High frequency trading

[LostInNerSpace]

Not for me. I see high frequency trading as a kind of spam. It's annoying and creates a lot of chaos. High frequency trading is responsible for much of the volatility we see in the markets these days. I think we should have a rule limiting high frequency trading. There was or is a bill floating around proposing such a rule, a rule that would make it very expensive to trade in this manner. It's only large institutions that have the infrastructure to execute those trades anyway. Such rules already exist (uptick rule no longer exists, but is one obvious example). Retailer traders would not stand a chance. Traders play an essential role in the markets by creating liquidity. This allows commercial to go about the business of hedging on reasonable terms. The high frequency traders are not adding value. If we allow large institutions to participate in the markets why is it so wrong to allow retail traders to participate?

Just because spam exists that does not mean we cannot use email to make money responsibly. It's not easy making money in the markets, but people are going to participate no matter what. It's a part of the American dream, it's a part of my dream. I want to give people tools to enable them to make better decisions.

Pretty much the same math that goes into high frequency trading can be applied to low frequency trading. One example is pairs trading. It's is pseudo statistical arbitrage. You look for and try to exploit statistical relationships, but it is not really arbitrage. You can see a form of arbitrage if you look at the fair value futures quote on CNBC before the open. If the FV is below the opening value of the index, the market should rise because the arbs will buy futures until the different disappears.

 

[Jaguar]

Not for me. I see high frequency trading as kind of spam. It's annoying and creates a lot of chaos. High frequency trading is responsible for much of the volatility we see in the markets these days. I think we should have a rule to limit high frequency trading. There was or is a bill floating around proposing such a rule that would make it very expensive to do that kind of trading. It's only huge institutions that have the infrastructure to execute those trades anyway. Retailer traders would not stand a chance.

Just because spam exists does not mean we cannot use email to make money responsibly. It's not easy making money in the markets, but people are going to participate no matter what. It's a part of the American dream, it's a part of my dream. I want to give people tools to enable them to make better decisions.

Pretty much the same math that goes into high frequency trading can be applied to low frequency trading. One example is pairs trading. It's is pseudo statistical arbitrage. You look for and try to exploit statistical relationships, but it is not really arbitrage. You can see a form of arbitrage if you look at the fair value futures quote on CNBC before the open. If the FV is below the opening value of the index, the market should rise because the arbs will buy futures until the different disappears.

If you don't keep cash, you can't piss in the tall weeds with the big dogs.

 

[LostInNerSpace]

If you don't take any risk you'll have to settle for a dog pee shower because you won't reach high enough to piss on those tall weeds.

 

[avolkiteshvara]

Its harder to make $ with the institutional traders using super computers. Average Joe has to work much harder.


I am not sure about how I feel about high frequency. There is a lot of noise but I don't know how you can restrict someone from participating.

 

[Jaguar]

If you don't take any risk you'll have to settle for a dog pee shower because you won't reach high enough to piss on those tall weeds.

The trend is your friend.

 

[LostInNerSpace]

Its harder to make $ with the institutional traders using super computers. Average Joe has to work much harder.

No it's not. There are strategies and markets they cannot participate in because they have too much money. They can only execute those high frequency trading algorithms on instruments with enormous volume (liquidity).

S&P e-mini, Apple, IBM are favorites with algos because of the daily volume. The NASDAQ e-mini volume is growing but still not high enough for HF algorithms. DOW / GOLD mini contracts and other countless stocks and contracts not even close to having enough liquidity for HF algorithms. There is plenty of opportunity in the forex markets, but you have to be wary of the bucket shops. Better to stick with the regulated futures contracts. The CME micro fx contracts look promising.

Even without the HF algorithms, the big players can be quite severely handicapped by the amount of money they have to move around.

 

[nomadic]

high frequency trading does add liquidity to the market. they get paid for the added liquidity by the major exchanges.

i actually used to be a high frequency trader at a algo shop. lolz but anyways. im no longer doing it, so i could care less.

 

[LostInNerSpace]

I'm sure they do get paid. More volume=more money for the exchange. By definition it does add liquidity. But the additional volatility can't good for the market overall.

 

[nomadic]

But the additional volatility can't good for the market overall.

do you have any papers or research that shows hft adds volatility to the market?

because in general implied VIX has overexaggerated actual market volatility.

i can see how certain strategies can add or detract volatility. But I'd like to see the research backing up your claim. And I am firmly against flash order tracking.

 

[LostInNerSpace]

No. I'm sure such papers exist somewhere, but you can see the difference visually.

Look at an intraday chart of the S&P cash index.

Compare with same time frame S&P e-mini. S&P e-mini is the most liquid contact.

The do the same comparing the russell 2000 cash index with the e-mini, and the DOW with the mini sized dow.

The low volume Russell and Dow contracts correlate much more closely with their respective cash indexes than the S&P e-mini contract does with the S&P cash index.

The NASDAQ e-mini contract has higher volume than either the DOW or the Russell contracts but less than S&P. The volatility is in-between, as would be expected.

There is no proof the algos are responsible, but it is well known they account for a large portion of volume.

i can see how certain strategies can add or detract volatility. But I'd like to see the research backing up your claim. And I am firmly against flash order tracking.

The Wikipedia entry does not mention it but I seem to recall Larry McMillan saying the VIX is calculated with just 8 or 12 stocks. Besides, that is just options volatility. I doubt there are high frequency algorithms making use options. I don't think there are any contracts liquid enough, and people trading options don't take Options positions for the same reasons they take stock or futures positions.

 

[nomadic]

There's definitely high frequency algos that deal with options.

Thats a pretty weak argument to say volume contributes to volatility, and algos contribute to volume, so algos are the reason why markets are volatile. You have no justification of why algo trading has a different market impact than regular trading. Also, does the VIX depend on volume? Because earlier this year, the VIX index would be pretty high even though there was little trading volume.

Also, S&P Cash index is calculated every minute, while S&P futures changes every moment. So naturally, if there is more volume on the S&P, there will be more differences with the Cash Index because they are calculated at different intervals and there is more trading intraminute. If S&P Cash Index was calculated every moment too, there would be much less differnces.

No. I'm sure such papers exist somewhere

Well, the burden of proof is on your assertion.

 

[LostInNerSpace]

There's definitely high frequency algos that deal with options.

Thats a pretty weak argument to say volume contributes to volatility, and algos contribute to volume, so algos are the reason why markets are volatile. You have no justification of why algo trading has a different market impact than regular trading. Also, does the VIX depend on volume? Because earlier this year, the VIX index would be pretty high even though there was little trading volume.

Also, S&P Cash index is calculated every minute, while S&P futures changes every moment. So naturally, if there is more volume on the S&P, there will be more differences with the Cash Index because they are calculated at different intervals and there is more trading intraminute. If S&P Cash Index was calculated every moment too, there would be much less differnces.



Well, the burden of proof is on your assertion.

You could be right about options. I've been out of the options market for a few years.

I did not say volume creates volatility. I am saying constantly pulling a security in different directions at the same time creates volatility. What exactly do you think volatility is? More volatility means more players are placing opposing bets at the same time. When everyone agrees price moves in that directions, up or down. The more they agree the faster it moves.

 

[nomadic]

prices are volatile when there is no one on the other side of the trade. Lets say I own Lehman Brothers, and I want to sell at 100, no one wants to buy at 100. All the buyers are spooked, so they clear out and the only bid is at 80, whereas in normal times, the spread might be 20 cents. I have to sell bc for some reason, so I'll hit the 80 bid and take a huge loss. Thats the volatility, when the spread is huge. Not because of volume and narrow spreads.

You're talking about ticks up and down, thats more flash order tracking. When the algos just seem to know how to trade against you even though you might have put in a hidden stop loss order. Thats Flash order reading. I am very firmly against that.

Well, i guess I finally understand why u started this thread. lolz

 

[LostInNerSpace]

That's not volatility. That's liquidity. But it can cause volatility in a liquidity crisis, like one we had in and around August last year.

Well, i guess I finally understand why u started this thread. lolz

Probably not.

 

[nomadic]

That's not volatility. That's liquidity. But it can cause volatility in a liquidity crisis, like one we had in and around August last year.

Dude. Its too painful for me to continue. good luck with watever ur trying to do.

 

[Venom]

I did not say volume creates volatility. I am saying constantly pulling a security in different directions at the same time creates volatility.

1. So, in your opinion, a better market has less people pulling a security in different directions? (how is this different from just demanding that there be less people trading? ModNomad already provided the example of spreads, which you said wasnt what you meant, so im at a loss for how your definition of volatility is independent of # of people)

2. i think you should try a general explanation in one post. complete with definitions, your reasons for them, why the status quo is bad, and why your solution would be different in practice and therefore results.

 

[LostInNerSpace]

1. So, in your opinion, a better market has less people pulling a security in different directions? (how is this different from just demanding that there be less people trading? ModNomad already provided the example of spreads, which you said wasnt what you meant, so im at a loss for how your definition of volatility is independent of # of people)

Buyers meeting sellers, sellers meeting buyers is what the markets are all about.

At what point does a strategy or behavior do more harm than good? Think CDO market. Everyone thought it was perfectly acceptable until it all went south. I'm not saying algorithmic trading will blow up the markets. What's more likely is smaller traders and investors will get pushed out of certain markets.

The level of volatility in the markets now is not so bad. Where it is headed does not look good. You would have to try trading to know what I am talking about. You would also need a little experience to know what trading in a well behaved market is like verse trading in a volatile market.

1
2. i think you should try a general explanation in one post. complete with definitions, your reasons for them, why the status quo is bad, and why your solution would be different in practice and therefore results.

I really did not intend for it to go on so long.

 

[Willfrey]

From what I understand about it computers are being used to detect market trends and make many, many relatively small trades that overall nets the trader quite a bit of money. I believe the critics take issue with the fact that there are great sums of money to be made over a short period of time without adding any real value to the market.

 

[LostInNerSpace]

From what I understand about it computers are being used to detect market trends and make many, many relatively small trades that overall nets the trader quite a bit of money. I believe the critics take issue with the fact that there are great sums of money to be made over a short period of time without adding any real value to the market.

Some critics take issue with that. I'm not concerned with people making a lot of money. I want to do that myself, responsibly. America is a capitalist society. I want to make a lot of money without destroying the environment, whether it is the natural environment or the environment in the market place. I am more concerned about the health of the market and maintaining an even playing field. Not everyone cares about doing it responsibly.