Can you HFT guys give an example of an old bread and butter strategy you have used ? What is it exactly that you do and how would you describe it to the layman ? For example do you trade on momentum , do you detect volume patterns in the orders ? Do you mostly arb between ECN's ? Do you trade baskets against ETF's or futures ? Any vulgarized resource on the subject ? Everybody is talking about it but never says what it is .
Ok, I will bite. This is a "out of date" HFT strategy that uses "rebate trading" on AMEX to make some decent rebates. Back in 2004-2005, there were a list of names that ARCA maintains that there is 0.0 (zero) cost for taking liquidity, and something like 0.2 cents for providing liquidity. So a very simple strategy would be (again, this is before RegNMS, but obviously the orders can be sweeped). a) Put on order on a particular ticker. Assuming the "trend" is not against you (momentum analysis). b) Monitor the broad market and correlated symbols (correlation analysis), assuming nothing severe happens, keep the order, otherwise, cancel. And as necessary, replace the order. c) Immediately after fill (assuming there is enough order queue after execution, otherwise the order shld have been cancelled), sell (assuming it was buy), or buy cover (assume it was sell short), at the same price. d) Collect rebate. I have seen a few guys making a few thousand / day doing exactly like this on AMEX (which eventually discontinued this "special list"), obviously not *all* the profits come from rebates, but if you think about it carefully, the "rebates" provides a nice fat little "add on" in addition to any profits. They would put on 5-10k blocks, and just wait. Again, this only went on for a few years, and would seems to be "gaming the system", but heck, there is nothing wrong with making 500k-low few M for doing something fairly simple for a while.
The exampel that Rufus gave would be a true HFT strategy. Something that as soon as you get a fill you instantly turn around and sell to collect a rebate is a high frequency of round trips and the time from being long/short to flat can be sub-second. When I started playing around with boxes and automation it was purely market making stuff. Today I leave that to the big boys because I can't compete and its not worth it to me to take on that much risk. The longer you hold the more you can take out of a trade. It is very hard to take a point out of a stock in a sub-second trade. Many traders today that have boxes are branded as HFT but actually run simple momentum, price & volume, relative strength, regressions, etc. strategies. I've mentioned in a few other of mizhael's posts that the simple things are the best. The deck is stacked against you so trying to start out with something that is based on high freq liquidity providing is going to be virtually an impossible task. Even with an excellent backtesting engine its virtually impossible to simulate accurate fills when providing liquidity. I've also said this before - why not focus on the strategies instead of the order execution? If you use market (or limit through $.50) you are going to get a fast fill, its not the fills its the position management logic that will be a bitch. Unless you have the skills, capital and resources to draw down a few thousand dollars per strategy while you tweak, why not just partner with someone who will take on the capital risk and code it for you? You may give up 1-2 trades in the beginning but in the long run your learning curve will be much easier working with someone who does this versus trying to go it alone. Also as an FYI - its not the holy grail printing press that everyone chalks it up to be.
I second this. I flipped through the contents and some of the book and I noticed that she is just rehashing all the same theory but putting the words "high frequency" throughout. This article seems like a real joke and is also in her book: "How Profitable are High Frequency Trading Strategies?" http://www.finalternatives.com/node/9271 She basically says we don't know how profitable they are because they are secretive (even though she works for one) and then proceeds through a Jack Hershey-like analysis of the ranges of daily, minute, etc prices -- like that has _anything_ to do with profits.
My theory on Ms. Aldridge is that she won't know what a high frequency trading system is if it hit her in the face. Some of the HFT systems are very profitable, *relative* to their capital base. I have seen ppl making 10+M / yr on a starting capital base of just 1-2M, and similarly returning 60-80M on capital base of 20-30M. Now before you all pull out your calculators and start going, "wait, if this person gets to play with 1B, and even if they won't return 5B, won't they be able to return 3B easy?", the problem with HFT is "capacity", as in the Market's capacity. If HFT is alrdy accounting for say 40-50% of trading volume, you can not just "ramp it up" to 80% of the trading volume, at some point, it would just be HFTs trying to cannibalizing each other. This is the exact reason why most HFT are still done with proprietary trading firms and some bank prop desks, instead of hedge funds and the like, as there simply isn't a demand for "additional capital". Capital is plenty, the universe of good profitable HFT strategies are much harder to find.
These are excellent, excellent book choices, and Mr Egg's other comments are very good also. But a caveat is, the three books on microstructure (the other is on econometrics) are respectively: 8, 9, and 9 years old -- i.e., written well before the modern HFT era.
Also, Kumiega sometimes speaks at seminars and conferences -- he's well worth hearing. Of the other three book selections, Hasbrouck is the most worthwhile.
If you can't beat 'em join 'em I'm beginning the slow journey of self educating myself in the area of algorithmic execution. I know if I don't "keep up" I'll be left behind. I just started reading Barry Johnson's book which has a publish date of Feb 2010. As I said, I just started reading the book and can't compare it to others (I haven't read...yet) mentioned in the thread . However, I already have a deeper understanding of my "competition" in the markets after reading ONLY the first few chapters. Here's a link, Look Inside! And check out the reviews. http://www.amazon.com/gp/product/0956399207/ref=oss_product <*)))><
Aldridge is a good simplification of things as is narang. I could give away all 100 trading books I have and I wouldn't likely be effected, but Hasbrouck and Kumiega are important reference books to keep around. Kumiega has a structured view of how to organize the process of trading system development and testing that is unique in the field of quant/trading books. Other books not directly related to quant trading are equally important - Teweles and Jones - "The futures game", and Christina Ray's "The Bond Market" are important for getting a sense of real trading of diverse assets. The list goes on and on, but those sum up for me the "trading effect" you need to function as a viable quant trader without necessarily needing an academic base of knowledge, but rather a workable starting point for controlling risk in a systematic way.