How To Fix High-Frequency Trading

"The recent public outcry over high frequency trading is pointless. Solutions exist. Virtually every comparable market in the world uses them already.

But, some electronic exchanges may not willingly adopt them. Doing so may disrupt their current business model. The incentives are misaligned, and competitors or regulators may need to force the issue to see change. Luckily, the issue to be forced is far simpler than most think.

It’s time to add quality to the matching process. Over thousands of years, every naturally evolved market has headed this direction – from the ancient Greeks to Alibaba.com. It’s time for Wall Street to realize what they lost along the way, and how it can fix far more than just HFT."

http://www.zerohedge.com/news/2014-05-26/how-fix-high-frequency-trading

Do retail traders suffer from high frequency traders?

"Using a change in regulatory fees in Canada in April 2012 that affected algorithmic quoting activities, we analyze the impact of high frequency quoting and trading on market quality, trader behavior, and trading costs and profits. Following the change, algorithmic message traffic, i.e. the number of orders, trades, and order cancellations, dropped by 30% and the bid-ask spread rose by 9%. Using trader-level data, we attribute this change to message-intensive algorithmic traders reducing their activity, and we show that their reduced activity had a negative impact on retail traders’ intraday returns, in particular on their returns from limit orders. We further find that institutional traders’ intraday returns from market orders increased."

http://qed.econ.queensu.ca/pub/faculty/milne/322/IIROC_FeeChange_submission_KM_AP3.pdf

High Frequency Trading: All You Need To Know

"So the bottom line: HFT is legal frontrunning... but also so much more.  In fact, like the TBTF banks, HFT itself has become so embedded in the topological fabric of modern market structure, that any practical suggestions to eradicate HFT at this point are laughable simply because extricating HFT from a market - which indeed is rigged but not only by HFTs at the micro level, but more importantly by the Federal Reserve and global central banks at the macro - is virtually impossible without a grand systemic reset first. Which is why regulators, legislators and enforcers will huff and puff, and...  end up doing nothing. Because if there is one thing the TBTF systemic participants have, is unlimited leverage to collect as much capital due to being in a position of systematic importance in a market, rigged or otherwise.

Finally, if push comes to shove, and the fate of HFT is threatened, watch out below, because if HFT's presence, glitchy as it may have been, led to the May 2010 flash crash and the subsequently unstable market which has exhibited at least one memorable crash every single month, then the threat of pulling the marginal trader which now accounts for 70% of all stock churn and volume (if certainly not liquidity) would have consequences comparable to the Lehman collapse."

http://www.zerohedge.com/news/2014-04-06/high-frequency-trading-all-you-need-know

High-Speed Traders Rip Investors Off

Michael Lewis, autor m.in. "Liar's Poker" czy "Moneyball: The Art of Winning an Unfair Game", krytykuje strategie HFT.

"The U.S. stock market is rigged when high-frequency traders with advanced computers make tens of billions of dollars by jumping in front of investors, according to author Michael Lewis, who spent the past year researching the topic for his new book “Flash Boys.”

"While speed traders’ strategies, developed over the past decade with help from exchanges, are legal, “it’s just nuts” that they’re allowed, Lewis said during an interview televised yesterday on CBS Corp.’s “60 Minutes.” The tactics are too complicated for individual investors to understand, he said."

http://www.bloomberg.com/news/2014-03-30/high-frequency-traders-ripping-off-investors-michael-lewis-says.html

The Financial Economists Roundtable Weighs in on Financial Transaction Taxes

"Many concerns motivate these proposed taxes. Some people want the financial sector to pay for the tremendous economic costs that they believe it imposed on everyone in the global financial crisis of 2008. Others believe that the financial sector should bear its “fair share” of taxes; such beliefs are particularly strong in countries where financial transactions are exempt from value-added taxes and therefore “escape” taxation. Still others simply want new revenues to support additional government spending, reduce the deficit, or provide tax relief to other sectors. Finally, some commentators believe that too much financial activity focuses on short-term rather than long-term goals. They believe that a transaction tax would force investors and businesses to focus more on long-term values and less on short-term activities that they perceive to be wasteful."

"Not all taxes are economically sensible, regardless of how desirable they may appear. A transaction tax imposed at any economically meaningful rate by only some countries would cause many transactions to be shifted to other countries, resulting in far less revenue than a simple static analysis might suggest. Furthermore, to the extent that a financial transaction tax would generate substantial revenue, the tax and the associated reduction in liquidity would lower asset prices. Lower asset prices would cause decreased corporate investment, resulting in less capital per worker in the long run and thus lower wages throughout the economy. Therefore, governments should be extremely wary of introducing or increasing financial transaction taxes."

http://blogs.cfainstitute.org/investor/2014/02/27/the-financial-economists-roundtable-weighs-in-on-financial-transaction-taxes/

The Wall Street Code

Krótki film dokumentalny o osobach programujących algorytmy na Wall Street, ich działalności oraz branży HFT.

http://www.youtube.com/watch?v=kFQJNeQDDHA#t=2293

How to lose $172,222 a second for 45 minutes

Szczegółowy opis SEC (amerykański KNF, wybrane fragmenty) na temat jednej z większych ludzkich wpadek i niedopasowania procedur w branży HFT.

"This is probably the most painful bug report I’ve ever read, describing in glorious technicolor the steps leading to Knight Capital’s $465m trading loss due to a software bug that struck late last year, effectively bankrupting the company.

The tale has all the hallmarks of technical debt in a huge, unmaintained, bitrotten codebase (the bug itself due to code that hadn’t been used for 8 years), and a really poor, undisciplined devops story."

http://pythonsweetness.tumblr.com/post/64740079543/how-to-lose-172-222-a-second-for-45-minutes

What Radioshack's 5-Second 10% Spike Looked Like To The Machines

HFT i ruchy kursów akcji o 10% w poniżej 5 sekund na podstawie nagłówków wiadomości. 

"News yesterday that Radioshack was planning to seek new debt financing in order to give suppliers more confidence - which in itself is kind of ironic that suppliers would find an even-more-levered company a better credit risk - sent the stock spiking higher by 10% in mere seconds as the machines took the headline and ran with it. Sanity was restored moments later as the stock hit the exchange limits and was instantly reverted back to unchanged."

"Each box represents one exchange. The SIP (CQS in this case) is the box at 6 o'clock. It shows the National Best Bid/Offer. Watch how much it changes in a fraction of a second.The shapes represent quote changes which are the result of a change to the top of the book at each exchange. The time at the bottom of the screen is Eastern Time HH:MM:SS:mmm (mmm = millisecond). We slow time down so you can see what goes on at the millisecond level. A millisecond (ms) is 1/1000th of a second.

Note how every exchange must process every quote from the others -- for proper trade through price protection. This complex web of technology must run flawlessly every millisecond of the trading day, or arbitrage (HFT profit) opportunities will appear. It is easy for HFTs to cause delays in one or more of the connections between each exchange."

http://www.youtube.com/watch?v=FY11xLN54pQ

http://www.zerohedge.com/news/2013-10-04/what-radioshacks-5-second-10-spike-looked-machines

Nanex Research, fałszywy tweet o wybuchu w Białym Domu 23 kwietnia 2013

Pewnie część z Was już słyszała o dzisiejszym fałszywym tweet'cie o wybuchu w Białym Domu i rannym prezydencie USA. Nanex Research prezentuje jaki wpływ miała ta informacja na rynek, usunięta i zdementowana tylko minuty później. Zupełna utrata płynności i głębokości w arkuszu zleceń. Nie skończyło się to wielkim krachem, bo wymiar spadku i szybkiego powrotu w postaci około 1% na indeksach to nie aż tak wiele, jak można by oczekiwać po takim wydarzeniu w erze HFT.

http://www.nanex.net/aqck2/4176.html
http://www.zerohedge.com/news/2013-04-23/ap-reports-two-explosions-white-house-obama-injured

Exploratory trading - The Top 8 HFTs Remove Liquidity 59% of the Time

"Exploratory trading is a form of manipulation designed to test the market's reaction to a trade. Probing for stop orders would be one form of exploratory trading. This paper specifically investigates exploratory trading that attempts to determine whether the bid/ask spread is about to shift up or down a level. The impact on the market would be an increase in intraday volatility. Exploratory trading distorts the market's view of supply and demand and induces trading activity from other participants. Furthermore, as participants learn of the strategy, they will employ counter-measures - which will further muddy an accurate picture of supply and demand for everyone else. This is why regulations ban manipulation."

"A lot of media discussion about HFT focuses on 3 benefits: they provide liquidity, narrow spreads and lower trading costs. This Harvard paper exposes some disturbing truths: the top HFT engage in a predatory market manipulation strategy that removes liquidity 59.2% of the time (by volume), causes undue intraday volatility (which amounts to a tax on investors), warps the true picture of supply and demand, and raises trading costs for everyone processing market data."

http://www.nanex.net/aqck2/4136.html

Algorithms Take Control of Wall Street

"Before long, investors and portfolio managers began to tap the world’s premier math, science, and engineering schools for talent. These academics brought to trading desks sophisticated knowledge of AI methods from computer science and statistics.

And they started applying those methods to every aspect of the financial industry. Some built algorithms to perform the familiar function of discovering, buying, and selling individual stocks (a practice known as proprietary, or “prop,” trading). Others devised algorithms to help brokers execute large trades—massive buy or sell orders that take a while to go through and that become vulnerable to price manipulation if other traders sniff them out before they’re completed. These algorithms break up and optimize those orders to conceal them from the rest of the market. (This, confusingly enough, is known as algorithmic trading.) Still others are used to crack those codes, to discover the massive orders that other quants are trying to conceal. (This is called predatory trading.)"

http://www.wired.com/magazine/2010/12/ff_ai_flashtrading/

What to Do about High-Frequency Trading

Polecam bardzo tekst o HFT opisujący zarówno pozytywne i negatywne skutki działalności HFT oraz dodatkowo zawierający parę sugestii odnośnie zmian w sferze regulacyjnej. 

"Many people believe that restrictions on HFT cannot harm the markets because investment decisions are not made over one-second intervals, much less over millisecond intervals. The premise of this argument is right, but the conclusion is wrong. HFT promotes markets by making them more liquid and thus ultimately lowers corporate costs of capital. High-frequency traders need to submit and cancel their orders quickly to provide liquidity cheaply.

The most pressing danger that the markets face from HFT is least recognized: High-frequency traders are engaged in a costly technology arms race that will not end well for investors if regulators do not act soon. Fortunately, a simple change in order-handling procedures—described herein—can sensibly stop this race.

Identifying what regulators should and should not do about HFT requires some understanding about what high-frequency traders do."

http://www.cfapubs.org/doi/full/10.2469/faj.v69.n2.6

HFT Infographics

Wracając do tematu algorytmów w handlu, poniżej zamieszczam dwa linki do ciekawych grafik o HFT.

http://pl.scribd.com/doc/123286545/Infographic-HFT

http://www.thebureauinvestigates.com/2012/09/16/infographic-trading-at-the-speed-of-light/

Przykład, jak się bawią "algorytmy"

Ciekawy przykład, co się dzieje, gdy następuje błąd jakiegoś algorytmu transakcyjnego. Dodatkowo rzadko kiedy w Polsce jest potrzeba i okazja oglądać wykresy w interwałach wynoszących 5 milisekund oraz z podziałem na zlecenia z różnych platform obrotu. :) Część transakcji poniżej $32.72 została anulowana później.

http://www.nanex.net/aqck2/4052.html

http://www.zerohedge.com/news/2013-01-02/another-algo-gone-wild-bailed-out-nasdaq-after-mini-flash-crash

http://www.finviz.com/quote.ashx?t=gva