[ElBorrachoInfamoso]

Let me summarize to see if I understand the HFT-haters on this issue.

Two experts in finance weigh in. One triple majored in math, management and chemical engineering at MIT before going on to earn his masters in chemical engineering at the same school. The other earned his PhD at Chicago in quant finance working with Nobel Laureate Eugene Fama. Both of them believe that HFT is not only fair, but that it improves the markets.

Haters respond by hating.

Quote:

Anybody defending HFT doesn't know what they are talking about and have clearly never traded at a high level before...

Clearly, the two high level fund managers who wrote the WSJ article have never traded at a high level before...

Quote:

The average volume of trades during the boom years was 250K; today you're lucky if you can push 150K.

Diverting attention to other changes on Wall Street.


There are real crimes occurring on Wall Street. HFT is not one of them.

There are even more crimes occurring on K Street and in Congress.

Next time you get hated on for picking up some bitch, remember how you hated on HF traders for making honest money.

[randomForest]

Related: Now dark liquidity pools are coming under scrutiny--

Shadow markets worse than HFT?

For the record, I have less of an issue with dark pools than I do with HFT. In my view, there is no reason that super low latency trading should exist at all. The idea that there is any value whatsoever to broader market liquidity in being able to buy and hold a stock for 10 milliseconds before selling it is ridiculous. The regulators ought to force guys to hold their positions for at least 60 seconds--HFT would be dead tomorrow and the markets would be a lot better off.

Dark pools are more legit--matching buys to sells without dealing with the exchanges is a legitimate way to do business, roughly akin to bartering or a private transaction between people as opposed to shopping at the supermarket. Retails investors (read: the little guy) are big users of these pools. But the costs to price discovery and meaningful transparency are high. One way to fix this is to lower exchange-based transaction costs to encourage business to move from the dark pools to the lit exchanges. Hopefully the increase in volume would still enable the exchanges to turn a reasonable profit.

But I'm still not sure how you would handle the problem of sellers on lit exchanges getting wind of large block trades and then jacking up the prices---and that's definitely a problem. You could maybe just make the exchange the other side of every single trade, the way they are trying to do with derivative instruments as a result of Dodd-Frank.

Crazy times we live in.

[scorpion]

(04-07-2014 05:17 AM)ElBorrachoInfamoso Wrote:  

Let me summarize to see if I understand the HFT-haters on this issue.

Two experts in finance weigh in. One triple majored in math, management and chemical engineering at MIT before going on to earn his masters in chemical engineering at the same school. The other earned his PhD at Chicago in quant finance working with Nobel Laureate Eugene Fama. Both of them believe that HFT is not only fair, but that it improves the markets.

Do you understand why people write op-eds? (Hint: It's because they are getting paid to do so by others, and/or have a personal agenda to push)

Do you know what an appeal to authority logical fallacy is? (Hint: It's what you just did)

Your understanding of this issue is laughably bad. You're basically reduced to saying, "Well, these smart guys in the newspaper support it, so it must be ok!" This is literally a child-like attitude.

The only people defending HFT are: 1) People who don't understand it, and 2) People who are making money from it.

You are a 1, the guys whose authority you are appealing to are 2s.

[Lou pai]

Michael Lewis is also trying to sell books. His whole career is about writing books about how wall street is an entire scam. So if you are going to dismiss an op-ed piece than any points Michael Lewis makes have to be dismissed as well.

[ElBorrachoInfamoso]

Three groups of people are hating on HFT

1. Garden variety haters who don't understand it and just have hate in their hearts

2. People who understand it but benefit from more restricted markets

3. People who may or may not understand HFT but are opposed to the fundamental human right of free markets.

Not one person on this thread has made a well-reasoned argument against HFT so it's safe to assume all the haters here fall into either 1 or 3.

[scorpion]

(04-07-2014 12:19 PM)Lou pai Wrote:  

Michael Lewis is also trying to sell books. His whole career is about writing books about how wall street is an entire scam. So if you are going to dismiss an op-ed piece than any points Michael Lewis makes have to be dismissed as well.

This would be a valid point if Michael Lewis was the only person calling HFT a scam. But he's not. Far from it. He's just the first mainstream financial writer to take on the issue. The financial blogosphere has been calling out HFT for years. Most financial writers are far too cowardly and sycophantic towards Wall Street to bite the hand that feeds. Michael Lewis is in a position to not give a fuck.

[ElBorrachoInfamoso]

(04-07-2014 11:05 AM)scorpion Wrote:  

The only people defending HFT are: 1) People who don't understand it, and 2) People who are making money from it.

You are a 1, the guys whose authority you are appealing to are 2s.

The writers of that article only benefit from HFT because HFT makes markets more efficient i.e. if they benefit then so do average Joe investors. They don't do HFT themselves. Learn. How. To. Read.

I guarantee that I understand HFT much better than any of you haters on this thread.

[ElBorrachoInfamoso]

(04-07-2014 12:19 PM)Lou pai Wrote:  

Michael Lewis is also trying to sell books. His whole career is about writing books about how wall street is an entire scam. So if you are going to dismiss an op-ed piece than any points Michael Lewis makes have to be dismissed as well.

I agree, but I really like Michael Lewis. He built his brand and he clearly works hard to keep it strong. He started working on Wall Street with the intention of writing about how horrible it is. Now that's some real hustle.

[scorpion]

(04-07-2014 12:49 PM)ElBorrachoInfamoso Wrote:  

Three groups of people are hating on HFT

1. Garden variety haters who don't understand it and just have hate in their hearts

2. People who understand it but benefit from more restricted markets

3. People who may or may not understand HFT but are opposed to the fundamental human right of free markets.

Not one person on this thread has made a well-reasoned argument against HFT so it's safe to assume all the haters here fall into either 1 or 3.

Honestly, you just have no idea what you're talking about.

Invoking "The fundamental right of free markets" to defend HFT is like invoking "The fundamental right to defraud the credulous and gullible" in defense of a Ponzi scheme. You are simply ignorant of how HFT actually works. HFT has nothing to do with normal trading whatsoever.

[Lou pai]

[/quote]
I agree, but I really like Michael Lewis. He built his brand and he clearly works hard to keep it strong. He started working on Wall Street with the intention of writing about how horrible it is. Now that's some real hustle.
[/quote]

That is true. I like Michael Lewis as well and I have read all of his books and really enjoy them. But at the end of the day he is pushing a certain agenda.

There is stuff on wall street that does need to be reined in but I can you tell you HFT is the least of concern. I work in finance but I am not a trader, just work on a sales desk. So personally could care less if HFT traders are making money or not, but the whole idea that all HFT trading firms are printing money thing is not true.

[BIGINJAPAN]

(04-07-2014 05:17 AM)ElBorrachoInfamoso Wrote:  

Let me summarize to see if I understand the HFT-haters on this issue.

Two experts in finance weigh in. One triple majored in math, management and chemical engineering at MIT before going on to earn his masters in chemical engineering at the same school. The other earned his PhD at Chicago in quant finance working with Nobel Laureate Eugene Fama. Both of them believe that HFT is not only fair, but that it improves the markets.

Haters respond by hating.

Quote:

Anybody defending HFT doesn't know what they are talking about and have clearly never traded at a high level before...

Clearly, the two high level fund managers who wrote the WSJ article have never traded at a high level before...

Quote:

The average volume of trades during the boom years was 250K; today you're lucky if you can push 150K.

Diverting attention to other changes on Wall Street.


There are real crimes occurring on Wall Street. HFT is not one of them.

There are even more crimes occurring on K Street and in Congress.

Next time you get hated on for picking up some bitch, remember how you hated on HF traders for making honest money.

Do you trade ? I do. I have traded for myself for years and now also trade for a rather large commodity firm in Canada. I am not hating on these firms because they have better technology and faster computers.

When I execute an actual trade in any market I have to put up the firms money or our clients. Doesn't matter if it is for a second or a year. The money is debited out of our account and now I have less capital or margin to play with. HFT's are not using any money to skim pennies. They are quickly jumping into the market and out of it without posting any collateral to be involved. They have no skin in the game and they are increasing the cost of the buyer of whatever security they are trying to trade. If a trader is trying to buy a 1,000,000 worth of stock the HFT is not reducing the price and letting the trader pick up the poistion for 9,990,000, it is causing the trade to increase to 1,001,000.

I like your argument how these guys with 10 degrees came out and defended HFT's. As if smart people don't lie and cheat/steal.

I guess you didn't see the CEO of a trading company outright lie on national TV a week ago ? http://www.linkedin.com/pub/william-o-brien/13/42a/76a

Looks like his profile says he has a couple degrees as well.

What about Manoj Narang ? Mr. Manoj Narang is the Chief Executive Officer of Tradeworx, Inc. He developed the firm’s automated trading strategy. Mr. Narang was a Proprietary Trader for Goldman Sachs and as a Senior Investment Technologist with Citicorp, CS First Boston, and Lehman Brothers. He is a Member of Risk Management Advisory Committee at Platinum Capital Management Limited. Mr. Narang holds a B.S. in Mathematics and Computer Science from MIT.

Looks like zerohedge and others uncovered he owns the tower that has the fastest signal from Chicago to NJ.

http://www.zerohedge.com/news/2014-04-07...ery-solved

He also has a pretty prestigious degree from a world class school. He also came out in defense of HFT's and claimed that speed doesn't matter anymore. Yet why is he the owner of the fastest signal transmitter in the country ?

Lesson learned today everyone, smart people with multiple degrees never lie or do anything wrong.



   

Kaczynski was accepted into Harvard University at the age of 16, where he earned an undergraduate degree. He subsequently earned a PhD in mathematics from the University of Michigan. He became an assistant professor at the University of California, Berkeley in 1967 at age 25

[Feisbook Control]

Why is everyone getting so upset? Of course we can trust smart people.

[Cattle Rustler]

Everyone should post their finance credentials below their comment...to filter theoretical armchair bankers from the real ones.

[Feisbook Control]

By that logic, everyone would need to be a doctor to comment on medical ethics or malpractice, everyone would need to be an architect/engineer to comment upon poor building practices, and everyone would need to have feathers to comment on whether or not a duck is in fact an ostrich.

[ElBorrachoInfamoso]

For the other people on this thread who actually know enough about finance to understand these papers.


The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response

Quote:

We argue that the continuous limit order book is a flawed market design and propose that financial exchanges instead use frequent batch auctions: uniform-price sealed-bid double auctions conducted at frequent but discrete time intervals, e.g., every 1 second. Our argument has four parts. First, we use millisecond-level direct-feed data from exchanges to show that the continuous limit order book market design does not really “work” in continuous time: market correlations completely break down at high-frequency time horizons. Second, we show that this correlation breakdown creates frequent technical arbitrage opportunities, available to whomever is fastest, which in turn creates an arms race to exploit such opportunities. Third, we develop a simple new theory model motivated by these empirical facts. The model shows that the arms race is not only socially wasteful – a prisoner’s dilemma built directly into the market design – but moreover that its cost is ultimately borne by investors via wider spreads and thinner markets. Last, we show that frequent batch auctions eliminate the arms race, both because they reduce the value of tiny speed advantages and because they transform competition on speed into competition on price. Consequently, frequent batch auctions lead to narrower spreads, deeper markets, and increased social welfare.

Empirically, they find that HFT has led to markets reaching efficiency faster - not at all surprising. Theoretically, they find the negative effects of HFT that many on this thread have pointed out. I need to take a deeper look but their model appears purely theoretical rather than phenomenological.

HIGH FREQUENCY TRADING AND ITS IMPACT ON MARKET QUALITY

Quote:

This paper examines the impact of high frequency traders (HFTs) on the U.S. equity market. I analyze a unique data set to study the strategies utilized by HFTs, their profitability, and their relationship with characteristics of the overall market, including liquidity, price discovery, and volatility. The 26 high frequency trading (HFT) firms in my dataset participate in 74% of all trades and make up a larger percent of large market capitalization firms. I find the following key results: (1) HFTs tend to follow a price reversal strategy driven by order imbalances, (2) HFTs make approximately $3 billion annually, (3) HFTs do not seem to systematically front run non-HFTs, (4) HFTs rely on a less diverse set of strategies than do non-HFTs, (5) HFTs trading level changes only moderately as volatility increases, (6) HFTs add substantially to the price discovery process, (7) HFTs provide the best bid and offer quotes for a significant portion of the trading day, but only around one-fourth of the book depth as do non-HFTs, and (8) HFTs do not seem to increase volatility and may in fact reduce it.

This paper is all empirical. It is much simpler than the first paper in that the results are all derived from real data rather than combining real data with a theoretical model.


In a previous life I was a theoretical physicist so I am quite partial to the methods of the first paper, but I've grown skeptical of the models of economists and even as a theorist I recognize the need for phenomenological models whenever there is useful data to fit models to. Otherwise you end up having to rationalize why your model doesn't fit the data as the authors of the first paper have to do in their discussion. In physics, reviewers in normal to top-tier journals will reject your paper if you can't at least show qualitative agreement with experiments, assuming the relevant experiments have already been done.

Full disclosure, I've had to read some of these papers recently, I wasn't inspired to do so by this thread. Quant finance is an area of interest to me and I considered it as a career but went into other areas of business instead. I have only ever actively traded commodities. The bulk of my investments are in ETFs that I do not actively manage. I am currently an entrepreneur but most of my experience is in basic research and the pharmaceutical industry.

[Samseau]

One of the men responsible for developing HFT claims it's all rigged:

http://www.zerohedge.com/news/2014-04-07...igged-game

[samsamsam]

(04-07-2014 06:53 PM)BIGINJAPAN Wrote:  

Lesson learned today everyone, smart people with multiple degrees never lie or do anything wrong.

Exactly. lol.

CR, just because some people are not full time traders it doesn't mean their opinions are inferior to those who trade.

BIGINJAPAN makes a great point the HFT guys never put their capital at risk, if anything, they are betting on a sure thing because they see the orders coming. I don't blame people for wanting a sure thing, but does it seem right? Hmmm not so much.

[Lou pai]

That is not true, how could HFT firms lose money if it is a sure thing?

[BIGINJAPAN]

(04-08-2014 03:55 PM)Lou pai Wrote:  

That is not true, how could HFT firms lose money if it is a sure thing?

They lose money because other firms blow them up with faster and more precise algorithms. If it was just the firm vs the general public they would never lose money

[ElBorrachoInfamoso]

(04-08-2014 02:33 PM)samsamsam Wrote:  

BIGINJAPAN makes a great point the HFT guys never put their capital at risk, if anything, they are betting on a sure thing because they see the orders coming. I don't blame people for wanting a sure thing, but does it seem right? Hmmm not so much.

HFTs put their capital at risk when they invest in the infrastructure needed to make HFT possible. If a particular HFT were the only HFT around, they would never lose money. They only lose when other HFTs do a better job and push them out of the market.

I don't see how this is fundamentally different from other businesses.

If you move to a town with no cafe and you build the only one in town then you are putting your capital at risk. As the only cafe you are unlikely to lose money. But if Starbucks moves in and does a better job then you could get pushed out of the market.

This is how every business works in a relatively free market. As long as the business provides value to its customers, it will always be profitable assuming it has a monopoly. Competition introduces the possibility of failure.

I don't think HFT haters really care so much about that. If so, then they clearly have a weak understanding of markets and aren't worth listening to.


These, I think, are the main points of the non-idiotic HFT haters
1. HFT only exists because of flawed market design.
2. A market design that optimizes value for all traders would not allow the possibility of HFT.

Basically, HFTs can only intermediate because exchanges are designed in a particular way. Exchanges can and should be designed in such a way that optimizes value for the people who actually take positions in the traded assets - both long and short positions. Such a design would preclude the possibility of HFT.

[Samseau]

Quote:

This is how every business works in a relatively free market. As long as the business provides value to its customers, it will always be profitable assuming it has a monopoly.

But that's just not true. Thousands of new business ideas are tried each year and fail. What the public will find valuable can be very fickle.

HFT also doesn't provide anything that normal trading does not; it merely does it faster in order to game the system. It's really no different than putting a toll on a highway.

[Stun]

(04-09-2014 03:36 AM)ElBorrachoInfamoso Wrote:  

If you move to a town with no cafe and you build the only one in town then you are putting your capital at risk. As the only cafe you are unlikely to lose money. But if Starbucks moves in and does a better job then you could get pushed out of the market.

That's a poor analogy. If I have my little cafe and a Starbucks opens, there's no conflict of interest. I serve my customers and they serve theirs and customers are free to go where they want.

HFT, due to the ridiculous advantage firms have over the retail investor is more like if the manager of Starbucks ran over to my cafe and started feeding my customers while they were waiting in line. They aren't likely to be very hungry when they get to the register.

[BIGINJAPAN]

(04-09-2014 03:36 AM)ElBorrachoInfamoso Wrote:  

(04-08-2014 02:33 PM)samsamsam Wrote:  

BIGINJAPAN makes a great point the HFT guys never put their capital at risk, if anything, they are betting on a sure thing because they see the orders coming. I don't blame people for wanting a sure thing, but does it seem right? Hmmm not so much.

HFTs put their capital at risk when they invest in the infrastructure needed to make HFT possible. If a particular HFT were the only HFT around, they would never lose money. They only lose when other HFTs do a better job and push them out of the market.

I don't see how this is fundamentally different from other businesses.

If you move to a town with no cafe and you build the only one in town then you are putting your capital at risk. As the only cafe you are unlikely to lose money. But if Starbucks moves in and does a better job then you could get pushed out of the market.

This is how every business works in a relatively free market. As long as the business provides value to its customers, it will always be profitable assuming it has a monopoly. Competition introduces the possibility of failure.

I don't think HFT haters really care so much about that. If so, then they clearly have a weak understanding of markets and aren't worth listening to.


These, I think, are the main points of the non-idiotic HFT haters
1. HFT only exists because of flawed market design.
2. A market design that optimizes value for all traders would not allow the possibility of HFT.

Basically, HFTs can only intermediate because exchanges are designed in a particular way. Exchanges can and should be designed in such a way that optimizes value for the people who actually take positions in the traded assets - both long and short positions. Such a design would preclude the possibility of HFT.

I think your problem is you are a math genius and you see how HFT works and think it's neat. You think you are smarter and therefore the rest of the regular folks are too dumb to understand the mechanics of how HFT works. You are only looking at the math and the programming. You don't take into consideration how the NBBO works and price discovery. Not to mention the law. HFT is illegal and the useless SEC chooses to do nothing about it. High Frequency Trading is not a case of them being a head of the regulators and there being no law in place. NBBO is what is supposed to protect people but exchanges are being paid off to give HFT's an advantage.

Why do you think dark pools exist ? Why do you think most hedgefunds, Banks and pension funds trade in dark pools ?

I think i need to re-read your background as it sounds like you are an academic without a lot of real world experience in trading.

[ElBorrachoInfamoso]

(04-09-2014 10:24 AM)Samseau Wrote:  

But that's just not true. Thousands of new business ideas are tried each year and fail. What the public will find valuable can be very fickle.

HFT also doesn't provide anything that normal trading does not; it merely does it faster in order to game the system. It's really no different than putting a toll on a highway.

That is why I qualified my statement and specified businesses that provide value. It's clear that if you have the monopoly on a worthless product then you still won't make money.

HFT provides faster trades. If you believe some of the research, it also provides narrower bid-ask spreads. Maybe HFT is a net negative value to society but the way exchanges are set up now, it does provide some value.

(04-09-2014 10:49 AM)Sugar Wrote:  

That's a poor analogy. If I have my little cafe and a Starbucks opens, there's no conflict of interest. I serve my customers and they serve theirs and customers are free to go where they want.

HFT, due to the ridiculous advantage firms have over the retail investor is more like if the manager of Starbucks ran over to my cafe and started feeding my customers while they were waiting in line. They aren't likely to be very hungry when they get to the register.

The analogy I intended:
Little Cafe is to Starbucks as Little HFT is to Big HFT

The analogy you inferred:
Little Cafe is to Starbucks as Retail investor (or maybe traditional broker) is to HFT

If it were legal for someone to come and sell coffee or food in your cafe and they offered better prices, you probably would go out of the business. I don't see how that is bad for the customers though.

(04-09-2014 06:58 PM)BIGINJAPAN Wrote:  

I think your problem is you are a math genius and you see how HFT works and think it's neat. You think you are smarter and therefore the rest of the regular folks are too dumb to understand the mechanics of how HFT works. You are only looking at the math and the programming. You don't take into consideration how the NBBO works and price discovery. Not to mention the law. HFT is illegal and the useless SEC chooses to do nothing about it. High Frequency Trading is not a case of them being a head of the regulators and there being no law in place. NBBO is what is supposed to protect people but exchanges are being paid off to give HFT's an advantage.

Why do you think dark pools exist ? Why do you think most hedgefunds, Banks and pension funds trade in dark pools ?

I think i need to re-read your background as it sounds like you are an academic without a lot of real world experience in trading.

I am sure that most regular folks are too dumb to understand HFT. I can accept that regular traders might be better off with different exchange rules, but I haven't seen a convincing argument yet.

How is HFT illegal? I don't doubt that some strategies pursued by some HFTs are illegal, but HFT in general is not illegal. Being a better intermediary is not illegal.

I do not work in finance beyond some pro-bono consulting I do for a startup in the weather derivatives space. The bulk of my real world work experience is in the pharma/biotech space including R&D, operations and commercial. I abandoned academia when I figured out I'd rather kill myself than be a 30-year-old post-doc. Best decision I ever made. Despite my years in research, I have been hustling ever since I ran my own business as a teenager.

[Nemencine]

ElBorrachoInfamoso,

+1 rep point from me.

These threads are amusing. There was one about TWITTER and another one about facebook purchase of whatsapp. It is quite interesting to read the level of misinformation in those threads.....

People that have no qualifications or experience with something... lecturing others about that same subject... the blind leading the blind.

I am willing to bet that most of these commentators do not have the requisite background in quantitative science, and (b), do not trade the financial markets....but they are apparently qualified to lecture on these subjects!

I have background in quantitative science and i also trade the financial market.

I am willing to bet that some of these commentators talking about HFT have no fracking clue about order flow characteristics at the level of market microstructure...... that when you go to that granular level inside market ecology, that market orders exhibits herding behaviour that sometime follows power laws series...What does this say about the claims being made about HFT? i will bet they cannot answer that. That market orders follows a concave function...again, what does this say about the claims being made about HFT?..... i am also willing to bet they dont know how trading friction and Volatility clustering relates to HFT.... what are the causes and roles of order cascades? .... or do you think they understand liquidity disequilibrium in the market place? or the relevance of latent and pending interest in generating episodic volatility?

or what the ARCH-GARCH model even means? BY that i am referring to autoregressive conditional heteroskedasticity.

You think they have any fracking idea how market digest changes in supply and demand... and what effects, if any, HFT have on that? And yet, they are lecturing about how HFT affects supply and demand.

You honestly think they can grasp or understand the mathematics and models behind it?

I am not an expert, of course. But i dont go around lecturing others because i read some zero hedge nonsense or watch some youtube clips. I certainly wont debate thomas the rhymer about medicine or prophylactic about chiropractic medicine or MikeCf about the law.

ElBorrachoInfamoso, please stop wasting your time..... let them circle-jerk and engage in their doomsday sayings.

That is all i have to say. And with that, i am abandoning thread

adios, amigos.




regards,

Nemencine