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T3Live: The World of HFT - Six Primary Strategies
courtesy of Brandon Rowley
With all of the recent interest in high frequency trading, I put together the chart below explaining what we see as the six primary strategies of buy-side short-term algorithmic traders. This chart excludes the subset of algorithmic trading dedicated to the execution of buy-side funds with longer-term interests. These six strategies are what short-term traders contend with on a daily basis and understanding their methods is useful.
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correction: Seven. It's called frontrunning.
Call me crazy but how about this. Make it illegal to use anything but a human using his finger to make a trade. No automated trading. Out of my gourd right? Thats calling for a tear in the fabric of reality? Someone would have to allocate only 50 million for that next Sotheby's auction. God help us all.
the techniques cited are what we *all* do all day long in principle, but not in equal access. the problem isn't wanting to force humans to be pressing the buttons, it's the liquidity providers' (a very exclusive club, BTW) access to price action before actually having to execute. Therefore they know, before the rest of us know, what 'cannot be known' without our committing to our trades.
the HFT part of this is where they can poke the market as a probe (normal buy order or sell orders), but unlike us sheeple, when they find sellers/buyer orders to match, they can cancel those orders before they actually commit/fill. now *they* know something nobody else knows, with no risk to their capital... and can use that info to their advantage. i think 'flash orders' was the term to google.
all of this happens in micro-seconds, and works in both directions.
in simpler terms, certain HFT "club members" can essentially "see" pending orders (including limit-buy and stop-loss orders) that the rest of us cannot - but only club members, and at virtually no risk to their own assets.
not that that that would give them any market advantage...
oh - and the market is up today? again? on low volume? and look!, record earnings this quarter...
can i hook my network to the same exchange? does DSL come in OC-3 data-rates? heh.
This chart is a great example of what's wrong with using the term "High Frequency Trading" to mean so many different things. To me, true HFT strategies are those strategies which wouldn't be viable without the ability to enter and exit a position in under a second.
Three of the strategies mentioned here -- Filter Trading, Momentum Trading, and Technical Trading -- usually don't even involve sub-second holding periods.
Market Making has been an essential feature of exchanges for decades. Its nature has changed, but it's nothing new.
Similarly, Statistical Arbitrage goes back decades. The difference is that the window of opportunity has been whittled down to milliseconds. Is it a bad thing that price inefficiences only exist for milliseconds now due to HFT?
Rebate Trading is more of a result of changes in the pricing structure (i.e. maker/taker pricing) at exchanges than sub-second holding periods. Rebate Trading has replaced traditional market making.
And one of the few strategies that is unquestionably HFT isn't even mentioned here: latency arbitrage.
"To me, true HFT strategies are those strategies which wouldn't be viable without the ability to enter and exit a position in under a second."
True. The problem, IMHO, is the exchanges paying the 'market makers' for providing liquidity.
Why do you think that exchanges paying people for providing liquidity is a problem? Why is having market makers profit from a spread a better model than paying people for "making" liquidity and charging people for "taking" liquidity?
Full disclosure: I work for one of those exchanges and I'm genuinely interested in your opinion.
agreed. exchanges and central banks incentivizing faux-activity to promote the illusion of current "fair market" "values." at least the CME, NYX etc. haven't extended themselves into emerging markets, oh wait.
enthusiastically agreed that the generic catch-all term of HFT is a crappy one, casting way too wide a shadow; but that is an issue of branding, stigma and a lack of public information.
the author here is a full-time trader, forced to interact with various iterations of 'HFT' on a daily basis. his aim is not to write a book on HFT proper but rather to outline the chief strategies therein for a wide audience of individual traders. he is certainly helping to make practical distinction, not blurring an already much too fuzzy line. and while Tyler continues to lead the charge against egregiously criminal HFT activities, charts such as Brandon's above provide factual information about 'other' practices that are unfortunately / incorrectly lumped alongside the catch-all term of 'HFT'.
and though tri-tiered latency arbitrage does unfortunately represent the forefront of 'evil'-HFT, as humans without co-lo'd server farms we must use the tools at our disposal to trade ~ three broadly classified areas therein being Filter, Momentum and Technical trading. each are wholly technical in nature, with differing methodologies and stylistic approaches.
what is called 'HFT' is really uber-high frequency; latency is a completely different beast from all other approaches and avenues. spoofing, sub-pennying, information arb and flat out front-running measured in milliseconds (where 97% of that 'time' is solely the product of signal relay-delay between global variable functions & confirming conditionals) is wholly egregious. no question about that. computing power for the sake of computational circumstance is a-ok; co-lo'd server farms with virtual license to steal six-ways-to-sunday ain't kosher.
there 'ought' be a different descriptor for the grouping of medium / high frequency human traders (which is where 'most' experienced, systematic traders fall under) but then again, what can we really expect when Jimmy Jones is still pitching tv infomercials for stock guru's who teach people "how to become a day-trader using technical analysis."
Question: Are commissions paid on each trade?
If so, and many of these occur per second, wouldn't that be a huge number?
Skynet will hunt you down and trade against your positions for publishing that.
Thanks.