How to disrupt Wall Street(cdixon.org)
cdixon.org
How to disrupt Wall Street
http://cdixon.org/2010/01/23/how-to-disrupt-wall-street/?utm_source=twitterfeed&utm_medium=twitter
9 comments
Why would you want to disrupt prop trading? Prop trading is about allocating resources to their most productive use. High frequency trading is a particularly stupid target; high frequency traders provide liquidity. Without them, you might place an order that goes unfilled. Is that a good thing?
Regarding mutual funds, you can get better (and more volatile) returns with an index fund. No one disputes this. But what if you want a tuned investment strategy? A mutual fund I'm invested in tries to make large profits right now (while I'm young) from high risk investments, and over time transitions into low risk investments (to protect my retirement). It won't beat the market, and it isn't meant to.
Regarding mutual funds, you can get better (and more volatile) returns with an index fund. No one disputes this. But what if you want a tuned investment strategy? A mutual fund I'm invested in tries to make large profits right now (while I'm young) from high risk investments, and over time transitions into low risk investments (to protect my retirement). It won't beat the market, and it isn't meant to.
No high frequency trader wants to provide liquidity by filling an order that would otherwise go unfilled. Their goal is to find orders that would otherwise be filled within milliseconds, take on a completely superfluous middleman role, and steal most of the spread from the real buyer and seller.
http://seekingalpha.com/article/151173-hft-the-high-frequenc...
http://seekingalpha.com/article/151173-hft-the-high-frequenc...
If the person believed a natural counterparty would come along within milliseconds, why would he or she enter a market order rather than a passive limit order?
There are many high-frequency strategies, and front-running/manipulating markets might be one that unscrupulous firms engage in, but most would rather make legal money. The linked article doesn't make a lot of sense. For one, flash orders are no longer available on major exchanges, and secondly it's very difficult (and costly) to push most stocks 30 cents away from their fair value.
Most of the anti-HFT things I read are pushed by buy-side traders who have a hard time tricking the market into executing huge orders without moving the price, as if they ever had some natural right to do so. Trading is a competitive endeavor. If your poor execution algorithm shows your hand and someone more sophisticated notices, it's fair play for them to use that public information.
There are many high-frequency strategies, and front-running/manipulating markets might be one that unscrupulous firms engage in, but most would rather make legal money. The linked article doesn't make a lot of sense. For one, flash orders are no longer available on major exchanges, and secondly it's very difficult (and costly) to push most stocks 30 cents away from their fair value.
Most of the anti-HFT things I read are pushed by buy-side traders who have a hard time tricking the market into executing huge orders without moving the price, as if they ever had some natural right to do so. Trading is a competitive endeavor. If your poor execution algorithm shows your hand and someone more sophisticated notices, it's fair play for them to use that public information.
How can HFT serve any purpose other than front-running a trade that was about to happen anyway? Is there any other reason latency matters? The correct allocation of society's resources did not actually change within those few milliseconds, so their profits can only come from exploiting some flaw in the way the market clears.
Front-running is knowing an order is going to be inserted into an exchange's book, and sending your order before it; an example would be if a broker saw a client making a big trade and sent his order before the client's, hoping to profit when the market moved.
In most modern stock markets there is not tiered access. My order is just as good as anyone else's, and no participants are given unfair notice of another's orders. Firms can spend money and be more competitive in these markets (e.g. better analysts, faster systems, co-location), but anyone has a fair shot at competing. If an order is public, there's nothing wrong with me taking action based on it before you if my only advantage is superior technology.
In most modern stock markets there is not tiered access. My order is just as good as anyone else's, and no participants are given unfair notice of another's orders. Firms can spend money and be more competitive in these markets (e.g. better analysts, faster systems, co-location), but anyone has a fair shot at competing. If an order is public, there's nothing wrong with me taking action based on it before you if my only advantage is superior technology.
> In most modern stock markets there is not tiered access.
It seems if you are the broker and also trade for your own company, you would see your clients' orders before they go in. You can send in your order before theirs, thus creating a tiered access.
It seems if you are the broker and also trade for your own company, you would see your clients' orders before they go in. You can send in your order before theirs, thus creating a tiered access.
That's called dual trading and there are already regulations in place that prohibit the scenario you described. A broker must execute his clients' orders before his own.
In any case, most high-frequency operations are only trading for themselves.
In any case, most high-frequency operations are only trading for themselves.
Is there any other reason latency matters?
Let's say I have a statistical model that is able to identify and exploit statistically significant price deviations. Furthermore, let's say someone has a very similar model. If I'm able to execute my trade before my competitor, I get the profit, and he doesn't. That's one argument. There are many others.
Let's say I have a statistical model that is able to identify and exploit statistically significant price deviations. Furthermore, let's say someone has a very similar model. If I'm able to execute my trade before my competitor, I get the profit, and he doesn't. That's one argument. There are many others.
"In the old days, short-term liquidity was provided by specialists or floor-traders. In the past 10 years, their role has largely been replaced by sophisticated high-speed computer models. CNBC still reports live from the floor of the NYSE to preserve an outdated illusion for the public - the reality is the vast majority of the trading is now done by computers."
From Tradebot Systems' homepage (http://www.tradebotsystems.com/) - a proprietary trading group out of Kansas City that competes with major investment banks.
I disagree with the author's characterization of market-making as predatory. There are risks involved in providing liquidity, so there should be some cost, and as a purely competitive enterprise with many players, the costs will be very low. All brokerage houses allow you to submit your own limit orders if you don't want to pay the spread. I fail to see how a bunch of computer market-makers competing with one another to offer spreads tight as 1 cent are worse than the old monopolist NYSE specialist quoting in $1/16ths while seeing all order flow.