Who's afraid of high-frequency trading?

Discussion in 'Automated Trading' started by Dogfish, Dec 2, 2009.

  1. Dogfish


    <b>Who's afraid of high-frequency trading?</b>

    By Jonathan Spicer and Herbert Lash

    NEW YORK (Reuters) - Inside the offices of Tradeworx, an emerging player in the secretive and controversial world of high-frequency trading, it's dead quiet as staffers pore over the "tape," financial industry speak for the record of the day's transactions.

    Many of the firm's 30 employees are not yet 25. They were hired straight from college to ensure their thinking and work habits are untainted. Now they're making Wall Street's latest fortune, a fraction of a penny at a time.

    The only clue that Tradeworx, a six-year-old hedge fund based in Red Bank, New Jersey, is a financial outfit at all are two giant screens that break up the monotony of white walls and grayish carpets. The physics and computer science graduates are crafting complex computer codes to exploit trading patterns revealed by the tape.

    Tradeworx and other firms like it use such algorithms in the lightning-quick trading approach that is altering the landscape of U.S. markets, driving broker-dealers out of business and changing how money managers invest.

    High-frequency trading now accounts for 60 percent of total U.S. equity volume, and is spreading overseas and into other markets. These traders stand ready to buy and sell shares at all times, providing the liquidity that keeps markets moving. As a result, trading is now cheaper and easier than ever.

    Yet critics worry fast trading may undermine the integrity of the U.S. equity market, a bastion of capitalism and corporate America, and could even spark another financial crisis.

    They also complain about the money high-frequency firms are making -- and how they are making it. During last year's plunge, when volatility rose, many high-frequency traders earned 10 times their usual profits, executives at several of the proprietary firms told Reuters.

    For their part, the fast traders don't see what all the fuss is about. Continued...
  2. garbageman

    garbageman Guest

    I really hate how the media paints high-frequency trading as this complex combination of physics and computer science and scares the bad-at-math public into thinking there's something truly beyond them going on here. These journalists need to get a grip.

    What we're seeing here is an active campaign to vilify legitimate market participants who have a different educational background than your typical finance/business school graduate, and people who don't believe in the efficient market hypothesis (at least at the time frames on which they are trading.)

    As far as selectivity goes, there's a great deal of stupidity involved regarding hiring recent graduates. You may get a genius here and there, but even genius is no substitute for a guy with an IQ of 120 or more who has lots of experience. The new graduate doesn't know what the implications of certain design decisions have on the end product, so he/she ends up with a random grab bag of technical problems that an experienced person will have seen before. Tradeworx is probably run by a paranoid guy who is counting on the lack of sophistication by college grads to understand the trade enough to walk away with it and start his own HFT operations. It has nothing to do with "taint."

    These journalists are a problem.
  3. LOL, read: Cheap, and their brains can be baffled by the bullshit from above.

    Agreed with garbageman's post above.

    They are after smart people who are driven by solving difficult problems - most of the time - you do occasionally get physics PhDs getting paid pitiful amounts and scrubbing data in some of these places for phuck's sakes! Not people who are passionate about finance. There's a good reason why they want them young and green and not phynancial.
  4. Heh, Tradeworx, it is amazing how ppl repackage themselves as HFT outfits, when they don't have anything to do HFT at all. Tradeworx, if i remember correctly, was a retail investment analytics provider started maybe in '98 - '99.

    It is sad that ppl are just attaching themselves to HFT, just to get into the "bubble" (and yes, it is a bubble). I am sure Tradeworx is trying to raise more financing, so having good press would probably help.

    In terms of afraid of HFT, well, I do it, day in and day out (do a search of my posting over the years), I think HFT is what it is, a nice niche business, nothing more, nothing less. It is getting harder to make money HFT, it eerily remind me of the dot-com bubble by end of last decade. Some ppl got rich, a lot of ppl just developed a bunch of useless systems.
  5. lol

    this is a very good example of taking these new articles with a pinch of salt.

    let me make a few things clear with someone who actually knows a thing or two more than Reuters journalists who got history degrees and want some attention.

    1. HF in its raw form (i.e. trading with higher frequency, no flash orders etc) is not a money maker. I don't need to argue or be convinced becuase I've worked some of the best places and I know what I'm talking about. this type of HF - based on stat/physics whatever they like to call it is one of the least successful strategies in trading desks anywhere.

    2. HF with flash orders. this can make money but only if you are huge such as GS. some hedge funds specialise in this using anywhere from 10m to 500m and their profits are not as significant as you'd imagine.

    3. HF with flash orders has nothing to do with physics or PHd's. this is hillarious. remember the PHds structuring CDO's ? that didn't have anything with Physics either! it's all about law. let me tel you something: it's law, not physics. there is a grey area in all areas of finance and you'd often see the best lawyers in these type of works. from SPVs in Cayman to HF co-located in Chicago by a big broker. some of the best paid people in finance are paid NOT TO TAKE RISK. They are paid to make money WITHOUT TAKING RISKS. in fact banks HATE TAKING RISKS. believe I know what I'm talking about. what this means is alot of people are specialised in exploiting the grey areas of law (which appear illegal to some). many large institutions employee alot in general - especially people with good backgrounds and good universities and good qualifications for reputation purposes. these 'intellects' often server nothing more than a dressing for the firm. while they continue in a endless 'research' activity into risk-taking strategies, they underlying strategy of the firm is often different.

    4. a basic math proof can show ultra HF inc commission is not profitable without using flash orders.

    finally, I like to add, there is a boiler-room type of crowd in the market, from wall street to city of london. this group is not really interested in science of trading. it is rather more concerned with how to exploit the law (market microstructure, legal regulations of states, tax systems, industry laws etc) to make risk-less profits. they are very powerful but have little scientific talent. they employee many true scientists to publish material to dress themselves. what you should know is this: this crowd come and go - because laws change.

    if you want to be a trader long-term - focus on the science. if you want to make quick buck - there are many ways.

    "Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism – which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object." - John Maynard Keynes

    the question is, what object are the best brains directed towards..
  6. Everything you wrote is categorically false.

    Sure, HFT is not quite what the media portrays out to be, but to say thing is like "HFT is not profitable without flash orders", is ludicrous.
  7. FredBloggs

    FredBloggs Guest

    thats it.

    im throwing in the towel on this trading gig. how can i turn a dime when there are hft's out there - WITH PHYSICS PHDs!!

    its the end i tell you.

    good bye......


    :)D :D :D )
  8. I should say it can be profitable, but not attractive enough to most large players. put it this way - no globally leading fund or bank makes money from HF without flash orders or other form of front running. if you disagree, go get some real life experiences of working at one.
  9. squeeze


    There seem to be a lot of companies jumping on the HFT bandwagon at the moment and spending a lot of money in the process. I have spoken to at least two over the past month or two that have forked out well over a million on infrastructure and development and had yet to get anything really working or make a cent back.

    The people that I have spoken to that are successful (mostly teams from tier1 banks) do truly vast volumes but with very little capital allocated to it and only moderate amounts of revenue at the end of it. I am not sure how TABB calculated the 21.8bn of revenue but I regard this with extreme skeptisism along with many of the other reports they have produced.
  10. Remember 10 years ago how everybody was changing the name of their company to "Dot.com Something"? Or when titanium was all the rage? EVERYTHING had to have titanium in it. We even saw golf balls which were supposedly "titanium" some how.
    #10     Dec 2, 2009