Since they both manipulate the prices before humans can react, HFT bots have algorithms too, algo bots benefit lower latency setups and they're not mutually exclusive imho.

Have to disagree with you here. HFT is a subset of algos trading. As I said before, Most Algos bots work through the day or whatever time period to get volume done, volume is priority, followed by price, followed lastly by speed.
HFTs bots are completely opposite. Price is the overwhelming consideration. Filling a stray 50lot on the SPI and selling stock to delta hedge.

The main objective of algo trading is not necessarily to maximize profits but rather to control execution costs and market risk.

http://www.math.nyu.edu/faculty/avellane/QuantCongressUSA2011AlgoTradingLAST.pdf

 

[Androopy]

Very entertaining thread.

This might be relevant: http://www.youtube.com/watch?v=NzfmT4vGXZY&feature=related

 

[Joules MM1]

Very entertaining thread.

This might be relevant: http://www.youtube.com/watch?v=NzfmT4vGXZY&feature=related

lulz, nice advert !

 

[Joules MM1]

for mine, hft add to liquidity they dont drain, let's say you take out the function you take out liquidity, just like short selling brings both sell liquidity and (re)buy liquidity through, all executing on the same field......this is like how we could bang on that derivatives don't add to society and they dont, still, they are a apart of market function, they facilitate trade, they allow liquidity to flow......that's all

i think the front running man-in-a-dark-raincoat idea is complete bubcus

markets evolve constantly and all you're seeing is that evolution just the same way that pit traders hated screen traders and now your average ill-informed screen junkie hates, well, they just need to hate something......and so it goes....ignorance is a funny thing

still, my only concern is the flattening of volatility via none-human speed but it's long way away till we get to a Kurzweil singularity thing

btw, journalists are journalists and not traders...... for a very good reason

 

[JonnoB]

http://www.math.nyu.edu/faculty/avellane/QuantCongressUSA2011AlgoTradingLAST.pdf

Thanks for the link. Marco Avellaneda has some interesting papers.

Here are a couple of blog entries on HFT. A higher level discussion.

A High Frequency Trader's Apology, Pt 1

A High Frequency Trader's Apology, Pt 2

 

[CanOz]

Another opinion on HFT from another forum....not bad.

Colocation of servers, not just in Chicago, but actually within the exchange buildings, is standard procedure amongst the HFTs. This has nothing to do with any kind of exchange corruption, per se, or 'high level people at the CME', but simply the priorities and resources of the HFT firms.

A few encouraging things to bear in mind, however, are the following:

HFT firms operate most extensively in individual stocks, where the superior speed of execution has largely usurped traditional market-making. When they do operate within futures markets such as the @ES, it's largely in the mode of arbitrageur, hedging off a position against a basket of underlying stocks (or a similar contract such as the SPY).

The HFT firms, as the name suggests, employ 'high frequency' strategies, and seldom hold positions for more than a few seconds. Their trading models are incredibly sophisticated and are very far removed from anything that you (or I) are likely to be using. In this sense, their demands are unlikely to intersect with yours, the retail trader. So although they might want to have an order filled at a particular price that is the same as yours, it's not because they're going through the same trade decision making process as you, but then somehow getting in there faster.

Worrying about the actions and effect of high frequency trading is a bit like an athlete about to run a marathon worrying whether certain celular metabolic processes will take place efficiently within his body. HFT occurs on a 'microscopic' level far beneath that of day traders (and that's whether you trade momentum, volatility, reversion to the mean . . . anything), and apart from the fact that it makes contracts highly liquid it can be ignored. To look at it from a different point of view, do you really think that the big trend-following funds, who hold positions for many months or even years, are interested in what a daytrader is doing to affect the market at any particular time, or fretting over the few ticks of slippage that result?

CanOz

 

[Iro]

I wasn't condescending. I did answer it with great detail. Then realised you had no clue and were miles away from having to worry about it anyway because you didn't even understand position sizing. So I then tried to correct your huge hole in the most basic of trading understanding.

But clearly I have wasted my time.

Yes I can see from this reply you are not condescending at all. *sarcasm*

The fact is I gave you specific questions, and you not only have not answered them you and tech actually started insulting me when all I did was pose questions. You say I didn't understand position sizing, but did you bother to explain?

I've actually bothered read through your whole "something for nothing" thread and even your absurd hypothetical hedge fund thread. It turned out to be a huge waste time. In your posts you provided no useful information, no system for entry or exit, no examples why you took the trades, no explanations other than "you had a gut feeling". Gee I wonder how many traders just go with their gut and expect to win. And your sage "advice"? "Go learn more dom." (So helpful, wow) It seems more like an ego masturbation thread than any genuine attempt to help others.

Compare that tradesims's scalping thread. He clearly defines his system for scalping. Price and volume scan the day before to find set ups. Thin sell lines, thick buy lines. 3 points take profit. Get out when momentum stalls. Set up orders to execute before hand. Clear strategy and execution.

Or CanOz's genetic programming thread here and on trader's lab. Linking that propriety software to tradestation, input different indicators and conditions, define appropriate generations and backtest the hell out of it with appropriate data until you have a profitably bot. Clear starting point and strategy.

Or the other numerous system threads on forexfactory or babypips. Heck even that youtube School of Trade guy's bracket break out system is better than that nonsense you're touting.

 

[Iro]

proof? Link would be very nice.

Its not that hard to find. The fees schedule is on the asx website. Google "ASX Market Connectivity Schedule of Fees". You're looking for the ASX ITCH config and liquidity cross rates, added that to mandatory 5km collocation fees for that setup and you're looking at around 20k per month for basic Pure and Tradematch orderbook access. Plus additional fees charged on top for volume. Pretty good money for just connecting a few cables.

There's similar fees if you want access to Chi-X and the other various pools.

"pre-order filters" as you call it are broker side controls. No-one sees them, your broker's algo may see them to determine whether its looks ok or you've missed decimal dots. Its more to stop fat fingers going through and a complicated mess to sort through afterwards. Link to specific press release? ASX website hopeless.

My opinion about the order filters is from reading one of HFT books or articles, forgot which one, but I remember author didn't think much of ASX claims given that they get so much money from the guys they're suppose to protecting us from. Also I'm fairly sure the pre-order filters, if they do much at all, would NOT be on the broker side. They would be on setup on the ASX computers or one of the intermediaries along the way. If they were on broker side, it would defeat the point, since the entire purpose of them is supposedly to prevent brokers from manipulating prices. Or perhaps you're thinking of something else.

Min size threshold? How would that hurt algos?

Say for example a typical large institution wanted to buy from dark pool, with orderbook access you can see the order coming but not the limit price. So one way to get around this would be to issue tiny share lots with ‘immediate or cancel’ orders' (IOCs) say @ $20.10, if that order is ‘eaten’ the computer then issues an order at $20.25, then $20.30, then $20.35, then $20.40. When it tries $20.45 it gets no bite and the order is immediately canceled and you've just found out the highest price the institutional buyer is willing to pay. That's one example. There's also many algo bots that use small order to "scout" out the market to see if they meet conditions for various buy or sell entries. And others bots that try detect or obfusticate such activity, leading to the dueling bots thing that the articles before were talking about. Other activities like trying to flutter the spread or trying to quote stuff the system also requires large amounts of small parcels. I'm sure there's tons of other methods out there I don't know about.

Anyway if the asx really wanted to stop this sort of activity, it could enforce a minimum size threshold, making the above activity uneconomical. As the bots would have to actually have to buy or sell marketable parcels like the rest of us, instead of been able to dip their toe in without getting wet.

The other points about difference between whats considered HFC and normal "algo" bots isn't that important to me, its just like tomaito or tomarto imo. They're not mutually exclusive, there's no law that says you can't code a HFC to focus on volume or algo on price or whatever. Difference of timeframes is all.

 

[Iro]

for mine, hft add to liquidity they dont drain, let's say you take out the function you take out liquidity, just like short selling brings both sell liquidity and (re)buy liquidity through, all executing on the same field......this is like how we could bang on that derivatives don't add to society and they dont, still, they are a apart of market function, they facilitate trade, they allow liquidity to flow......that's all

i think the front running man-in-a-dark-raincoat idea is complete bubcus

markets evolve constantly and all you're seeing is that evolution just the same way that pit traders hated screen traders and now your average ill-informed screen junkie hates, well, they just need to hate something......and so it goes....ignorance is a funny thing

still, my only concern is the flattening of volatility via none-human speed but it's long way away till we get to a Kurzweil singularity thing

btw, journalists are journalists and not traders...... for a very good reason

Hft add to liquidity only if its in their favour, other times they take away liquidity just as well.

I can't believe how you could think front running don't exist either. Eg Shady brokers have been front running their clients ever since the stock market was invented. Plenty of people have been arrested for it. With HFT its a matter of been able to do the same but legally and more high tech.

As for the market evolving business, take a step back and think about it. What would be the point? All its doing is moving money around, heck most of it is not even money its just credit created out of thin air. It doesn't produce anything useful and instead just sucks money out of the real economy. Even if the market "evolved" light years away as you say, with every trade conducted in nanoseconds with bots, the only difference would be brokers raking in even more cash, computers will use up more electricity and financial market fill continue to suck in even more money and talent from the real economy than ever before. People would not benefit from this.

Lastly Ray Kurzweil's singularity refers to AIs reaching a stage where it would be smart enough to enhance its own intelligence (possibly humans too), leading to an exponential explosion of technological progress that would benefit mankind. Faster HFT bots is NOT what the singularity is about.

 

[skyQuake]

Its not that hard to find. The fees schedule is on the asx website. Google "ASX Market Connectivity Schedule of Fees". You're looking for the ASX ITCH config and liquidity cross rates, added that to mandatory 5km collocation fees for that setup and you're looking at around 20k per month for basic Pure and Tradematch orderbook access. Plus additional fees charged on top for volume. Pretty good money for just connecting a few cables.

There's similar fees if you want access to Chi-X and the other various pools.

My orig question was in ref to
"Heh they may not call it that but I understand you can still pay asx a hefty fee to have access to order book level information, hence be able to see orders develop before everyone else and "see the future""
Don't really see how access to order book info allows u to see the future. Market depth access for retail isnt exactly expensive.

My opinion about the order filters is from reading one of HFT books or articles, forgot which one, but I remember author didn't think much of ASX claims given that they get so much money from the guys they're suppose to protecting us from. Also I'm fairly sure the pre-order filters, if they do much at all, would NOT be on the broker side. They would be on setup on the ASX computers or one of the intermediaries along the way. If they were on broker side, it would defeat the point, since the entire purpose of them is supposedly to prevent brokers from manipulating prices. Or perhaps you're thinking of something else.

Im pretty sure there are broker side filters for DMA (have encountered them before), iress has a whole audit trail of trade entry, trade authorization, and if price seems its missing a decimal dot it gets queried etc.
But then again seeing large caps get sold down to 2c every few months. The filters employed by broker and asx side seem pretty crap...

Say for example a typical large institution wanted to buy from dark pool, with orderbook access you can see the order coming but not the limit price. So one way to get around this would be to issue tiny share lots with ‘immediate or cancel’ orders' (IOCs) say @ $20.10, if that order is ‘eaten’ the computer then issues an order at $20.25, then $20.30, then $20.35, then $20.40. When it tries $20.45 it gets no bite and the order is immediately canceled and you've just found out the highest price the institutional buyer is willing to pay. That's one example. There's also many algo bots that use small order to "scout" out the market to see if they meet conditions for various buy or sell entries. And others bots that try detect or obfusticate such activity, leading to the dueling bots thing that the articles before were talking about. Other activities like trying to flutter the spread or trying to quote stuff the system also requires large amounts of small parcels. I'm sure there's tons of other methods out there I don't know about.

Anyway if the asx really wanted to stop this sort of activity, it could enforce a minimum size threshold, making the above activity uneconomical. As the bots would have to actually have to buy or sell marketable parcels like the rest of us, instead of been able to dip their toe in without getting wet.

Doubt the spread would be 1.5% on a $20 large cap but i get your point, min size threshold would be tricky to implement. How small is too small? Insto algos wouldnt worry about p/l on a $500 ping order if they need to move a few $million of stock.

Though I don't think the insto trying to hide the buy order has the moral high ground over the algo trying to find it.

 

[Trembling Hand]

Yes I can see from this reply you are not condescending at all. *sarcasm*

The fact is I gave you specific questions, and you not only have not answered them you and tech actually started insulting me when all I did was pose questions. You say I didn't understand position sizing, but did you bother to explain?

Blah

Blah

Blah

LOL mate. Good luck in your travels.

 

[DB008]

Bloomberg Video (2:30)
http://www.bloomberg.com/video/the-future-of-high-frequency-trading-SOTWkKwURMKc3xvt914Llw.html

(The video is pretty bad first half, but the audio is fine)

 

[Trembling Hand]

Here is a bigger problem.

Dark pools,

THE Australian Securities Exchange has warned of increasing risks of sharp swings in the stockmarket with the rise of ultra-fast trading technology taking place on dark pool trading venues.

The ASX raised the risks of the trading in its submission to the Australian Securities and Investments Commission review over rules to regulate the flow of trading away from the public exchanges into so-called ''dark pools''.
Dark pools are orders to buy or sell shares set up by brokers or specialist firms that are not submitted to transparent ''lit'' markets, such as ASX and Chi-X.

Dark pools already account for about 30 per cent of total Australian trading volume, and ASX has said the high-frequency computer-based traders operating inside them are effectively operating under limited regulation.


Read more: http://www.theage.com.au/business/a...-black-hole-20120806-23q97.html#ixzz22oAGNn9b

 

[DB008]

Bloomberg

SEC Leads From Behind as High-Frequency Trading Shows Data Gap

The U.S. Securities and Exchange Commission, stung by criticism that it lacks the knowledge to analyze the computerized trading that has come to dominate American stock markets, is planning to catch up.

Initiatives to increase the breadth of data received from exchanges and to record orders from origination to execution are at the center of the effort. Gregg Berman, who holds a doctorate in physics from Princeton University, will head the commission’s planned office of analytics and research.

http://www.bloomberg.com/news/2012-10-01/sec-leads-from-behind-as-high-frequency-trading-shows-data-gap.html

 

[nulla nulla]

Did the high frequency traders take a holiday on Monday? Volumes appeared to be down, to the one I watch anyrate.

 

[DB008]

http://www.smh.com.au/business/highfrequency-trading-rewriting-the-rule-book-20121026-28azm.html

 

[baby_swallow]

From today's SMH........

HIGH-FREQUENCY traders could soon be held directly responsible for out of control algorithms and manipulative trading strategies, with the federal government considering reforms to the licensing regime under which they operate in Australia.

The recommendation is part of a regulatory push by the federal government to protect the integrity of the securities market as concerns grow about high-frequency traders and off-market exchanges.
Minister for Financial Services Bill Shorten released a paper on Friday discussing options for reforming Australia's financial market licensing regime.

The government has asked federal Treasury to consider whether high-frequency traders (HFTs) ought to be subject to the same market integrity rules that govern other market participants.
Advertisement

At the moment, some HFTs are run by ''non-market participants'', some of which are based overseas. These are not required to hold an Australian financial services licence.
That means that if these non-market participant HFTs manipulate the stockmarket, or fail to maintain control of their algorithms, the Australian Securities and Investments Commission cannot penalise them directly. ASIC can only penalise the market participant that provided them access to the market.
''There is an argument that changes to the regulatory framework should be made so that the HF traders themselves bear the regulatory burden directly, and provide some improved protection to market participants that are providing market access for HF traders,'' the paper said.
''This would improve the effectiveness of market integrity rules relating to HFT activity, and would more fairly share the compliance load.''....


Read more: http://www.smh.com.au/business/trad...accountable-20121202-2aoz6.html#ixzz2DwTp4EKt

 

[DB008]

Somebody Stole 7 Milliseconds From the Federal Reserve

Last Wednesday, the Fed announced that it would not be tapering its bond buying program. This news was released at precisely 2 pm in Washington "as measured by the national atomic clock." It takes 7 milliseconds for this information to get to Chicago. However, several huge orders that were based on the Fed's decision were placed on Chicago exchanges 2-3 milliseconds after 2 pm. How did this happen?

CNBC has the story here, and the answer is: we don't know. Reporters get the Fed release early, but they get it in a secure room and aren't permitted to communicate with the outside world until precisely 2 pm. Still, maybe someone figured out a way to game the embargo. It would certainly be worth a ton of money. Investigations are ongoing, but Neil Irwin has this to say:

In the meantime, there's another useful lesson out of the whole episode. It is the reality of how much trading activity, particularly of the ultra-high-frequency variety is really a dead weight loss for society.
....There is a role in [capital] markets for traders whose work is more speculative.... But when taken to its logical extremes, such as computers exploiting five millisecond advantages in the transfer of market-moving information, it's much less clear that society gains anything....In the high-frequency trading business, billions of dollars are spent on high-speed lines, programming talent, and advanced computers by funds looking to capitalize on the smallest and most fleeting of mispricings. Those are computing resources and insanely intelligent people who could instead be put to work making the Internet run faster for everyone, or figuring out how to distribute electricity more efficiently, or really anything other than trying to figure out how to trade gold futures on the latest Fed announcement faster than the speed of light.

http://www.motherjones.com/kevin-drum/2013/09/somebody-stole-7-milliseconds-federal-reserve

 

[Trembling Hand]

Don't wory about front running. This algorithm can tell if you’re a hipster

Researchers at the University of California, San Diego, are developing an algorithm that aims to identify whether you’re a hipster, a goth or a punk, just from the cut of your social media jib.
+
The team has been analysing pictures of groups of people in an attempt to place them within one of eight sub-cultures according to their appearance. These included hipsters, goths, surfers and bikers.
+
By looking out for trendy haircuts, telltale tattoos and jewelry, the algorithm is being trained to make assumptions about you based for example on your social media pictures.

LOL