Earlier you talked about index arbitrage in equities. You were saying that for instance the emini is traded against a basket of 20 or so components. I'm trying to understand how legging risk works with this. If you only wanted to ever have a position in the complete basket and hedged with the emini, it seems like there only one trade you can do. You can quote the ES and hit the components, or quote nothing and hit everything at once. So who is quoting all the different components? Are they still doing index arbitrage? If you quote 20 components and get hit on one of them how do you hedge or are they unhedged for the most part? Another question about market making in general. Is any of this really backtested? It seems like since you're adding liquidity you couldn't really backtest.
Haha, great analogy. With Getco now public, I wonder if they'll use their stock to buy some of their competitors.
Where can I find more information about hardwares, technologies, OS, etc. that are used by HFT firm? Do you use customized linux? I completely have no idea how to lower latency to sub millis, since it takes about 0.5ms for my computer just to ping to itself (ping 127.0.0.1). Thank you!
I said that index arbitrage is primarily ES vs. SPY. I haven't seen ES vs. full basket done as a pure arbitrage. I have seen ES vs. small basket as a expanded pairs type trade. So one might pick some of the largest constituents from each sector and trading something like ES vs. (XOM + AAPL + JNJ + ....). When I've seen this done, it's only been quoting ES and hitting the representative basket, and expanding on that basket as your ES position gets larger. It's not exactly 'arbitrage' but is still HFT since you're latency sensitive in both quoting ES and hitting the stocks. As far as people quoting the components, I don't think they're doing it based on completing a basket and hedging to ES for the reasons you mentioned. When I quote the components I use ES as an alpha signal, but am really quoting something like AAPL @ one endpoint vs. its quotes at other endpoints. About backtesting, there are a small minority of people in HFT that lean on backtesting results in market-making, but I am not one of them.
Your box sucks. Or maybe you're misreading a decimal point, my not-so-great workstation pings localhost at 0.05 millis . I see your point if you're at 0.5 millis, but then again, you're already sub-millisecond! We don't use customized linux, just a standard distro. There are a few methods to essentially cut out the OS from your hotpath. I don't know of a really reliable source to read up about HFT hardware. Vendors might be your best bet (i.e. Solarflare). http://www.solarflare.com/Content/UserFiles/Documents/Solarflare_10GbE_RDMA_over_RoCE.pdf
Can you clarify this statement? I've heard people use this language before but I've never understood its meaning. Thanks a lot for this thread. It's great to have a thread here that's not just copy pasted from zero hedge.
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