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  1. #1
    Senior Member LostInNerSpace's Avatar
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    Default High frequency trading

    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.

  2. #2
    Senior Member Jaguar's Avatar
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    Quote Originally Posted by LostInNerSpace View Post
    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.

  3. #3
    Senior Member LostInNerSpace's Avatar
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    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.

  4. #4
    Senior Member avolkiteshvara's Avatar
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    Default

    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.

  5. #5
    Senior Member Jaguar's Avatar
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    Quote Originally Posted by LostInNerSpace View Post
    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.

  6. #6
    Senior Member LostInNerSpace's Avatar
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    Quote Originally Posted by avolkiteshvara View Post
    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.

  7. #7
    mountain surfing nomadic's Avatar
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    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.

  8. #8
    Senior Member LostInNerSpace's Avatar
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    Default

    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.

  9. #9
    mountain surfing nomadic's Avatar
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    Quote Originally Posted by LostInNerSpace View Post
    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.

  10. #10
    Senior Member LostInNerSpace's Avatar
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    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.

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