What are algos actually doing?

Discussion in 'Programming' started by booked, Mar 13, 2012.

  1. booked


    Hey guys,

    Obviously algos/bots are a big talking point in the markets now, and some are for it, some are against it. But I was thinking today, some traders probably would like to make their own algo, but I thought what do they actually do? I was trying to think of it today......like, explained in real basic terms, what ideas do these HFT firms have that they turn into algos? Especially that basically eliminates human scalpers?

    How do they program that into a computer, so that its effect is to eliminate the human scalper(basically the end result, not like they go out at have that in mind obviously). So do they program it to have the best bid/offer(where the real speed HFTers come in, colocation etc.) or do they somehow know when an order is a real person and so its programmed to squeeze it against them a few ticks, have some bid/offers there for when they puke out or what?

    Or....is it much more advanced than that, as in massive calculations and formulas based on statistics, standard deviations, mean reverting, relative value formulas or something?

    It amazes me that they can actually program something to scalp.......AND that it's actually profitable, sure whoever is fastest can because they will be able to get the inside bid/offer I guess, but then the guys/firms that are fractions of a second behind wouldn't be able to do the same thing surely? So then they would have to come up with some other "Push it against the previous move X ticks until a rush of activity in which it actually is entering on" type thing.

    Curious to know more about what they actually program into these things that makes it so humans are no longer a force. (talking about futures here btw, not stocks).

    Any info would be great to hear, if anyone knows anything about the details, it's no doubt all very secretive.
  2. what I hear (just surfing on the net) is that it's mostly arbitrage, i.e. models like index arbitrage, or ETF's against baskets, etc.
  3. AK100


    Big money is involved so you can bet the calculations are very complex and the operations expensive to run.

    Those with $400 Dell's should not attempt to compete :)
  4. booked


    So in futures it'd be the difference between the cash and futures for example?

    Ha, yeah agreed AK100, still would be good if anyone knows of anything that they actually do. Surely there's someone here that's smart enough to figure out what they might be doing, or knows someone working at a HFT firm or something.

    There are a few traders I know that use some kind of statistical analysis etc. for certain products, they have figured out "tolerances" of markets(anyone have any clue how to do that or what it even means?) and it seems to be working a treat, would think that HFT firms would be something along these lines, historical testing with statistics to find out what X product can handle, stress limits etc. push them to those limits then bring it back or something, dunno. Interesting :)
  5. Bob111


    imo-you can compete with $400 dell or whatever. you have to outsmart the machines on other side of your screen. it's not easy,but it's not impossible either. off course you can't compete with them in their game.simply because you can't have the data they have,collocation etc.
  6. AK100


    Yes, you can compete even with a pen and pencil in this game, just not with HFT.

    I know a fella in prison that trades all the markets (he got caught running a mini-ponzi). He uses weekly charts so knows in advance what he's going to do should price get to his levels. He mails his orders out to his wife and she puts them in :)
  7. AK100


    Search on either this forum or www.trade2win.com/forums because somebody posted within the last year a great PDF that shows some of the main strategies, many of them were 'revert to the mean' type trades.
  8. Bob111


    again-that depends. HFT is very broad term and they have variety of plays. one of the common tactics is bluffing(specially on small,low vol stocks with spreads) with goal to squeeze you out and force you to sell at bid and buy at ask. i know at least one person,who was able to beat them manually in that game
  9. booked


    found a few PDFs/papers on HFT strategies, haven't read any of them yet but if anyone is interested. Looks like there is a little bit of a hint in there about what sort of thing they look at, first one is more basic, others are actual papers it seems with all the formulas etc.



  10. rdg


    A huge amount of the arbs in futures are against similar products, not the 'true' arbs. When gold got bombed a few weeks ago, the bots instantaneously arbed it against silver and copper. Now from a human perspective everything moves at the same time and there's much less advantage to watching correlated markets if you're trading from home.

    I think that's a big reason ES is such a pain in the ass to trade. Since it's spread against everything under the sun, every time it goes bid, it's a deal for a seller somewhere against something else.
    #10     Mar 14, 2012