tag:blogger.com,1999:blog-17232051.post4642860655776650294..comments2024-03-28T03:16:14.104-04:00Comments on Noahpinion: The HFT arms raceNoah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger34125tag:blogger.com,1999:blog-17232051.post-13747770121939349732014-02-14T21:49:38.725-05:002014-02-14T21:49:38.725-05:00Thanks Giorgio,
My apologies for missing your def...Thanks Giorgio,<br /><br />My apologies for missing your definition on the first read. That's usually a good signal for me to do a closer inspection.<br /><br /><br />The point I was trying to make about the fat-finger vs true flash crash is that without knowing which is which, your model is unlikely to reflect reality. <br /><br />From what I see, it looks like you have a good start to the idea. But I don't think the market microstructure is correctly specified to reflect reality. <br /><br />Do you have market makers? Without modeling this you're of course going to get crashes.<br /><br />Further, allowing HF traders to increase their size based on available book liquidity is of course going to lead to crashes as well. Setting a hard position limit is insufficient because that's simply not how firms allocate capital.<br /><br />Given that you allow long and short positions, you should also be seeing flash rallies as well. <br /><br />There is a lot more that doesn't accurately reflect market microstructure. But you're on your way. The great thing about agent models is their ability to be improved.<br /><br />ZHDhttps://www.blogger.com/profile/08214594460108974188noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-4431147235678919232014-02-14T02:44:25.299-05:002014-02-14T02:44:25.299-05:00Dear ZHD
Thanks very much for your comments.
We...Dear ZHD <br /><br />Thanks very much for your comments.<br /><br />We show that flash crashes are caused i) by the synchronization of HF traders on the sell side in a situation where ii) bid-ask spreads are large. These two elements are in line with the description of the flash crashes contained in Kirilenko et al (2011) paper, although you are right, the empirical paper of Kirilenko only says that HFTs were only exacerbating downward price movements. <br /><br />I disagree with you that we do not provide a definition of flash crashes. We define flash crash at p.5 "as drops in the asset price of at least 5% followed by a sudden recovery of 30 minutes at maximum". This was based on the evidence about the size and duration of the May 6, 2010 flash crash reported in Kirilenko et al. (2011) paper.<br /><br />Regarding flash crash pervasiveness, so far this aspect has been left for future research since in the present model we focus only on one market. This aspect certainly deserves more attention.<br /><br />Finally, I appreciate your point about fat finger trade and how HF traders could respond it. However, our point in this paper was different. It was more about investigating whether there were features of HFT that could generate flash crashes. We show that some directional strategies employed by HF traders may lead to large bid-ask spreads and therefore set the conditions for the occurrence of flash crashes. It's also because of this important element that we claim, indeed, that HFT can cause flash crashes.Giorgio Fagiolohttp://www.lem.sssup.it/fagiolo/Welcome.htmlnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-8014068904301796062014-02-13T14:26:52.778-05:002014-02-13T14:26:52.778-05:00Paul the fractions come from dark pools. Paul the fractions come from dark pools. ZHDhttps://www.blogger.com/profile/08214594460108974188noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-27267362971542971822014-02-13T14:05:53.281-05:002014-02-13T14:05:53.281-05:00Eliminate fractions, that'll do it. Minimum on...Eliminate fractions, that'll do it. Minimum one penny diff between bid/ask, nothing executes in the gap. These HFT's exploit really tiny diffs.Paulhttps://www.blogger.com/profile/15051209181290080651noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-75325535511894120542014-02-13T11:13:07.729-05:002014-02-13T11:13:07.729-05:00Giorgio,
I am a huge proponent of ABMs and I appr...Giorgio, <br />I am a huge proponent of ABMs and I appreciate your efforts in modeling. However, after a cursory examination of your paper I have some concerns. <br /><br />First, I think your paraphrased citation of the Kirilenko 2011 paper might be misrepresenting its findings. <br /><br />Second, you do not define "flash crash" nor present empirical findings (yours or otherwise) of their pervasiveness. <br /><br />Third, the papers you're leaning on do not differentiate between what is known as a "fat finger" trade and a flash crash. Consistent with the Kirilenko paper, HFT is not the cause of the flash crashes, it merely exacerbates volatility when the market is already sweeping. (The Sornette 2011 is particularly weak because of this)<br /><br />I think your modeling efforts would be best directed at investigating how HFTs respond to these fat finger trades. ZHDhttps://www.blogger.com/profile/08214594460108974188noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-59075675776153714732014-02-13T10:32:01.335-05:002014-02-13T10:32:01.335-05:00Noah, very interesting and timely post! You might ...Noah, very interesting and timely post! You might be interested to know that together with my co-authors Sandrine Jacob Leal, Mauro Napoletano and Andrea Roventini, I have just finished a paper where we theoretically investigate whether high-frequency trading exacerbates market volatility and generates flash crashes (http://arxiv.org/abs/1402.2046). <br /><br />Our main result is that the presence of high-frequency trading increases market volatility and plays a fundamental role in the generation of flash crashes. The emergence of flash crashes is explained by the ability of high-frequency traders to siphon liquidity off and to massively sell. We also find that higher rates of order cancellation by high-frequency traders increase the incidence of flash crashes but reduce their duration. We infer that order cancellation strategies of HF traders cast more complex effects than thought so far, and that regulatory policies aimed at curbing such practices (e.g., the imposition of cancellation fees) should take such dynamics into account. I hope you might find this article interesting!Giorgio Fagiolohttp://www.lem.sssup.it/fagiolo/Welcome.htmlnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-26254387760445334322014-02-12T18:25:39.602-05:002014-02-12T18:25:39.602-05:00> but HFT automates and improves the process
T...> but HFT automates and improves the process<br /><br />Tom, front-running was incredibly prevalent in the day's of NYSE specialists. Or how about the futures pits? How do you think all of those guys with high-school educations made so much money for themselves.Jon Beyerhttps://www.blogger.com/profile/03734067084958714948noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-69899370826147791032014-02-12T16:29:20.458-05:002014-02-12T16:29:20.458-05:00Something I've been thinking about:
From the 3...Something I've been thinking about:<br />From the 30,000 foot perspective I'm having a hard time seeing how a crypto-currency like BitCoin is any different than high frequency trading. Both require large scale computing hammering away at algorithms to generate perceptible value. They're both opaque to the laymen in showing how they generate utility and value. And if your point on HFT reducing liquidity is validated then they both have liquidity issues; e.g finding a BitCoin exchange as to waiting for an HFT to unwind.<br />I suppose HFT are trading "real" underlying assets (although if they were working on synthetic products, that too would be debatable right?)<br />While I'm sure anyone working on HFT would sneer at the thought of generating BitCoins (I'm sure a BitCoin miner would think the same at going into HFT). Aren't their net results the same?everybodyswonghttps://www.blogger.com/profile/07482969664255258343noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-949528059496314942014-02-12T14:22:09.769-05:002014-02-12T14:22:09.769-05:00Andy, a transaction tax (at the rates commonly pro...Andy, a transaction tax (at the rates commonly proposed) is a draconian response to this problem. It decimates liquidity. While this is not the only factor to consider, it still provides value (even to individual long-term investors). <br /><br />Also, illiquid products trade much more erratically and are much more prone to manipulation by large players. If the objective is to maximize the informational efficiency of markets, a fee for excessive quote/trade ratios will work far better.Anonymoushttps://www.blogger.com/profile/10226468773687080905noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-67453532402615305032014-02-12T13:58:34.061-05:002014-02-12T13:58:34.061-05:00It does seem as though complex order types may be ...It does seem as though complex order types may be a problem:<br /><br />http://online.wsj.com/news/articles/SB10000872396390443989204577599243693561670Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-35138583303178998982014-02-12T13:57:02.310-05:002014-02-12T13:57:02.310-05:00Execution on dark pools isn't point and click....Execution on dark pools isn't point and click. Dark pools are a feature of HFT, not a bug.<br />ZHDhttps://www.blogger.com/profile/08214594460108974188noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-59448790774244172822014-02-12T13:37:37.478-05:002014-02-12T13:37:37.478-05:00Yes to some extent sniffing out big orders in adva...Yes to some extent sniffing out big orders in advance was possible before HFT, but HFT automates and improves the process. HFT also uses past big orders/moves as signals to buy comparable assets. If you're trying to argue that the move towards dark pools has nothing to do with avoiding HFT, you're being silly.Tomnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-16789982026270281132014-02-12T13:23:14.687-05:002014-02-12T13:23:14.687-05:00Sounds like the argument for porn's benefits o...Sounds like the argument for porn's benefits on development of internet infrastructure.Tomnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-30136578803963929112014-02-12T13:04:49.907-05:002014-02-12T13:04:49.907-05:00Noah, this guy has his causality all mixed up. Wh...Noah, this guy has his causality all mixed up. When a particular stock is more volatile, it becomes less liquid, while simultaneously more profitable to attack ( take liquidity ) - that's why multiple HFTs switch to attacking it rather than providing liquidity. Nothing to see here, moving on.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-17829537700617244302014-02-12T11:43:36.470-05:002014-02-12T11:43:36.470-05:00Andy,
The commonly parroted phrase of "these...Andy, <br />The commonly parroted phrase of "these trades last a fraction of a second" isn't really true. It doesn't make sense when you actually think about the mechanics of trading. And it makes it seem like people with fast computers are printing all sorts of free money — also not true.<br /><br />A person taking liquidity has to buy at the best offer. This means that unless that best offer is knocked out, the person taking liquidity is already losing on the trade. Further, even if the market does improve in the taker's favor, they can't immediately sell because what price are they going to sell at? The new best bid is likely the price they bought at. This implies that they're holding inventory for a while. And often they can't get out of their position when the price goes back against them.<br /><br />ZHDhttps://www.blogger.com/profile/08214594460108974188noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-1395477039099768232014-02-12T11:14:57.804-05:002014-02-12T11:14:57.804-05:00Fair point - though I do believe that this differe...Fair point - though I do believe that this difference in degree is large enough to have become a difference in kind. <br /><br />And the difference doesn't, to my mind, argue against my favorite proposed "remedy", namely a transaction tax. Given that we all currently effectively pay a toll to the guy that parked a big supercomputer next to the exchange, why not just pay that toll to a government that we all have a stake in. <br /><br />Anonymoushttps://www.blogger.com/profile/07997581411308083927noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-26968339672081111502014-02-12T10:14:44.329-05:002014-02-12T10:14:44.329-05:00That HFT is largely taking this money from human s...That HFT is largely taking this money from human short term traders/market makers who used to do the same thing (albeit in timeframes observable to the human eye). In most cases I have no issue with this (although as a short-term human trader it costs me money). Take stat arb for example - is it really necessary to have humans maintain a correlation between S&P and Nasdaq tick-for-tick all day long? The problem is when a) individuals can pay money for a significant execution advantage and b) the times when computers are less efficient at pricing.Anonymoushttps://www.blogger.com/profile/10226468773687080905noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-78344738553343961472014-02-12T09:39:04.054-05:002014-02-12T09:39:04.054-05:00Hopefully someone can help me out here, I've a...Hopefully someone can help me out here, I've always viewed arguments in favor of HFT as muddy-headed at best, disingenuous at worst. There are two positives posited - increased liquidity and decreased transaction costs.<br /><br />On liquidity, firstly note that, by definition, these trades only last a fraction of a second. They are inserted between the seller and the long term buyer. Now, if long term buyers go away, so do the HFTs. That doesn't sound like increased liquidity to me. Another way to look at it would be to look at the total capital at risk in HFT operations relative to the market cap of the stock market (well not quite that but something of a similar order of magnitude). It's miniscule.<br /><br />On decreased transaction costs, again, I can't see how anything but the opposite could result from HFT. These guys aren't doing it for negative profit. Compare two scenarios, a trade between a seller and a long term buyer with and without a HFT sandwiched in between. In the first scenario, it took one transaction, in the second it took two. And what's worse, in the second the HFT skimmed some profit. So if we assume no variable cost to extra transactions, then the fixed cost has been spread over 2 transactions in the second scenario, making the immediate transaction cost half as much, but if viewed as a complete whole, the cost is the same, but buyer and seller have been made poorer by the amount of profit HFT was able to skim. And of course it's worse than that, because there is variable cost to transactions.<br /><br />What am I missing?Anonymoushttps://www.blogger.com/profile/07997581411308083927noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-28721720439898137932014-02-12T09:27:58.213-05:002014-02-12T09:27:58.213-05:00This is just 'jumping the que,' isn't ...This is just 'jumping the que,' isn't it? What value is created by jumping the que? This activity used to be illegal, equivalent to trading on insider information. Tax it until it dies. And good riddance.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-8116312696352019272014-02-12T09:13:22.822-05:002014-02-12T09:13:22.822-05:00One highly overlooked impact of HFT is the market ...One highly overlooked impact of HFT is the market distortion caused by excessive layering and cancellations (this is exacerbated by the maker-taker/rebate model in the stock market). This causes artificially thick bid-ask levels which are to some degree illusory - particularly during moments of high volatility. This actually causes a decrease in volatility most of the time, followed by abrupt "Minsky moments" with magnified spikes in prices. Penalizing excessive quote/trade ratios and banning the maker-taker model would be a good way of keeping this in check IMO.Anonymoushttps://www.blogger.com/profile/10226468773687080905noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-32071964953952885752014-02-12T08:08:51.323-05:002014-02-12T08:08:51.323-05:00"And think about how many energy we could sav..."And think about how many energy we could save by axing all those servers that host blogs!!! That's way more energy than HFT could ever hope to consume."<br /><br />I am 100% sure it's really true that HFT consumes less energy than blogs. Nowadays hosting blogs does not take too much computing power, while HFT probably does. I know an algorithmic trading company (low frequency), they switched to GPUs more than ten years ago, before it was fashionable.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-53901172660942501932014-02-12T05:16:54.258-05:002014-02-12T05:16:54.258-05:00I don't think people talk about HFT in context...I don't think people talk about HFT in context of commodity trading. In case of electricity there really should be a fundamental value to milliseconds trading decisions as electricity cannot be stored easily and redirecting electrity may make allocation more efficient.<br />I think people are biased against the strange unknown of millisecond markets. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-41772672949704609762014-02-12T02:29:09.067-05:002014-02-12T02:29:09.067-05:00I don't know why you think HFT has anything to...I don't know why you think HFT has anything to do with that. Front running was an institutional problem long before HFT existed.<br /><br />Dark pools allow large blocks to execute without the order size being known. When someone knows how much you're bidding/offering, they can try to game that to your disadvantage. The first attempts at solving this problem were done by regular exchanges when they implemented what are known as "iceberg" orders, in which you're allowed to specify some amount less than what you're actually bidding (never more) that will show up in the order book. But icebergs were eventually games as well as players would send small, incremental orders trying to test the actual size. (this order type still exists however)<br /><br />Please provide some evidence to support your hypothesis. I don't think you have anything to support it.ZHDhttps://www.blogger.com/profile/08214594460108974188noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-64582548243935950442014-02-12T02:28:01.340-05:002014-02-12T02:28:01.340-05:00This comment has been removed by the author.ZHDhttps://www.blogger.com/profile/08214594460108974188noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-68234166185505853732014-02-12T01:32:03.777-05:002014-02-12T01:32:03.777-05:00There's another cost to HFT that is perhaps la...There's another cost to HFT that is perhaps large. Fear of being front-run is driving much of market trading into "dark pools." There are efficiency and regulatory concerns with this; HFT ends up undermining the role of public, transparent securities markets.Evan Soltashttps://www.blogger.com/profile/06212305798151301158noreply@blogger.com