Quick question about trading costs in automated trading stratagies. We have a algorithimic trading system that generally does quite well but sufferes from the fact that our trading costs are so high. I was wondering if anyone here knows how high frequency traders deal with trading costs? Are there firms that have set-ups with little to no trading costs or flat monthly trading costs? We currently estimate .1% per trade (which comes out to .2% total to get in and out of a position). As such this accounts for a fair bit of our profit. Does any have any suggestions? Thank you in advance.
What's your per-share execution rate (assuming equities?) The HFT firms become registered as broker dealers, some self-clear, while others negotiate clearing arrangements at insanely low rates. .1% per trade means 1 penny/share on a $10 stock. That was the standard rate for a daytrader doing 10k shares/day in 2005. Costs are closer to .001%. If you add liquidity on more than about 55-60% of your executions, the rebates will result in you having a net negative cost to trade (i.e. if your gross is $0, your net could be $2000 if you traded, say, a million shares). To summarize, no one pays anywhere NEAR .1%.
I am also looking to implement a HFT strategy. I currently use interactive brokers and think the commission is too high. They charge $0.002/share for volume>300K. I am thinking connect to exchange directly and found a clearing house. But I do not know how to do it. For example, I checked BATS, which requires registered broker-dealer. I am not sure what the cost to register as a dealer. Also, I do not know where to find the clearing house to support me, small investor with $500K fund.
It's not the cost to register a B/D which might be $20,000 and about 6 months time... It's the administrative overhead which will kill you... Also B/Ds are locked into Clearing Contracts... Which are not necessarily cheaper... But a signing bad 50 page contract can kill you. It you are trying to make money off $0.01 spreads... You are up against the Big Players and will fail... You gotta trade stuff with $0.03 to $0.04 spreads... Either because it's less liquid or because it's gotten temporarily volatile.... Or futures with 2 tick spreads... Even CL 6 months out has 2 tick spreads.
Yes, I am thinking I cannot compete with big player in HFT. My strategy should be scalping with bigger spread as you said. If I am implementing this strategy, I guess I would pay $5000 commission to IB every month. That's why I am thinking if there is another alternative that I can reduce the cost. If register B/D and clearing myself costs more than $5000/month, then it is for sure no advantage to do this. Just wondering if it is a good idea to pay $5000 commission to earn another $10000-$20000 (This is the number I guess I can profit). I am using 1:1 leverage in another strategy (stocks holding for 1-2 months), and still have some margin. So I am thinking implementing a scalping strategy to earn more money since they can use the margin, but closed position everyday.
Just a question here, but I thought part of the HFQ game was to 'get' comms through an order flow rather than pay comms to the broker? Maybe I'm supposing away from your model.
I do not know the story of get commission from order flow. But at regular broker, I pay the commission, and get the rebate from offering liquidity.