Mark Cuban: High-Frequency Traders Are the Ultimate Hackers

http://blogs.wsj.com/marketbeat/2012/06/26/mark-cuban-high-frequency-traders-are-the-ultimate-hackers/

by adventureful • 14 years ago

104 121 14 years ago

blogs.wsj.com

ezl2• 14 years ago

sigh i got really excited about this because I was considering the interpretation of the word "hackers" like we use it in "Hacker News" (relevant: http://paulgraham.com/gba.html)

I know that the startup community at large doesn't largely respect short term trading, particularly HFT. I understand it, though I honestly think its misguided and the outrage is disproportionately large, but thats another story.

The reason why this article TITLE excited me was because I think its totally true, or least close to true. I think awesome HTFs and algo traders have a very similar skillset to top notch startup hackers.

Small prop shops ARE startups. You:

    1. wear a lot of hats
    2. release early, release often
    3. write really fast code, really fast
    4. validate theories against the market (or consumers)
    5. if you're right, keep going, if not, pivot
    6. success is dependent on understanding lots of different sub-specialties
    7. lots of overlapping skills: big data, distributed computing, machine learning

At some point, I'd love to get a bunch of hackers together and start a small prop shop. The jobs are different, but in so many ways it takes the same kind of person to succeed at either.

kjhughes• 14 years ago

Definition of prop shop, for those unfamiliar with the term: http://www.investopedia.com/terms/p/prop_shop.asp

theorique• 14 years ago

Exactly my thought - I guessed that MC was praising us. Sigh, you'd think we HFT practitioners were, I dunno, Goldman Sachs or something like that. ;) (jk, GS, you know we love you ...)

Good list, also. I work with some really smart programmers and tech people and HFT is a great laboratory to work on tough technical problems in the real-world, with real results.

chewxy4• 14 years ago

I was very interested in HFT when I was in uni. Then I discovered the minimum sunk costs of running a HFT startup and my balls shrank.

So now I create my own matching markets which is still based on high speed trading theories, but without the pressure.

But if ever you're interested, my email is my username here at gmail

javert9• 14 years ago

Then I discovered the minimum sunk costs of running a HFT startup and my balls shrank.

Care to elaborate?

Retric• 14 years ago

The problem with HFT algorithms in the eyes of most hackers is they are almost entirely a zero sum game. Assuming minimal volatility and free trades the absolutely dumbest algorithm* will make money.

*Buy at X sell at X + 1cent with a simple ratchet of buy orders from 1 cent up to market price + a small number of shares to be sold if the market price increases.

PS: Random walk that averages +/- one cent 10 times a second = 5 cent's profit a second assuming ~2,000 trading hours a year = 360k profit. Cost to make that for a stock worth ~20$ = ~30,000$ of capital + whatever it takes to get on the HFT floor.

AznHisoka• 14 years ago

I find HFT is a lot similar to SEO, and the perception is similar as well.

People just don't like either because they feel it's not bringing any extra value to society, and it's all about gaming something for your own personal wealth. But most people aren't looking out for your personal interest anyway, so you should ignore them.

yaix4• 14 years ago

I disagree. SEO serves a purpose. It makes web sites more accessible to users, by correctly using HTML (title, h1, alt="", etc.) and it makes the web more machine readable and thus easier to find useful things. But I guess you mainly refer to the spammer SEOs that try to trick Google.

HTF otoh does not serve any purpose whatsoever. On the contrary, it brings instability into the market and makes the market less useful. But my guess it that it will need a major market crash before HFT gets banned.

joe_the_user2• 14 years ago

The thing is that "good" SEO isn't gaming the system but rather working to make sure that your site is a "notable authority" in whatever niche you're targeting. If the article is the counter-argument, what is the argument that HFT provides some similar kind of usefulness.

joe_the_user2• 14 years ago

Oddly enough, I was originally expecting that same thing.

Still, I think it's reasonable to ask the question: where does the boundary between good, useful hacking and evil, insidious hacking lie? And I think it's reasonable to not assume that the boundary lies at what is legal or that the boundary lies at what is "interesting".

I mean, how you produce and profit from spam is a hard, interesting problem. Flame and Stuxnet might, in some courts, be legal. In fact, a lot of "Black hats" satisfy many if not all of your list items.

The argument that HFT is working with a nearly zero-sum situation needs to be addressed. A "normal" startup is usually trying to create "new usefulness". Where do "props" fit in to this question?

cynicalkane• 14 years ago

Trading is a zero-sum game, but investing is not, and trading exists to make markets and snipe inefficiencies. The amount of money that can be made here can be surprising, until you consider that they're oiling the gears for manifold trillions of dollars in commerce and wealth. Some of that is gambling, but most of it isn't. Stuff like institutional hedgers and investment funds are huge sources of market activity.

clavalle• 14 years ago

I think the zero sum nature of HFT is already providing an answer.

There is so much competition in the U.S. that HFT firms are having to expand to other markets like London and beyond that don't have the same level of saturation.

There are only so many markets in the world, so in about 10 years (probably much less) when they are all saturated with very low margin HFT, equilibrium will be reached firms will simply evaporate and/or glom together.

jasonwatkinspdx3• 14 years ago

That you can, does not mean you should.

And who pays for your failures?

chii• 14 years ago

For a corporation, the psycopathic behaviour is that if it makes a profit and is not illegal (yet), then do it.

The real problem is that large financial institutions have somehow ingrained themselves in society in such a way that they bring us all down when they fail, and so society would _have_ to bail them out. It is an ingenious stragegy - by aligning failure with the downfall of many others, these large financial institutions gets the protection they don't deserve. I wish it was me who was reaping the benefits, but unfortunately, being a "commoner", that aint so.

kristianp2• 14 years ago

Here is Cuban's blog entry in which he states that HFT-ers are (the bad type of) hackers: http://blogmaverick.com/2010/05/09/what-business-is-wall-str...

kristianp2• 14 years ago

I for one don't agree with HFT. Why should our best hackers and mathematical minds be wasted on something so shallow as gaming the market?

Would a small randomised delay introduced by the exchange into each stock trade (or price datum) reduce the incentive for HFT?

twoodfin• 14 years ago

Why should our best hackers and mathematical minds be wasted on something so shallow as gaming the market?

If you think they're wasting their time, don't give them your money.

drblast• 14 years ago

I don't think it's as simple as all that. There are legitimate parties at either end of a stock transaction, and the HFT's are pretty much just siphoning off small amounts of the proceeds. The reason this can occur is that our government ensures that public companies have to do business this way. And all of these rules are in place for good reasons and it works pretty well, but HFT is an aberration.

A good analogy is credit card companies; it's perfectly rational for a customer to use a rewards credit card and pay it off at the end of every month, and it's perfectly rational for a merchant to allow credit card transactions for convenience. Arguably, however, the credit card company is little else but a 3-5% drain on the economy, especially for brick-and-mortar stores.

That said, credit card companies provide some value in the form of convenience, so maybe the transaction fee is worth it. HFT's, however, provide no benefit to anyone but themselves. The transactions would still occur whether or not the HFT existed. The distinction Mark Cuban makes between "investors" and "traders" is an astute one.

javert9• 14 years ago

Why should our best hackers and mathematical minds be wasted on something so shallow as gaming the market?

Your mistaken premise is "our." That implies ownership.

How would you rather allocate those minds, commissar?

mistermann6• 14 years ago

Take the word "our" out, do you still disagree?

One thing you will notice about certain topics is advocates of one side or the other will nitpick inconsequential portions of sentences rather than actually discussing the topic.

ezl2• 14 years ago

I forget where I read this, but in an article by someone else I read something like:

"[There's something very sinister about a company that takes society's greatest engineer and science minds away from important tasks for humanity and diverts them to the task of optimizing ads]

A lot of people will say what you say about HFT, but have no qualms about Google and Facebook and Twitter. Why is that?

clarky07• 14 years ago

I for one would say this about HFT, Facebook, twitter, and google. Though to a lesser extent for google as they have lots of other impressive projects such as self driving cars that could have a good impact.

infinii2• 14 years ago

Society does nothing about underpaying the educators of our children; so they should deal with the fact that great minds will be lured away to less critical tasks.

mistermann6• 14 years ago

> A lot of people will say what you say about HFT, but have no qualms about Google and Facebook and Twitter. Why is that?

Because Google and Facebook and Twitter provide legitimate value and services (some more valuable than others), and offer something that wasn't there before.

HFT does none of the above, unless you believe that lack of liquidity was somehow a big problem prior to them entering the market and generating 80% of the trades, and skimming off as much money as possible in the process.

sskates• 14 years ago

Can someone explain this mindset to me? That there is somehow a fixed amount of mathematical talent in the world and if there are people whose preferences make taking a job in HFT optimal then society is necessarily worse off.

jberryman• 14 years ago

Well, speaking broadly about finance vs other more productive fields of human endeavor, there is a staggering amount of brain drain of the (very much finite) graduates of ivy league schools to the finance industry:

http://www.wbur.org/npr/146434854/stopping-the-brain-drain-o...

I think it's obvious that that doesn't mesh with the narrative we tell ourselves about the importance of higher education to society at large.

MBlume• 14 years ago

Uh, where do you think we can get more mathematical talent from? At the end of the day, there's only so many people at the right end of the bell curve.

MarkMc• 14 years ago

I don't think it assumes a fixed amount of talent.

Perhaps a hypothetical analogy can help: Imagine that a tax of 0.000001% is applied to every stockmarket transaction, and the proceeds are given to the top 10 people who can best memorise the digits of PI.

Most people would say that this scheme necessarily makes society worse off.

Would you oppose this hypothetical scheme? If so, what is the significant difference between it and HFT?

spamizbad• 14 years ago

> Why should our best hackers and mathematical minds be wasted on something so shallow as gaming the market?

The reason why these shops can employ the "best hackers and mathematical minds" is because they're willing to pay for them.

Everyone wants to hire 10-to-1s but nobody wants to pay them even 1.5x the salary of a blub hack. These days people say "We pay market rate!" and wear it like a badge of honor.

programminggeek• 14 years ago

I have no problem with HFT, but only because it is turning machines into things that are doing what humans did before, only at a speed that we can't keep up with as humans with our inherently physical interfaces.

How is HFT different than traditional arbitrage except for the fact that it is faster and potentially at a scale that normal traders would never be able to keep up with? How is buying something one second and selling the next inherently different than buying one day and selling the next? Speed?

Does computers being faster make it any more unfair than when one trader has access to millions or billions of dollars when I only have access to hundreds or thousands? I don't think so.

Now, one could argue that HFT disrupts the way that Wall Street has worked for decades, but really, it is shifting the profit from traders, bankers, and fund managers to HFT firms. Sure, Wall Street probably doesn't like it, but does anyone like it when someone disrupts their market and takes their profit?

You could also argue that HFT doesn't add value because HFT firms inherently don't do anything other than trade millions of stocks only for the sake of trading them, but how is this worse than day trading or running any other fund other than the turnover rate?

Perhaps I'm blind to the real issues, but I just don't see a huge difference between HFT and traditional Wall St. trading, except maybe that it magnifies the problems inherent in the system due to speed and scale.

wmf• 14 years ago

The difference is that a crash can happen faster than any human can stop it. It's fine if you trust your high-frequency circuit breakers.

unabridged• 14 years ago

What exactly is a flash crash and why should individuals care? Isn't it just bank's computers temporarily offering stock at a severe discount and then the price going back to normal. It doesn't hurt anyone but the people with poorly programmed algorithms. No trades should ever be broken just because someone can't control their trading bots.

russtrpkovski2• 14 years ago

If you have a 401K or own shares in a mutual share, you should care about it.

The HFT algos siphon off billions every year from the big, slow "dumb money" large institutional investors (e.g. pension funds, index funds, insurance companies).

For example, if an insurance company needs to liquidate its portfolio to pay a claim, the HFT will sense the insurance company placing an order in the market and try to skim 5-10 cents per share by manipulating the share price during the trade. Its a zero-sum game.

The insurance company lost and the algo won. Market markets exist to provide liquidity (match buyers and sellers), not to front-run and bid up orders from customers.

nradov4• 14 years ago

The big insurance companies are not that stupid any more when it comes to trading.

russtrpkovski2• 14 years ago

If you are interested, check out the book below. Good read:

http://www.amazon.com/Dark-Pools-High-Speed-Traders-Financia...

prodigal_erik• 14 years ago

It's at least conceivable that the correct valuation of a company changes from one day to the next due to human-scale events, and that speculators are providing a useful pricing signal. Changes from one millisecond to the next are amplifying pure noise produced by flaws in the mechanics of trades reaching the market and clearing.

sseveran4• 14 years ago

What is the correct time interval?

iterationx• 14 years ago

Think about the optimization.

>>According to Information Week Magazine¹: “A one (1) millisecond advantage in trading applications can be worth $100 million a year to a major brokerage firm”. Currently electronic trading makes between 60% and 70% of daily volume of NYSE¹. Tabb Group, a research firm, estimated that High-frequency traders generated about $21 billion in 2008.²

From a site promoting microwave communication towers for low latency packet transfer.

http://www.aviatnetworks.com/solutions/low-latency-microwave...

steve89183• 14 years ago

The real issue is that in order to get an edge, HFT traders are engaging in electronic warfare in order to slow down their opponents.

One of the worst things they are doing is "quote stuffing", which means submitting bids and cancelling them tens of thousands of times per second. They stuff the exchanges with quotes and eventually cause a huge latency with respect to the quotes that are shown by the exchange, such as NYSE, NASDAQ, etc. However, they aren't affected because they can see the prices because they have a raw data feed. This gives them an edge relative to the other traders that don't have their own raw feed straight from the exchanges, and they use that to basically shoot fish in a barrel.

This was one of the main causes for the flash crash in 2010. The excessive quotes

The thing is that they could stop this by implementing a minimum time for a quote to exist, something innocuous like 100 ms, but they don't because this would be a detriment to the HFT shops.

The other thing is that HFT shops behave like market makers, and they claim to provide liquidity, however, they have no obligation to provide liquidity, like real market makers. So just like during the flash crash, they turned off their machines, and the markets went haywire. So they want their cake and eat it too. If they are going to trade like market makers, they need to have the obligation to continue to provide liquidity.

javert9• 14 years ago

If I recall correctly, wasn't there, like, an extremely fast recovery from the flash crash? Why does the flash crash even matter? (I'm not being snarky at all, BTW.)

hogu2• 14 years ago

Some have suggested that the problem was when the quotes were timestamped.

http://www.nanex.net/FlashCrash/FlashCrashAnalysis_NBBO.html

I don't really understand how you could abuse an exchange through quote stuffing - I've heard(and it seems reasonable to me) that they would use round robin queues to protect from exactly this sort of thing.

Dn_Ab• 14 years ago

The problem of HFT is two.

First, HFT is very difficult. It requires the talents of extremely intelligent individuals. These individuals are a scarce resource. Now, being as they are near the generation and handling of money, HFT firms are best placed to outbid all others for these people. So R&D and other such lose out on top minds. Additionally, if much of the money of high net people is being invested in funds without finding its way into risky high tech research, this too can be a drag on the economy in the long term. http://sirc.rbi.org.in/downloads/4Cecchetti.pdf

The second is a problem of misaligned priorities. It's one thing to suck in all the best minds and it's another to have them all expending a massive amount of effort trying to shave down microseconds so their order goes in first. Chris Stucchio here http://www.chrisstucchio.com/blog/2012/hft_whats_broken.html argues very well that the so called sub-penny rule (abs(changeinprice) >= 0.01) is antiquated and from a time when humans reigned. This rule is a source of friction for the bots and is very likely a key player in the current misallocation of talent. It's removal would make HFTing cheap enough that not so many people would be needed. Some would leave to cure cancer or mine asteroids. The rest could then work on more sophisticated pricing techniques - which is a net boon, maybe those techniques could make prices more stable or be reused for optimal donor matching or something.

msellout• 14 years ago

To increase speed, you must decrease computation and memory access. The less computation and memory access possible, the smaller the variety of strategies possible. In regular timescales, the strategy space is much larger than the number of machines / agents competing. The ratio of the number of agents to the number of possible strategies approaches zero. As more machines compete in nanosecond time scales, the ratio of the number of machines to the number of strategies in this restricted space becomes much larger.

As this ratio increases, the system dynamics undergo a phase shift. The probability of dramatic movements becomes much greater. When too many agents are crowded onto the same strategy, they all try to take the same side of a trade -- liquidity disappears. This was the cause of the flash crash of 2010, and will be the cause of many more.

evolve2k• 14 years ago

'Is the market supposed to be a platform for companies to raise money for growth and to create liquidity and opportunity for shareholders as it has been in the past? Or is the stock market a laissez-faire platform that evolves however it evolves? The missing link in all the discussions is: What is the purpose of the stock market?'

javert9• 14 years ago

It's clear why we need investors.

Why do we need day traders? Well, they can only exist because the investors exist, and they provide the function of pricing the market accurately. And provide liquidity to investors. Nobody is arguing that we should ban day trading.

Why do we need market makers? Well, they definitely benefit the day traders, because they do lower the bid/ask spread, once again making pricing more accurate. And provide liquidity to day traders.

So what I'm proposing is that we only "really need" investors - but day traders are good for investors, and market makers are good for day traders. Thus, market makers are good for investors.

I'd be legitemitely interested to hear criticism of the above argument. I've been learning about market making recently, and I'm certainly sure that there's still more for me to learn.

_delirium• 14 years ago

I don't disagree in broad terms, but I think it's also quite possible that some configurations of trading will result in the "support" tail wagging the investment dog. At least, that would be the expected result if you think of markets like a dynamical system; in non-trivial dynamical systems (which I'd assume the economy is), the usual case is that there are significant internal dynamics (feedback loops, attractors, etc.) that in a number of cases will modulate, and may even dominate, the movements caused by external inputs. If that transfers to trading, there may well be pathological market dynamics that have little to do with the fundamentals of providing services to (ultimately) investors. Whether the dis-value of those pathologies produced outweighs the value of the services provided would then be the relevant question. Viewed as a machine, does the machine that includes the HFT lubricants run better in general, or is the reduced friction offset by a undesired effects such as greater risk of malfunction?

wikkiwa• 14 years ago

Here's an interview with a pro high frequency trader from a top shop if you're interested. http://techzinglive.com/page/1049/185-tz-interview-james-tho...

romansanchez• 14 years ago

Does anyone know if the software used for HFT is built in house or is there a particular vendor that specializes in this particular market?

rurounijones• 14 years ago

In-house. very very much in-house.

josephagoss• 14 years ago

From what I have read, its all in house, the software (including the mathematical algorithms) is the most important center point of a HFT shop. No vender would sell a competitive software system because they would make more money using it themselves.

yaix4• 14 years ago

HFT is just another area where everybody knows that it is broken, it does not serve any useful purpose for society, and everybody knows that eventually it will lead to a huge crash. And nobody does anything, because there is just too much quick money to be made. Humans...

bokonist6• 14 years ago

"As far as narrowing spreads, that’s absolutely true, but in absolute terms what does it translate into? For the individual investor it might save them a quarter a month."

In a properly designed, information age stock market there should not be a spread. All stocks should trade via a programmed, black box auction that runs on an interval. The HFT practice of creating phony orders that are immediately canceled, just to gain visibility into the current bids and asks, would be eliminated. No seeing other people's bids, and then front running them, no canceling orders. You put in a limit order for the value of the stock, and the stock goes to the highest bidder. All the extra pennies and quarters go to the shareholder, nothing to the HFT algorithms (unless they provide actually value such as market making or smoothing irrational volatility). It's the most efficient design for stock market trading possible.

freshhawk3• 14 years ago

> It's the most efficient design for stock market trading possible

Precisely why it doesn't work that way.

bokonist6• 14 years ago

In theory, if this system were to be adopted, the Stock Exchange Operator could charge a small tariff so that some of the money that now goes to HFT's goes to the stock exchange, with the rest going to the shareholders. So in theory, adopting this more optimal system would be financially beneficially to both the corporations and the Stock Exchange (and in theory, those two are the only two players who's agreement is needed to change the system). So I wonder why the optimal, auction based system does not get adopted - is there some reason for the status quo other than the normal inertia and stupidity of large institutions?

rudiger• 14 years ago

Interesting! Where can I find out more about this more efficient market exchange design?

hogu2• 14 years ago

How would this be better than what we have now? Right now stocks already go to the highest bidder - if there is a seller willing to sell at that price. how would you run an auction if there are 40 firms trying to sell the same stock?

The ad market is well suited towards auctions because you have one seller for many buyers, but in finance you have a symmetric relationship between buyers and sellers.

bokonist6• 14 years ago

Google "HFT frontrunning". The issue is that HFT algorithms can use their superior speed and the ability to cancel orders to essentially figure out what institutional buyers are bidding, and then front run the market to buy up shares in front of them. This would be prevented in my system by the black box auction and trading on an interval.

jeffem• 14 years ago

What experience do you have in financial markets that you believe you've come up with "the most efficient design for stock market trading possible"?

btilly• 14 years ago

What do you do in thinly traded markets, like some out of the market options?

bokonist6• 14 years ago

You might have different auction interval times based on the volume of the particular market or stock. An AAPL auction happens every minute, but some low volume securities might trade once an hour or even once a day.

zhoutong3• 14 years ago

This is not efficient. If you use interval bidding, there will frequently be gaps in market prices. Remember that at any instant, the order book (bids and asks) represents only a small portion of market sentiment (real demand and supply). The market prices move smoothly when people are able to react to order changes and price spikes. If it's a black box, it's very easy to manipulate the market in a massive scale.

For example, AAPL is $600 now. Under your system, $600 is the price that generated the highest volume in previous bidding event. (There will be sellers placing orders under $600, and buyers over $600 - they'll all be settled at $600 and the exchange obviously wants to maximize this overlap, hence the price). If a large institutional investor wants to manipulate the price, he can place huge buy and sell orders at $700. And very likely in the next bidding event the price of AAPL will move to close to $700, because that will be the price that maximizes the overlap. This is almost impossible in current market system, because you have to continuously buy from all the sellers who are willing to sell at $700 to get the price. Meanwhile, traders (especially day traders) will add to the order book to take advantage of this irrational move. In a black box, irrational moves can't be detected and corrected by other market participants. So you can't really get the idea of the actual matching price in a black box system.

When you place a buy order, if there's overlap with any sell orders, it should be matched and executed instantly. Otherwise it will stay in the book to wait for sell orders. The market equilibrium is reached when the spread is minimal and no trade occurs. (Yes, this is in theory.) However, in your "efficient" system, there's no market equilibrium, because buyers and sellers are discouraged from making their real demand and supply invisible. The exchange has the incentive to maximize trade volume, so the only way to result in zero volume is no overlapping orders in the entire interval, even when the buyers are sellers have no knowledge of any orders. This only happens when people have no confidence or interest to trade at all. Again, it makes market vulnerable to be manipulated.

In China, stock exchanges partially adopted your idea. In Shanghai Securities Exchange, the first 10 minutes (9.15am to 9.25am) of the day is set to be non-continuous bidding period. In Shenzhen Securities Exchange, the first 10 mins and last 3 mins are the same. This was introduced to reduce market manipulation because the order book is empty at the beginning of the day. However, after the period, trade starts continuously and all remainder orders in the bidding event will automatically enter the order book. This way, the price movement of the whole day is smooth with minimal spikes, while the opening and closing prices reflect market sentiment more accurately.

Generally, the more the visible orders, the more smoothed the price. Interval bidding discourages order placement because the next price is absolutely unpredictable. It can be adopted in extremely illiquid market situations though.

nhaehnle• 14 years ago

This is why we have Game Theory and Mechanism Design. Mathematicians and computer scientists study the different types of auction methods for their properties. Let's take a look at your example:

AAPL is $600 now. (...) If a large institutional investor wants to manipulate the price, he can place huge buy and sell orders at $700.

All your example shows is that a good auction mechanism should avoid this possibility of manipulation. But that's easy enough: the investor's buy at $700 will be matched with sells that are closer to $600, the same as in the current system. The sell at $700 doesn't affect anything.

So in fact the price will move the same as it would in continuous buying.

ajtaylor• 14 years ago

"To say they’re adding liquidity is like saying spitting in a thunderstorm is adding liquidity." Best quote of the whole article!

ajays2• 14 years ago

I keep hearing about HFT, and have read about it a little. But there's a surprising dearth of data.

Can someone come up with a data set? For example: here are N inputs to the program. If the program can make a decision D in time T, then it can make money. Or something to that effect. I have no idea right now what the inputs to these HFT programs are; what the expected actions under the time constraints are; and how the effectiveness is measured (in terms of the given data). Someone please enlighten me.

ajtulloch3• 14 years ago

Sure:

1. Data set - order book of your chosen stock exchange. Events being streamed in at rates up to 1Gb/s [1]. This is the entire set of actions affecting the order book - bids, offers, cancellations, adjustments, etc. - it's huge. If you want to get fancy - most do - you would typically pull in several of these feeds (or subscribe to a consolidated feed) containing several exchanges, and look to arb any price/book inefficiencies.

2. Actions - given the changes to the order book, figure out how you need to change your positioning to make money. Time is everything here - steps here are counted in tenths of milliseconds, and overall response times in low ms. HFT firms even try to minimise cable lengths within the colocated datacentres to shave the time to response down even further.

3. Effectiveness - if you didn't blow up, and if so, if you made money - typically you'd examine intraday PnL volatility, returns, etc. and assess yourself on those and other metrics.

ajays2• 14 years ago

How about releasing some data? Do some feature generation and come up with features, along with the desired action (the best possible action, given that you know how things are going to go in the future). Then us clueless types can see what all the hubbub is all about :-)

mkramlich• 14 years ago

HFT has some qualities which make it unattractive to me:

- strategically, it's an unbounded arms race, due to competing against lots of other HFT forces all trying to squeeze profits quickly out of micro opportunities in bid/ask numbers, news leak/announce gaps, etc.

- due to above, there are high technical and talent costs just to have the minimum setup needed to play in that game

- also following from the first thing, HFT becomes an additional profit motive for adding destructive, dishonest political vectors to society, such as corruption and propaganda, in order to time trades, do front running, insider trading, war profiteering, bankster conspiracies, etc.

- short-term thinking

- lastly, you're fundamentally not building anything real or positive for the rest of society outside HFT and your direct clients/owners; or making the world a better place; to others, you're just a parasite on the money flows, adding more noise and chaos, and arguably risk, to the economy

I like to compare it to the alternative, strategically-speaking: LFT (low f.t.)

- lower costs (your fixed & marginal costs "scale down" better, which is also better in the startup phase. Think lemonade stand, a small simple web SaaS, contract development -> software product company, etc.)

- longer-term thinking & bets (buy & hold; future trends, etc.)

- actually building, investing, helping others, bringing new products/services to the market, solving problems for others for profit

LFT could be used to describe traditional stock investing, it could include personal relationship investing, personal health/skills investing, building lifestyle businesses, building startups to flip, doing R&D, invention & marketing, etc.

Both HFT and LFT can make you wealthy on the top end scenarios. But LFT scales down to the low end scenarios and early phases better, and you can tangibly and visibly see improvements to the world that you've made happen. Both can benefit from hacker thinking. But to me, it's clear which is the healthier choice for the individual and society, in the long run.

cletus• 14 years ago

This post is being used as somewhat of a stalking horse for any number of other agendas and soapboxes, which I guess isn't surprising, so I'll join the fray.

1. There is a misconception about market makers and the nature of a spread. In particularly illiquid markets, market makers allow you to buy and sell immediately. This is a service. The spread pays for this service. The more liquid a market is the lower the spread (eg it is essentially if not actually zero on US Treasuries);

2. For those questioning our brightest and best being "wasted" on HFT, I see comparatively better value on all the bright minds being wasted on social networks;

3. Finance is a constant arms race. The flavour of the month is HFT. In 5-10 years it'll be something else where low-latency transactions are just taken for granted. This kind of market is a gold mine for innovators as the existing players need a certain amount of innovation just to stand still (relative to the other players). There is classic "mine the miners" opportunity here;

4. There is a lot of highly-leveraged trading that goes on, automated and otherwise, beyond the world of HFT. (I believe) Warren Buffett describes this as "picking up nickels in front of a bulldozer" [1]. In extreme market situations, market models go out the window and the highly leveraged are the first to go to the flames. Just ask Bear Stearns [2] with its 35:1 leveraged ratio.

5. Financial institutions have access to way more data and cheaper (typically free) transactions compared to the average investor. It's common practice to do things like whipsaw the market to hit stop loss orders and the like. Honestly, unless you're a bank in the short term it is an insider's game;

6. A lot of the problems with the lack of transparency, assymmetry of information between parties and bad behaviour (like flooding exchanges) comes down to a failure of regulation. The SEC is either toothless or has been subverted by political interests. Much of what happens in the US just doesn't happen in Australia (to the same degree at least). Just take all the fake documentation in the US housing bubble. How bank executives, loan originators and the like didn't go to jail for this is really astounding;

7. Banks and market funds have limited to no downside risk. If things go horribly pear-shaped the US Federal government will--and has--bail them out. This breeds an adverse appetite for risk. I subscribe to the view that the Federal Reserve, the World Bank and the IMF are in large part welfare for investment bankers; and

8. Banks and funds are too large. If something is "too big to fail" then it's too big and needs to be broken up.

That is all.

[1] http://en.wikipedia.org/wiki/Long-Term_Capital_Management

[2] http://en.wikipedia.org/wiki/Bear_Stearns

digitalengineer• 14 years ago

Thank you for the best explanation of this lunacy I have ever read.

yaix4• 14 years ago

"""The SEC is either toothless or has been subverted by political interests."""

Or politics is subverted by financial interests? If you have to find your own financial sponsors in order to run for a government office, it is hardly surprising that finance runs the show.

infinii2• 14 years ago

There's the sentiment that exchanges allow this because they are "businesses". What's to to stop exchanges from front running the HFT front runners without their knowledge and stealing all the marbles?

asto• 14 years ago

If a person is successful in one business should we subject ourselves to his idiotic views on another business?

By definition they can’t go into an equity unless there already is liquidity.

HFTs who are usually market makers [1] maintain liquidity in the market by constantly having buy/sell orders open for many instruments/scrips. In their absence, a counter trade may not exist for matching against when you or I put out a sell/buy order. Being able to sell/buy a scrip/instrument within seconds is a valuable service that investors appreciate. In India, the securities exchange regulator mandates that all market makers make a minimum value of trades per day. I am not sure of the exact current values in each segment but it's in the order of millions of rupees. This is how regulators create conditions of liquidity so that markets are nicer to trade in especially for retail investors.

The missing link in all the discussions is: What is the purpose of the stock market?

The stock market can be divided into a primary market and a secondary market. The primary market exists to finance companies. When they IPO, cash is generated which they can use to fund business activities. The secondary market exists to encourage purchases in the primary market and to efficiently discover the price of the securities. Without a liquid secondary market, very few investors would be interested in a primary market.

HFT is only doing what was already done since many years ago manually. Humans make the same mistakes computers are being programmed to make today. In their defence, they execute exactly as asked - they feel no fear, doubt or greed - unlike a human trader . Should we treat them as being harmful because computers make mistakes at a significantly faster rate? HFT is a still nascent concept. With sufficient regulation, we will likely be able to get rid of the problems and retain the advantages.

[1] http://en.wikipedia.org/wiki/Market_maker

JonnieCache• 14 years ago

>hould we treat them as being harmful because computers make mistakes at a significantly faster rate?

Yes. Significantly doesn't really cover it. When you increase the rate of an activity by many orders of magnitude and put an AI behind it, it becomes a totally different activity, even if the mechanics are notionally the same.

bogger• 14 years ago

MC is confused.

High frequency trading covers a broad range of trading strategies, some of which are beneficial to market participants.

In particular, were all automated market making to be banned, we would see a huge jump in the cost of trading.

The fuss about HFT is distracting people from the much more serious problem of good old-fashioned insider trading, which remains rampant.

dm_mongodb• 14 years ago

it seems to me that the exchange adding a small random delay (say 1ms) on message reception would dampen the benefits of speed and then there would be less work invested in saving a few microseconds here and there. you still have program trading but a little bit of silly dynamics is dampened.

Mark Cuban: High-Frequency Traders Are the Ultimate Hackers

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