Interesting High Frequency Trading - JAN 2010 Article

Discussion in 'Wall St. News' started by THE-BEAKER, Jan 12, 2010.

  1. I was leaving work late on a Friday night when my Blackberry buzzed with this message: “How come you all are using people to trade instead of computers? Aren’t you kinda stuck in the Stone Age here?”

    High-frequency trading (HFT) is all the rage in my business and beyond. It is the execution of stock transactions by powerful computers and algorithms at speeds faster than you can blink your eyes. But as blogger Kid Dynamite lampooned, “Was HFT responsible for Obama winning the Nobel Peace Prize? Can the dominance of the Yankees be explained by HFT? No.”

    New York Senator Chuck Schumer, with information fed to him by the head blogger at Zero Hedge, generated enough noise to move the SEC to propose a rule change. Even the mainstream media got in on the act. The New York Times and The Wall Street Journal both penned lengthy articles on the topic.

    With all the talk about whether HFT adds anything of societal value other than the ubiquitous liquidity, where does this leave us as discretionary traders? With more and more computer programs being designed to co-opt our money one nickel at a time, how do we adapt?


    For background, I have been actively trading my own equities account, mostly intraday, since 1997. Every one to two years since then, there has been a drastic series of events: the Asian financial crisis, the dot-com bubble, decimalization, 9/11, the integration of NYSE floor trading with electronic execution, subprime and the recent near collapse of the financial system.

    Out of necessity, I had to adapt my trading style every time the nature of the market changed. I started as a relative strength tech trader, picked up momentum trading during the Internet boom, mastered bounce trading in 2001, taught myself how to fade stocks during the slow-paced 2003-’06 years, shifted to uptrending plays for the next year, and then spent 2008 whacking bids and playing the downside momentum in overleveraged financials.

    At each point of my career, I witnessed veteran traders drop out of the business, unable to adapt. With each new technological development, members of our community gave new excuses for not making money. With more than half of U.S. equities volume now controlled by algorithmic trading, HFT might be my biggest challenge yet. I stand ready to overcome it.

    I empathize with frustrated traders in the trading ring, ducking the thrown elbows of HFT. On the second trading day of November, I lost my cool momentarily and called out some HFT programs that had out-traded me in AIG. “[Expletive] chiseler,” I exclaimed. This felt good temporarily but did not improve my profits. I went to bid or offer for 1,000 shares in AIG, and I got cut by a machine. This is all the byproduct of high-frequency trading. And I was...