# Great article on HFT and algo trading



## Lephturn (Aug 31, 2009)

Raging Bulls: How Wall Street Got Addicted to Light-Speed Trading

I think the first solution is to require a quote to remain in place for 10 seconds - long enough for an actual person to see it and react.

Never happen - the whole industry is dependent on the HFT firms for profits.


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## Cal (Jun 17, 2009)

Great read. I had read 'the quants' and liked that too.


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## humble_pie (Jun 7, 2009)

hey lepht this is an amazing & important article that just about every forum member should read. It's stunning how we are all still living in the dark ages. Here in cmfland, like most folks i've always been crumbling along in the quaint belief that one should invest in things of value ...

& the heart of wall street is not really on wall st, it's somewhere 50 kilometres out of town in new jersey. Who knew.

that description of fiber-optic vs photon delivery of data is priceless.


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## Lephturn (Aug 31, 2009)

Yeah it's pretty crazy when you think that when send an order 100% of the time a computer is going to see your order - step in front of it - and then sell it to you (or buy it from you) and shave a fractional penny.

Look at the quotes you see in your market depth chart... know that almost all of them are HFT generated and are being posted and cancelled many times per second. It is even permissible for them to "quote stuff" to slow down the exchange servers so they can gain an advantage. It's just wrong.

Interesting interview here from a programmer in London who works on these software packages. http://www.guardian.co.uk/commentis...15/computer-programmer-high-frequency-trading


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## humble_pie (Jun 7, 2009)

ok that explains it. Sometime maybe 6-7 years ago i began to see computers dogging my option bids & asks. I never deal at the natural, i always have a price somewhere within the range. Bang a computer will show up with a price just one penny away.

i adjust my price up or down. Bang my shadow will adjust its price, but always remain just a penny away.

this happens even in montreal. Being tagged & stalked has always annoyed me, but it's only upon seeing your article's explanation of how HFT traders get paid for quotes that i can understand better what's going on.

btw 10 years ago this wasn't happening.


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## Lephturn (Aug 31, 2009)

Yeah this is all really the last 5 years it has really gotten going.

Payment for order flow is also a dark little secret most traders/investors don't understand. How do you think brokerages survive with such low commissions? The answer is they make up the difference by selling your paper flow to a market making firm like Knight that feeds them rebates - Knight gets the rebates from the exchanges. When you hear the words "smart order router" you need to remember who that order routing algo is working for - hint: it's not you! One of the reasons I pay slightly higher commissions to OptionsXpress is that they let me control my routing. (I think IB lets you do this as well?) This is very important when doing spreads - I can look at their spread book and the market depth screens and find out what options exchange is doing the majority of the spread business in a given underlying and route my orders there. In most cases this means going straight to the CBOE. I also pay OX more because if I'm working a more complex spread or I'm not getting any bites anywhere close to the NBBO (National Best Bid and Offer) I'll call them and get them to work it for me on the trading desk. Yes they are willing to do this even with my little 1 to 5 lot butterflies and condors for no extra charge.

Just remember, your order flow as a retail trader/investor is not where most brokers make their money - your order flow is a commodity to be sold to the highest bidder.

Once you realize they really ARE all out to get you and you are not insane it actually makes things easier.  The good news is that we are such small fish that they only scalp us for pennies here and there - it's the big institutional traders they really make their money on - they do this in massive volume. This has lead to another practice that should be completely illegal - dark pools. Large institutions don't want to have their order flow sold or subjected to the HFT buzz-saw, so they set up their own networks and trade with each other anonymously, then report those trades back to the exchange only AFTER they have happened. So when you saw AAPL back in may go from loe $ 530s to $ 522 in a second and immediately bounce back - that was a 100 lot dark pool trade getting reported. I saw another one today like that in TLT. The point is this should be illegal because these dark pool members can execute trades without individual investors having the opportunity to take the other side. I don't think that is a fair and open market at all.

The big mistake was letting the exchanges become for-profit public or private companies - they have no motivation to provide equitable and stable markets, only to make the most profit. That means when they can make an extra couple of million by letting the HFT firms set up servers in the exchange data center so they can effectively front-run every single order out there that's what they do. Even if in the end they drive investors out of the market over time and hurt their own business, they will still do it for the short term profits to make their quarterly numbers. It's a death spiral - although it is a slow one.


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## humble_pie (Jun 7, 2009)

hmmmmn. I have to reread & digest all this.

but you know what lepht. I always leg my option spreads in one leg at a time. i don't really do 4-legged critters. I'm perfectly up to doing 3 sides by hand, extremely rapidly. It's the only way i know to collect spreads that are far better than the quotes one sees.

plus i don't believe any trading control desk would work my spreads the way i do. When a spread is too far out of the money, in my experience trading desk doesn't even send it out of the brokerage house. They don't tell the client his order is rotting in the house, either. 

i'm pretty sure that even when tdw starts up a new mainframe & thus manages to arrive at the previous century in options trading, i'll still be pecking away at my tarts one crumb at a time. I've gotten so i like the zany, rushy hi-adrenalin of one side being done but omg now the other side or sides have suddenly started to bolt away in the wrong direction. C'est fun.


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## ddkay (Nov 20, 2010)

Remember those guys that submit their market studies to Zerohedge, Nanex LLC? http://news.ycombinator.com/item?id=4362232

At some point the systemic risk will be the regulating factor because HFT outpace the speed they can be controlled at.


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## Lephturn (Aug 31, 2009)

Great link ddkay.

Here is another one: http://www.bloomberg.com/news/2012-...-sec-to-resolve-market-data-feed-inquiry.html

When I can I'll leg multi-legged spreads, but sometimes I don't feel like I can take the risk if things are moving quickly. While I agree a trading desk may not work the order the same way I would, so far I have been very happy with execution at OX - it's one of the reasons I use them. Frankly I'm surprised more people don't use them for their US trading.


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## Lephturn (Aug 31, 2009)

ddkay there was some excellent links there from Nanex.

This one very clearly explains the problem with HFT quotes and super-fast cancellations. http://www.nanex.net/Research/bloodbot/bloodbot.html

When the quotes change thousands of times per second and only co-located algos can POSSIBLY interact with those quotes - well that's just not right.

Since I started this thread in response to Knight and it's falling on it's own sword: http://www.nanex.net/aqck2/3519.html

The bottom of this one you can see how the volume of penny shaving dropped when nobody was routing to Knight. The payment for order flow I was talking about? This is why they pay for it (in part) and how they take it from investors.

So humble_pie it's worse in the equity side - http://www.nanex.net/aqck2/3520.html
In AAPL somebody steps in front of an order by less than $ 0.0001. And that report says that has cost AAPL investors over 100 million since 2006. Ouch.


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## Causalien (Apr 4, 2009)

Getting dogged by these hHFT is why I only trade at end of day now. Because that's when the algos can't dog you and must decided whether or not your trade is a good deal or not.

It might also explain why, since 2007, every stock out there gets a huge end of day spike in volume.


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## Lephturn (Aug 31, 2009)

Er...









When you get close to the end of the day, they don't even have to quote you within 8% of the NBBO anymore so they can widen out their quotes and fish for trades way outside the current range.


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## andrewf (Mar 1, 2010)

The problem isn't HFT per se, but some of the practices that are allowed, such as bad faith bids/offers. Requiring bid/offers to have a minimum duration of a few seconds is probably a good idea--better than a transaction tax which others are suggesting as a solution. HFT in principle has the potential to improve liquidity and help absorb market dislocations through arbitrage or hedged transactions.


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## Lephturn (Aug 31, 2009)

andrewf said:


> The problem isn't HFT per se, but some of the practices that are allowed, such as bad faith bids/offers. Requiring bid/offers to have a minimum duration of a few seconds is probably a good idea--better than a transaction tax which others are suggesting as a solution. HFT in principle has the potential to improve liquidity and help absorb market dislocations through arbitrage or hedged transactions.


Yeah a transaction tax won't solve the quote stuffing issue.

Hey I'm an options guy, but even I know that "liquidity, hedging, stability" have been used to sell the public on every dangerous derivative in the last 30 years. While some of it may be occasionally true, I find it suspect that the same arguments are made to support OTC swaps, CDOs, and other complex instruments that have been the tools of financial destruction. The "absorb market dislocations" argument has been flipped on it's head - HFT systems trading are now the CAUSE of these market dislocations - see Flash Crash, see BATS self-nuke, see Facebook, see Knight Capital. The evidence of the last few years is proving quite convincingly that the supporting arguments for such things as HFT are simply not true.


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## Lephturn (Aug 31, 2009)

Another interesting blog post - this time getting into the dark pools.

Statistics compiled by the Tabb Group indicate that the share of trades executed off of public exchanges has increased from 26% to 32% since 2008.

So much for "public markets" - how long before dark pool volume cracks 50% and is more important than the exchanges?


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## Cal (Jun 17, 2009)

OSC considering changes for HFT's.

http://www.theglobeandmail.com/glob...-about-high-frequency-trading/article4490639/


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## Dibs (May 26, 2011)

Found this interesting graphic of the explosion of quote spam due to high frequency quoting:
http://www.nanex.net/aqck/2804.HTML


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## Lephturn (Aug 31, 2009)

Yeah this is messed up.

http://www.nanex.net/aqck2/3555.html

In 2 1/2 minutes ZNH did 39 trades. In that same time span there were close to 200,000 quotes! That is crazy.

They need to put the clamps on quoting speed big time. What if they just mandated that any quote submitted may not be cancelled for 5 seconds?


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## Causalien (Apr 4, 2009)

That nanex graph looks like music when played in the frequency domain. Someone should probably convert it. Listen to the sound of the stock market.

Sad thing is. You show this to a congressman and they have no idea what it is. Or why it's bad.


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## Cal (Jun 17, 2009)

Another HFT article: http://www.theglobeandmail.com/glob...illisecond-is-worth-a-fortune/article4602168/

On one hand I wonder how much it really affects that average joe's buy/sell price in regards to time time in which we can put through trades. As for the most part we set our prices and buy then, or simply buy within the daily range.

On the other hand, the sheer volume of these computerized trades, trading amongst themselves has to effect the overall valuations.

Greater regulation is needed....


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## lonewolf (Jun 12, 2012)

I havent done research on bid/ask spreads but it seams to me that bid/ask spreads are wider then normal near panic bottoms. Perhaps the verry narrow bid/ask spreads could be indicative of an historic top ?

The HFTs can bring it on, just more money on the table for the taking. If everyone went to the other extreame & only traded once every 40 years it would not be that great for stocks being liquid. I say free markets but with rule of law


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