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  1. Default HFT......Legit or Scam?

    I've been following Tyler Durden for a while now. He is certainly the straw that stirs the drink lately.


    For the uninitiated HFT or High Frequency Trading now RULES all major equity markets. Estimates are 70% of all volume is HFT. For that matter, the exchanges are effectively held hostage by these firms. This I am confident in my belief. Trading curbs - gone, Uptick - gone. There can be no doubt the HFT contingent made these changes a reality.

    What is HFT? There are several strategies - many legit. In fact, all are technically legit. But the one strategy garnering the most press, and most outrage are flash orders.

  2. Default

    Flash orders are small orders that "ping" the market continuously. They have a life span of milliseconds and are not placed to buy or sell stock. Flash orders have one aim. To determine order flow. Its not unlike Jesse Livermore's strategy of tossing out a couple market orders to discern how the market takes them. However, these orders are rarely filled. On high liquid stocks....they are constant. They last literally milliseconds before they are cancelled. These algorithm's sole design is to find out what you want to buy, the price, and buy it before you because they have the competitive advantage of robust servers that are located within the exchange and sell it to you a tick or two higher. For this, the exchanges pay them a rebate for "providing liquidity". They get paid up to 1/3 of a penny by exchanges. So, on a $20 stock. By buying and selling at $20 - they make 2/3 of 1 cent. Doesn't sound like much. Well, as I said, these orders are constant on high volume liquid stocks. And when you add that to the tick or two profit they make on a trade......It can quickly add up.

  3. Default

    My basic beef with this is 1) These firms pay the exchanges to place their servers at the physical exchange to reduce milliseconds in order placement and cancellation. 2) The rebate. These two advantages are not offered to retail traders. 3) The exchanges are so unbelievably desperate to compete that they have become hostage to what amounts to 2% of all market participants at the expense of the remaining 98%.

    With everything that I think I know, I don't like firms being paid by the exchange to trade. I think it goes against the central tenant of an free and open exchange. Using the available technology to one up your competitors, of which, we all are, is what capitalism is all about. You could become a broker dealer, gain access, and place your servers at the exchange if you had the physical and intellectual capital to do so. So, in that regard, I don't think I have a problem with the strategy. There are hundreds of such firms competing against each other for your order and to game each other. But, I may be mistaken on this, specialists or market makers were never paid by the exchanges. I can conceive an argument that the rebate lowers the margin for the HFT traders and can therefore offer narrower spreads, thus, in theory, reduce transaction costs for the public. However, I don't think that is what is happening in practice.

  4. Default

    HK, great post, watch for much more on this in the near future. I have been conversing with a few other traders who use Goldmans RediPlus platform and there appears to be evidence that they are front running their own clients. I am not making accusations, at least not yet, since the practice as they seem to be doing it may be technically legal, but I guarantee that there will be more news on this subject in the future. At the very least you may see a migration of their retail and smaller institutional clients off the platform, or away from GS clearing.
    Add to that the fact that Sen Charles Shumer (D-NY) has made public statements of his intent to look into this matter. Love him or hate him, his proximity to the markets makes him a force.

  5. Default

    I'm not surprised Goldman "front-running" their clients. They're trying to front-run everyone!

    BTW...I like your blog Aiki.

    I posted this in the other room about HFT, but I'll post it here too.

    As much as I love Pimm Fox, the position is no where near as long as 2 hours pimm. Try 2 minutes...at most.

 

 

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