The New Masters of Wall Street(forbes.com)
forbes.com
The New Masters of Wall Street
http://www.forbes.com/forbes/2009/0921/revolutionaries-stocks-getco-new-masters-of-wall-street.html
3 comments
What surprises me is that it seems that this is a "new" thing. I thought computer trading has been happening for years.
Hedge funds, proprietary trading desks in i-banks, etc. have been using automated trading strategies for decades. But on the the agency equity trading side (the guys who move institutional investors in/out of larger long-term stock positions --- and the guys who are the driving force behind all the dark pools), it's still at least somewhat new.
Institutional clients were reluctant let a computer trade their big order. They wanted a human to be deciding how much to quote, when to trade a little fast/slow in response to market conditions, etc. And up to the early 2000s, agency "trading strategies" were still shockingly primitive. Marketing literature claimed they "intelligently managed market impact risk vs. volatility risk". Fancy way to describe a glorified time slicer. Human traders (not to mention prop algo strategies) earned easy money gaming these dumb things.
Eventually, the "human advantage" faded away because the humans in question were being expected to handle more and more volume (to earn more and more commissions) --- they just didn't have enough time to pay lots of attention to each client order and the prices being quoted all over the place on all the new alternative venues. And so the banks finally had an incentive to pour money into making their algorithmic trading systems less primitive.
Institutional clients were reluctant let a computer trade their big order. They wanted a human to be deciding how much to quote, when to trade a little fast/slow in response to market conditions, etc. And up to the early 2000s, agency "trading strategies" were still shockingly primitive. Marketing literature claimed they "intelligently managed market impact risk vs. volatility risk". Fancy way to describe a glorified time slicer. Human traders (not to mention prop algo strategies) earned easy money gaming these dumb things.
Eventually, the "human advantage" faded away because the humans in question were being expected to handle more and more volume (to earn more and more commissions) --- they just didn't have enough time to pay lots of attention to each client order and the prices being quoted all over the place on all the new alternative venues. And so the banks finally had an incentive to pour money into making their algorithmic trading systems less primitive.
Lots of people who are trading in this way seem to congregate at http://www.elitetrader.com/vb/forumdisplay.php?s=&forumi...
I can assure you that there are only a handful of people on ET who are successfully doing HFT and 10 at most who are profitably automated. The rest are either discretionary traders, retail pikers, trolls, or troll aliases. There's definitely no congregation, nor is there really anything of substance regarding automation or strategy trading, short of a few older threads.
What surprises me is that it seems that this is a "new" thing. I thought front-running has been known for years.
Front-running is when a firm places a trade ahead of its client's trade. High-frequency trading isn't front-running. Usually the firms are trading with their own capital and don't have clients to front-run.
If it(hf trading and associated phenomena) lowers the spread for the retail investor at the expense of NYSE, NASDAQ and regular brokerages that would be a good thing. It remains to be seen if it really does.
Dark pools sound more worrisome though, one loses transparency through them.
Dark pools sound more worrisome though, one loses transparency through them.
Better link: http://www.forbes.com/forbes/2009/0921/revolutionaries-stock...
Choice titbits from the article where algo-trading will "help the little guy":
- [...]high-frequency trading has morphed into a technology arms race.
- Making it in high-frequency trading these days requires the latest technology. Lots of it.
- [..]a big chunk of high-frequency profits derive from jumping into markets before small investors can.
Good luck, retail investor.
Choice titbits from the article where algo-trading will "help the little guy":
- [...]high-frequency trading has morphed into a technology arms race.
- Making it in high-frequency trading these days requires the latest technology. Lots of it.
- [..]a big chunk of high-frequency profits derive from jumping into markets before small investors can.
Good luck, retail investor.
Many high-frequency traders are the equivalent of un-sponsored market makers. The reason why a market must be "made" is because liquidity can quickly get out of balance (too many people want to sell, no one wants to buy). The job of the market maker is to be ready to stand on the other side of a transaction to ensure the market continues to function and does not freeze.
I call HF traders "un-sponsored" because most exchanges formalize this responsibility. For example, becoming an official market maker on the CME requires that you make a continuous market in the instruments you trade. For this, an "official" market maker is given special price treatment and other benefits.
Market making has been around forever, and is a required function of orderly markets. Generally, the more market makers you have the better: liquidity goes up, spreads go down. HF traders, being unofficial market makers, are making these markets without either the special responsibility of making a continuous market OR the benefits that go along with it.
It is suprising to me how little most folks understand about the functioning of markets. For example, if you have ever placed an order to Sell 100 shares of CSCO at 75.25 Limit then you are doing two things: (1) you're offering an option to someone else to buy--the compensation you receive is known as the spread; and, (2) you're prioritizing price over immediacy. If you remove the price from this order, and simply Sell 100 shares of CSCO at Market then you are: (1) purchasing an option from someone, in this case someone who has placed a Buy Limit order--the price you pay for this option is the spread; and (2) you're prioritizing immediacy over price.
In the first case, the case of the limit order, you are making one side of a market. Congratulations, you're a market maker; however, if you only continue to make a one sided market you'll go out of business quickly because you're inventories will either sky rocket (you'll own too many shares) or it will plummet to 0 -- this is bad for market makers. The goal of making markets is volume and speed because, if applied correctly, you can achieve a balanced inventory which is the goal of market making. Inventory == risk, and therefore it has to be balanced to the level of risk a given market maker wants to take.
Please don't make statements like, "Good luck, retail investor", when you don't fully understand what's happening. HF traders have nothing to do with credit-default swaps or under-capitalized mortgages. They do, however, make the markets you want to participate in more efficient.
I call HF traders "un-sponsored" because most exchanges formalize this responsibility. For example, becoming an official market maker on the CME requires that you make a continuous market in the instruments you trade. For this, an "official" market maker is given special price treatment and other benefits.
Market making has been around forever, and is a required function of orderly markets. Generally, the more market makers you have the better: liquidity goes up, spreads go down. HF traders, being unofficial market makers, are making these markets without either the special responsibility of making a continuous market OR the benefits that go along with it.
It is suprising to me how little most folks understand about the functioning of markets. For example, if you have ever placed an order to Sell 100 shares of CSCO at 75.25 Limit then you are doing two things: (1) you're offering an option to someone else to buy--the compensation you receive is known as the spread; and, (2) you're prioritizing price over immediacy. If you remove the price from this order, and simply Sell 100 shares of CSCO at Market then you are: (1) purchasing an option from someone, in this case someone who has placed a Buy Limit order--the price you pay for this option is the spread; and (2) you're prioritizing immediacy over price.
In the first case, the case of the limit order, you are making one side of a market. Congratulations, you're a market maker; however, if you only continue to make a one sided market you'll go out of business quickly because you're inventories will either sky rocket (you'll own too many shares) or it will plummet to 0 -- this is bad for market makers. The goal of making markets is volume and speed because, if applied correctly, you can achieve a balanced inventory which is the goal of market making. Inventory == risk, and therefore it has to be balanced to the level of risk a given market maker wants to take.
Please don't make statements like, "Good luck, retail investor", when you don't fully understand what's happening. HF traders have nothing to do with credit-default swaps or under-capitalized mortgages. They do, however, make the markets you want to participate in more efficient.
I can't find the NYTimes article link now, so these will have to do: http://www.dailykos.com/story/2009/7/7/750786/-Incredibly-Sh... and http://zerohedge.blogspot.com/2009/04/incredibly-shrinking-m...
Anti-GS scare-mongering and global conspiracy theories aside, it's fairly clear that only the really large players (Getco, GS, Renaissance) stand to make clear benefits from HFT. But that's alright - they're entitled to, if they figure out how. What is also clear is that the casual retail investor is getting screwed by HFT, and will never realise it.
CDS and krap mortgages were strawmen, so I'm not going there. I am curious to know though - do you have your fingers in algo trading in some manner (trader/programmer)?
Anti-GS scare-mongering and global conspiracy theories aside, it's fairly clear that only the really large players (Getco, GS, Renaissance) stand to make clear benefits from HFT. But that's alright - they're entitled to, if they figure out how. What is also clear is that the casual retail investor is getting screwed by HFT, and will never realise it.
CDS and krap mortgages were strawmen, so I'm not going there. I am curious to know though - do you have your fingers in algo trading in some manner (trader/programmer)?
I've read both articles before, just re-read them again, and fail to see how you conclude that it is "clear is that the casual retail investor is getting screwed by HFT, and will never realize it." If you can offer a rational explanation based on fact or accepted theory then I'm willing to listen, but a wild assertion based on two random blog posts that make some weak assertions/assumptions won't cut it, IMO.
I am not currently involved in high-frequency trading, but I did stay at a holiday inn express last night. :) Seriously though, I know several folks who are, I've followed the industry for a long time, and market micro-structure is a very interesting topic to me. But, why does that really matter, anyway?
I am not currently involved in high-frequency trading, but I did stay at a holiday inn express last night. :) Seriously though, I know several folks who are, I've followed the industry for a long time, and market micro-structure is a very interesting topic to me. But, why does that really matter, anyway?
If retail investors want to participate in day trading and high frequency market making, then indeed, good luck.