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HFT (High-frequency trading) and how it affects the market.

By American in Japan   Follow   Thu, 16 Aug 2012, 11:08pm   1,821 views   15 comments
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I will admid that while I know some about this, there is a lot that I don't know.
So I started with Wikipedia (this is not the end of my quest of course)...

High-frequency trading (Wikipedia)

Algorithmic trading (Wikipedia)

"By 2010 high-frequency trading accounted for over 70% of equity trades in the US and was rapidly growing in popularity in Europe and Asia."

Understanding the impact of high-frequency-trading (openmkts.com)

High-frequency-trading (A bit more information)

I am curious about how this affects the markets in time frames of longer than one day (a week, a month, a year...)

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1. American in Japan Follow Befriend (28) 149 threads 1,398 comments

   1   11:22pm Thu 16 Aug 2012   Share   Quote   Permalink   Like   Dislike   The Sharpe ratio is supposedly much better with HFT. http://en.wikipedia.org/wiki/Sharpe_ratio

2. thunderlips11 Follow Befriend (13) 52 threads 2,639 comments Premium

   2   7:45am Fri 17 Aug 2012   Share   Quote   Permalink   Like (1)   Dislike   Protected   SkyNet is in control of the Stock Market.

3. Peter P Follow Befriend (4) 117 threads 17,655 comments Premium

   3   9:00am Fri 17 Aug 2012   Share   Quote   Permalink   Like (4)   Dislike   Protected   Maximum *attainable* Sharpe ratio for any given time series is MUCH better at the higher frequencies. But then a black swan is always lurking. And he is very excited about the higher frequency of action. LTCM enjoyed a great Sharpe ratio until it did not. The more frequently you disturb a complex nonlinear system, the more likely something unexpected will happen in a given time frame.

4. Peter P Follow Befriend (4) 117 threads 17,655 comments Premium

   4   9:03am Fri 17 Aug 2012   Share   Quote   Permalink   Like (1)   Dislike   Protected   thunderlips11 says SkyNet is in control of the Stock Market. Complexity in nonlinear systems is WAY scarier than SkyNet.

5. uomo_senza_nome Follow Befriend (13) 787 threads 1,542 comments

   5   9:38am Fri 17 Aug 2012   Share   Quote   Permalink   Like   Dislike   Peter P says The more frequently you disturb a complex nonlinear system, the more likely something unexpected will happen in a given time frame. Word. The problem is that our policy "makers" focus too much on stability leading to a loss of resilience in the macro economy.

6. bmwman91 Follow Befriend (7) 37 threads 1,539 comments Mountain View, CA bmwman91's website Premium

   6   9:58am Fri 17 Aug 2012   Share   Quote   Permalink   Like   Dislike   Protected   Peter P says The more frequently you disturb a complex nonlinear system, the more likely something unexpected will happen in a given time frame. Very well put!

7. Dan8267 Follow Befriend (16) 764 threads 7,710 comments Boca Raton, FL Premium

   7   4:49pm Sat 18 Aug 2012   Share   Quote   Permalink   Like   Dislike   Protected   Damn, I was just about to read the article and then I noticed it was Crapipedia. No point since it would take more effort to separate the misinformation from the real information than doing a Google search.

8. American in Japan Follow Befriend (28) 149 threads 1,398 comments

   8   3:23am Sun 19 Aug 2012   Share   Quote   Permalink   Like   Dislike   I said that was the start. I am curious (on another thread) what errors you have found in Wikipedia.

9. krusty Follow Befriend 8 comments Westport, CT

   9   7:21am Mon 20 Aug 2012   Share   Quote   Permalink   Like (2)   Dislike   I am a high frequency trader at a hedge fund in NYC. My turnover is on the order of 0.5-1% of the US stock market. FWIW I've read the Wikipedia entry and found it to be generally accurate. BTW, when looking at numbers like the "70% of turnover is HFT" you need to distinguish between agency algorithmic trades (a.k.a. "real money") and efficiency traders like myself. There is only so much market inefficiency to go around so my type of trading is self-limiting; it can never become too large a portion of total turnover. If it did we wouldn't make money and would back off our size until it started working again. The majority of algorithmic trading is just executions for institutional investors. In the old days they used sales traders for hand execution. Now they put it into an algo, but it amounts to the same thing.

10. American in Japan Follow Befriend (28) 149 threads 1,398 comments

    10   7:31am Mon 20 Aug 2012   Share   Quote   Permalink   Like   Dislike   Thanks for the info, krusty.

11. American in Japan Follow Befriend (28) 149 threads 1,398 comments

    11   7:34am Fri 14 Sep 2012   Share   Quote   Permalink   Like   Dislike   One thing I don't understand are claims that HFT lifts up the value of the stock market.

12. krusty Follow Befriend 8 comments Westport, CT

    12   11:28am Fri 14 Sep 2012   Share   Quote   Permalink   Like   Dislike   Well I'd say it certainly doesn't raise the "value" of the market. In fact, IMO it has no effect whatsoever. Really the only thing that can move markets over any medium to long period is fundamental investment by buy-and-hold investors. Everything else just washes out: day traders, market makers, algos like mine. We always have a sell for every buy and vice-versa so the net impact is zero. I guess you could make the argument that higher liquidity makes a market more valuable since it is less risky, but really over the long run the only thing that really matters is the cash flow provided by the investment. This isn't affected at all by how you trade it. Anyway, why would people want the market level to be anything other than a true reflection of future value? All that does is provide a one-time windfall for current stockholders at the expense of future returns. I'd prefer if it was consistently undervalued so I could sit on a portfolio and collect the cash flows (dividends, capital reinvestment, etc.) Its like houses or hamburgers: you want prices to be low, not high.

13. American in Japan Follow Befriend (28) 149 threads 1,398 comments

    13   3:30pm Fri 14 Sep 2012   Share   Quote   Permalink   Like   Dislike   Thanks. I suspected such, but I had been reading otherwise.

14. American in Japan Follow Befriend (28) 149 threads 1,398 comments

    14   8:25pm Thu 20 Sep 2012   Share   Quote   Permalink   Like   Dislike   http://finance.yahoo.com/news/high-frequency-trading-worse-thought-165633554.html Worth noting. I am still learning about this...

15. American in Japan Follow Befriend (28) 149 threads 1,398 comments

    15   10:18pm Mon 8 Oct 2012   Share   Quote   Permalink   Like   Dislike   http://finance.yahoo.com/news/one-algorithm-made-4-quote-204830799.html