tag:blogger.com,1999:blog-17232051.post373818451763162505..comments2024-03-28T03:16:14.104-04:00Comments on Noahpinion: A healthy side effect of High Frequency Trading?Noah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger66125tag:blogger.com,1999:blog-17232051.post-10191377062494460862013-08-15T12:05:57.987-04:002013-08-15T12:05:57.987-04:00Once a day? What are you, some kind of evil trader...Once a day? What are you, some kind of evil trader?<br /><br />Once a year is good enough. We can do twice a year on leap years.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-74503830858482990362013-08-15T12:03:06.538-04:002013-08-15T12:03:06.538-04:00Similarly, you should also count the improvement i...Similarly, you should also count the improvement in computer architecture among the social benefits of HFT trading (just like porn was instrumental in developing good network infrastructure, the twin forces of advertising and HFT are instrumental in paying for improvements in computer architecture, specifically memory, disk, IO). I am sure if DWave like companies actually succeed in proving that they are doing quantum computation effectively, HFT will pay for their further development.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-39185272466885134612013-08-15T11:55:09.646-04:002013-08-15T11:55:09.646-04:00How is that front running? In what sense are the p...How is that front running? In what sense are the people, who placed the resting (passively or actively) orders, clients of the people who are running automated algorithms for trading.<br /><br />(From Wiki: <br />Front running is the illegal practice of a stockbroker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers.<br />)<br /><br /><br />Back in the nineties, when specialists filled orders, there were plenty of examples of front running and other double dealings. It was a opaque market, more akin to a snake pit. With computerized trading, the field is somewhat more even. You *can* write your algorithm, and connecting them to live trading is far far cheaper than before. Going to HFT market making (whether official or not) pinched market making profits in large sell side institutions. For evidence look at investment bank balance sheets and look at how often Equity S&T profits beat FICC S&T profits now vs before.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-16680075172980028052013-08-15T00:04:24.008-04:002013-08-15T00:04:24.008-04:00"In the long run (over a year), economic theo..."In the long run (over a year), economic theory is correct: buy and hold index funds because random walk wins."<br /><br />Not quite right, as my father Anil (who you know) could tell you.<br /><br />There's actually a longer time horizon: over the 5-year-plus horizon, it's quite easy to beat random walk with fundamentals research and stock picking. Economic theory is simply wrong.<br /><br />Incidentally this has been Warren Buffett's principle. <br /><br />Fundamentals research requires actual knowledge of the specific details of specific business operations within specific industrial sectors, of course, which is why so few people do it -- it's actual work. It even requires analyzing the behavior of individual CEOs and Boards of Directors to figure out whether they are going to manage their businesses competently or stupidly.<br /><br />It's an example of beating the markets through having information which the other people in the markets don't have, not because the information isn't public, but merely because very few bother to research it.<br /><br />Of course, if you don't have the time to do the research, index funds are the best you can do. If you happen to be intensively researching particular sectors for other reasons anyway, however, you can beat the indexes over the long run just by avoiding the mismanaged companies which are on a glide-path to bankruptcy.<br /><br />(Incidentally, there was a study a few years ago which debunked the idea that holding a stock index was consistently better than holding cash. Turns out, in the 19th century, it wasn't -- the bankruptcies made the difference. The bankruptcies had been omitted in the previous longitudinal studies which gave the false result. Of course, *as usual*, I don't have the reference on me. In short, in order to reliably do better than cash in a non-inflationary environment, you have to figure out how to avoid investing in companies which will go bankrupt.)<br /><br />I appreciate the rest of your comment, which I largely agree with.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-54401691260878151992013-08-14T23:50:44.539-04:002013-08-14T23:50:44.539-04:00This is just wrong, but read my comments near the ...This is just wrong, but read my comments near the bottom for why it's wrong. Yours is a very shallow understanding of the potential dangers to markets of front-running and instability.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-80377068165582345132013-08-14T23:49:08.456-04:002013-08-14T23:49:08.456-04:00Aha. You've explained why the market has so m...Aha. You've explained why the market has so much less liquidity than it used to.<br /><br />I do standing limit orders, but they're out-of-the-money "let it sit for a month" limit orders. That means I'm basically part of the process setting the ground rules of the market under which all these traders are trading. I expect they'll try to extract money from me, probably successfully, but what are you gonna do; they loot you a lot more on market orders, and there aren't that many types of orders.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-45698721755725074202013-08-14T23:43:52.723-04:002013-08-14T23:43:52.723-04:00You're confusing HFT with ordinary ("low ...You're confusing HFT with ordinary ("low frequency") electronic trading.<br /><br />Ordinary electronic trading -- the original NASDAQ -- was what eliminated the high profiteering of the traditional brokerages.<br /><br />HFT, which depends on having your computers very close to the exchange's computers, is a way for the traditional brokerages to get their advantage back and return to profiteering.Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-55391015741940220432013-08-14T23:41:43.218-04:002013-08-14T23:41:43.218-04:00Um, a lot of HFT is actually automated front-runni...Um, a lot of HFT is actually automated front-running. Noah, you need to understand why this is bad.<br /><br />And you underestimate the problem of flash crashes. They are EXTREMELY bad. The usual resolution to a "flash crash" is to retroactively cancel a bunch of trades made by real people in good faith. Do you understand what that does to people's trust in the markets?<br /><br />This is before we get to the final problem: most HFTs are run by the same old crooked brokerages with the purpose of, as Anonymous says, extracting half a cent a share from each long term trade. In other words, middlemen taking a cut. This can only be done by the very well-connected (literally well-connected, with computers physically very close to the NYSE). <br /><br />So HFT is basically a system of extracting wealth from long-term investors (pension funds, etc.) to socially worthless people at Goldman Sachs, JP Morgan Chase, etc<br />Nathanaelnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-43171320478211247102013-08-13T22:56:06.618-04:002013-08-13T22:56:06.618-04:00There seems to be a lack of understanding about di...There seems to be a lack of understanding about different types of algorithmic trading and HFT. They come in many different shapes and sizes. There is one type that is common to all NYSE listed stocks: Designated Market Maker aka DMM. In the old days, a stock was traded at a specialist station on the floor of the NYSE. One specialist firm was in charge in maintaining a “fair and orderly market.” Specialists went the way of the dinosaurs. <br /><br />The specialist function is now assigned to a single company who is the DMM. The DMM is actually a program that runs on co-located computers in Rahway, New Jersey. This is where the “real” NYSE is these days. The old location is essentially a façade used for photo ops. The DMM program is technically NOT HFT, although from a speed standpoint, it is very fast. The DMM program is setup to emulate what specialists used to do. One main difference is that they will NOT take very large positions to hold on “their book” like specialists used to do. Stated differently, they are not willing to risk much of their own capital, be it going long or going short on a stock.<br /><br />Totally separate from the DMM algorithm are the different HFT algorithms. HFT’s are trying to extract a half a cent/share or so from each long term buyer/seller. A common form of this algorithm is attempting to predict supply/demand over the next 1 to 10 seconds.<br /><br />Arbitrage is another form of HFT. This is where the price on the NYSE is different than the price on one of the other ~40 different exchanges or networks. The HFT tries to make a penny or two on the discrepancy.<br /><br />The trades that are done at X.0001 or Y.9999 MUST be done on “Dark pools” because that is the only format that allows “sub penny” trades of less than one cent. Dark pools are typically NOT all that fast and are NOT considered a form of HFT.<br /><br />One interesting aspect is that that the largest DMM firms, Getco and Goldman Sachs ALSO have “independent” HFT proprietary trading desks. So they are supposed to be “making the market” on XYZ while at the same time trading for their own account on XYZ. Luckily, these firms are 100% honest and ethical and would NEVER share data between those functions.<br /><br />A fair criticism of HFT needs to distinguish between these different types of algorithmic trading. These are others, but these are the main ones. <br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-43858952230655007422013-08-13T20:29:54.607-04:002013-08-13T20:29:54.607-04:00Using Expert Smarty Pants nickname while suggestin...Using Expert Smarty Pants nickname while suggesting “not waste everybody's time with an ad hominem attack “ sounds a little inconsistent , especially from a scholar you imply to be;-)<br />But I will answer your question-Noah didn’t say anything.<br /> Not a single fresh/original thought.<br /> He quoted someone else ideas, inserted few links and added comments. From the title to the last paragraph, which was used as template for my answer, he proceeds to insult and make fun of profession he apparently knows very little about. Actually, he’s cheering to a fact that HFT making it so tough on humans to compete that they are becoming obsolete.<br />In return he tasted some of his own medicine.<br />Discussing HFT strategies, its fairness ,compliance with existing rules and regulations and its impact on financial market its beyond scope of this discussion but investigating source-Noah’s- credibility is not.<br />I have based my research on publicly available sources and I offered my conclusions. <br />Most if not all rating sites have small sample bias problem but that doesn’t mean they should be ignored. For example if 4 out of 5 Yelp reviews from original users called mechanic a fraud, would you take your car there? Why student’s opinion should be treated differently? <br /> More, I am not pretending to have conducted complete research of Noah’s work although I posted a link to his other article and statements to confirm my evaluation. In fact, one can have a field day discussing ideas presented there. Please enjoy in your spare time.<br />Victor Gnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-40031319110825994452013-08-13T15:18:48.958-04:002013-08-13T15:18:48.958-04:00Thanks, that's helpful.
I guess my problem is...Thanks, that's helpful.<br /><br />I guess my problem is mostly with brokers rather than HFTs. I suspect part of my problem with limits is they get routed to third rate ECNs, and get executed last.<br /><br />I need to look into direct market access.<br />Stevehttps://www.blogger.com/profile/11574596367875858439noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-57488145373944852582013-08-13T15:05:26.431-04:002013-08-13T15:05:26.431-04:00I can't speak for Fidelity. However, most big...I can't speak for Fidelity. However, most big brokers either internalize their orders or sell the order flow to a firm that internalizes the orders and sends what it doesn't want to trade out into the market.<br /><br />Either way, the orders often do not see the open market. They trade against other clients or they take on the other side themselves if their algorithms see an advantage.<br /><br />It is a win/win situation for brokers. They collect a commission from you and they either profit from the trade themselves with no exchange cost to them, or simply sell the flow to someone else. <br /><br /><br />---<br /><br />I agree that fragmentation sucks (but que jumping is only prevalent in certain circumstances that a normal trader wouldn't be affected by). But that isn't the fault of HFT. And sub-pennying? Most of that is internalization. If you go to an exchange website and look at their order types, you can see exactly what a HFT can and cannot do. And guess what? You can do the exact same thing if you have direct market access (not hard to get). <br /><br /><br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-18155483959730230852013-08-13T14:50:37.761-04:002013-08-13T14:50:37.761-04:00Is the problem payment for order flow? I.e., Fide...Is the problem payment for order flow? I.e., Fidelity and the exchanges keep 0.0049, reimburse me 0.0001 for my ignorance, all while screwing over the people who post legitimate public at-risk limit orders?Stevehttps://www.blogger.com/profile/11574596367875858439noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-15355327173032224922013-08-13T14:43:30.400-04:002013-08-13T14:43:30.400-04:00I don't take any offense if that's actuall...I don't take any offense if that's actually true.<br /><br />But what you are arguing is that Fidelity (and most other brokers) are essentially operating internalized flash systems that skim from their clients. I'd like more documentation to that effect as I don't have time to go full Erin Brockovich.<br /><br />I've never had a problem with fast trading, my complaint is with fragmentation, sub-pennying, and lack of a proper queue protocol.Stevehttps://www.blogger.com/profile/11574596367875858439noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-79057275201645956702013-08-13T14:04:32.175-04:002013-08-13T14:04:32.175-04:00No offense. But this is exactly why HFT gets such...No offense. But this is exactly why HFT gets such a bad rap. The people complaining do not even understand how the system operates under the hood. It MUST be HFT.<br /><br />Look no further than your own Broker.<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-15843473541253428992013-08-13T13:35:46.564-04:002013-08-13T13:35:46.564-04:00I think you underestimate the costs of HFT. After ...I think you underestimate the costs of HFT. After reading this: http://www.vanityfair.com/business/2013/09/michael-lewis-goldman-sachs-programmer I really get the impression we are draining our best minds on a useless endeavor. HFT is all about having a slightly better computer program and slightly better statistical model than all other high frequency traders, which means that they pick our best programmers and statisticians out of fields where they could actually produce some value-added for the economy into one where they have no economic value.Matthew Martinhttps://www.blogger.com/profile/10254244795963585737noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-3500052808414902242013-08-13T13:13:09.518-04:002013-08-13T13:13:09.518-04:00Victor G.,
Oh come off it. If you think that Noa...Victor G.,<br /><br />Oh come off it. If you think that Noah has said something incorrect, then critique that specifically and clearly. Do not waste everybody's time with an ad hominem attack based on a limited set of teaching evaluations at a site known for its small sample bias problems (and of a newly starting teacher at that). So, sure, Noah has not published much, and he might even be a bad teacher. But what does any of this have to do with the quality or lack thereof of the arguments he makes here?<br /><br />His blog has become very widely read and influential because he says lots of interesting things on it, often things many people have not thought about, even if he is wrong or misguided in some of his arguments. But, forget about the ad hominem attacks and stick to the ideas, particularly if you are such an expert on finance as you imply. Just what is it he has said here that you find wrong, Mr. Expert Smarty Pants?<br /><br />Barkley Rosserrosserjb@jmu.eduhttps://www.blogger.com/profile/09300046915843554101noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-72000104633723477302013-08-13T13:03:56.223-04:002013-08-13T13:03:56.223-04:00To make my point more succinctly, suppose the nbbo...To make my point more succinctly, suppose the nbbo is 25.05/25.06.<br /><br />I can submit buy, sell, buy, sell orders through Fidelity all day. All the buys will be executed at 25.0599 and the sells at 25.0501. Someone is skimming half-spread. It isn't the guys publicly displaying limit orders; they never get filled.<br /><br />So who is skimming the half-spread?<br />Stevehttps://www.blogger.com/profile/11574596367875858439noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-45250979576535368232013-08-13T12:46:10.180-04:002013-08-13T12:46:10.180-04:00Interesting, I guess I do learn something every da...Interesting, I guess I do learn something every day. So when if the national best bid is 25.05 and Fidelity executes my 100 share sell at 25.0501 (for one penny of price improvement of the entire order), who is taking the other side? Someone else at Fidelity? And why is the price improvement always only 0.0001?<br /><br />My general observation is that a publicly displayed limit order is rarely executed except under adverse selection, i.e., a gap down post an executed buy order, or a gap up post an executed sell order. There is usually lots of volume at my price prior to my execution, though, even though I was the first and best publicly displayed limit. I never leave standing limits for that reason.<br /><br />Usually I just pay the 0.0099 toll to the toll keeper (whoever that is) for an order that can be immediately executed.<br /><br />Perhaps you are right that it is less costly than the alternative, but I generally assume I am paying a 0.0099 "commission" to people who are better able to arbitrage the market structure.<br />Stevehttps://www.blogger.com/profile/11574596367875858439noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-46836643797003973022013-08-13T11:36:34.739-04:002013-08-13T11:36:34.739-04:00>If big retail brokers like Fidelity and Vangua...>If big retail brokers like Fidelity and Vanguard are in the business of prop trading that would be news to me<br /><br />Well, you learn something new every day. I only bothered to look it up for fidelity. This website: https://www.fidelity.com/trading/execution-quality/overview<br />claims that they do price improvement on 85.1% of customer orders. <br /><br />flash trading is basically dead. Everyone but direct edge stopped offering it a few years ago when it became controversial. But a flash order was always a voluntary order type. No one got to see your orders ahead of time unless you decided to let them. <br /><br />>Suppose I submit a buy on ECN A. I am the national best bid. A machine sees that and submits the same order on ECN B. Ok, fine the machine is second in line. Then the machine submits a tiny bid on ECN A in order to update the time stamp, and bumps me to bottom of the queue. Voila! The machine on ECN B is now first in line for execution at the nbb, even though its order was a later copy of mine.<br /><br />It doesn't work that way. Its actually worse than you think! There is no time priority between ECNs just price priority, and that only for displayed orders. If I copy your order on another ECN I can get filled ahead of you. It doesn't require any funny games with timestamps. <br /><br />In general, I agree with you that the micro-structure of the US equity market is horribly complex, confusing and annoying. I don't think it hurts retail investors but it can make life difficult for institutional investors and there is a whole industry of "smart routing" technology or services that wouldn't need to exist if there were fewer liquidity pools. I think that the existing structure benefits larger HFTs by raising the barriers to entry from a technology/knowledge perspective. Its nowhere near the size of the advantage that the specialists used to have though. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-54786796113469771292013-08-13T11:10:15.750-04:002013-08-13T11:10:15.750-04:00That is internalization. Your order never hit the...That is internalization. Your order never hit the market and wasn't touched by a HFT firm, unless your broker sold the flow to them. <br /><br />Blame your broker not HFT.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-84601316541400735382013-08-13T09:52:48.601-04:002013-08-13T09:52:48.601-04:00If big retail brokers like Fidelity and Vanguard a...If big retail brokers like Fidelity and Vanguard are in the business of prop trading that would be news to me. It happens with every brokerage I've ever used. I assumed it is "flash trading" where the machines are given a millisecond sneak peak to decide if they want to execute the order against their own book before the order hits the exchange. Whatever it is, it disadvantages publicly displayed liquidity (through adverse selection), driving people into dark pools.<br /><br />Also, I see games played with exchange fragmentation. The prioritization and trade through rules are a mess. Suppose I submit a buy on ECN A. I am the national best bid. A machine sees that and submits the same order on ECN B. Ok, fine the machine is second in line. Then the machine submits a tiny bid on ECN A in order to update the time stamp, and bumps me to bottom of the queue. Voila! The machine on ECN B is now first in line for execution at the nbb, even though its order was a later copy of mine.Stevehttps://www.blogger.com/profile/11574596367875858439noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-21979565750178954852013-08-13T08:22:14.327-04:002013-08-13T08:22:14.327-04:00You are correct, I missed the different account pa...You are correct, I missed the different account part. I'm still pretty sure that it was your broker who price-improved you not an HFT though. Unless you count your broker as an HFT, which is fine but just different than how the term is generally used. If you trade without a broker I guarantee that you can cross yourself. I even think you can cross yourself with a broker (or at least by using 2 different brokers). All you have to do is make sure that your bid is actually the best bid (i.e. it shows up in the NBBO) and then you can hit it from the other account. If you are alone at the NBBO you should cross yourself a decent % of the time though sometimes your broker might price-improve the sale. I don't recommend trying it though! <br /><br />Anyway, I could be wrong. What market-structure flaw do you think there is that allowed an HFT to trade with your bid? What strategy do you think the HFT was pursuing? I'm bored so I wouldn't mind trying to figure out if your theory is plausible. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-35825210902792650942013-08-13T00:21:09.564-04:002013-08-13T00:21:09.564-04:00You're a bit pissed at Noah because he's w...You're a bit pissed at Noah because he's writing about something he has no direct experience in. You may be right. Or maybe Noah does know something that we don't know that actually does pertain to the subject. I don't know. And I don't know Noah, I don't know you, and I don't know Nassim. But I do know that one of the features of the internet is that anybody can spout off about anything they want, and that people spout anger in return. It's all so damn easy to do, but it doesn't help any of us. What do you think, Noah? Does your blog help the world?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-61413072494239898612013-08-12T22:12:37.903-04:002013-08-12T22:12:37.903-04:00Hey Anonymous,
Different brokerage accounts! You...Hey Anonymous,<br /><br />Different brokerage accounts! You must not have read my comment, you didn't even address the significant market structure flaws that allow HFT to jump in front of the existing order book.<br /><br />And it's not manipulation -- small trades, middle of bid-ask, same price as last trade, legitimate purpose, etc. But the market structure guarantees that HFT will always collect a rent from one half of the trade.<br /><br />Please go back into your HFT shill cave.<br />Stevehttps://www.blogger.com/profile/11574596367875858439noreply@blogger.com