Comment by lifeisstillgood | Hacker News Reader

Comment by lifeisstillgood | Hacker News Reader

lifeisstillgood

Well apart from "there goes October, dang I had real work planned", I am really welcoming this game. I would normally have jumped all over their compiler "tree", but I have been in my first Finance contract this year and I have not yet understood HFT.

Edit: this post got longer than planned - apologies - but this HFT / algo thing has been bugging at me for ages and this seems a likely thread for knowledgeable folks.

The references to Flash Boys worry me slightly - Lewis sold a false scenario there - it's pretty clear that no fool is going to see Bob buying a million Apple shares in London, then zip over their speed of light towers and front run Bob in Frankfurt for another million Apple shares. Who knows if Bob wants a million? Flash boys it seemed relied too much on a protected type of trader (market maker) getting roasted by the emergence of real competition - the "algo" traders.

It seems incontrovertible- equity market spreads have fallen by about 5/6ths in the past decade (no wonder Lewis' hero trader thought someone was stealing from him) but ... How and Why?

what algo traders actually do is a bit of a mystery to me.

The basics I kind of understand :

There are correlations between shares - spot those and you can make money. Let's say oil goes up, car manufacturers will go down by some amount. Short them and make money. The first time people did this they probably thought they had found a money printer. But then someone else starts playing the same algorithm - so you have to get your orders in taste than that guy - pretty soon you are worrying about the speed of light over glass.

But other correlations exist and get spotted and tried out and ... Well it seems a bit of a weak business model to me to live in P of .95.

So the business model of HFT is a bit weird, and the way their actions feed into reduced spread / liquidity is a bit unclear - but anyway, I look forward to totally screwing up my social life in a few weeks.

Anyone who can enlighten me, please shout.

Trust me, Patrick agrees with you about Flash Boys. If you haven't yet, read the followup/critique book he cited, even if you haven't read Flash Boys. It's fantastic and chock full of interesting technical details. It's way nerdier than Lewis' book.

That's the "Not so Fast" book? I actually read that before flash boys. Somehow the narrative from flash boys had penetrated the NYT/Economist meme-spreading network and I had accepted it at face value.

However the microstructure book looks ... Deep - but I guess I need to decide if I am in or out :-)

It is, as I'm fond of saying, The TCP/IP Illustrated of Money. As with Stevens, it's a bit outdated, but still the best reference.

Well I will treat it as I did "TCP/IP illustrated" - buy the whole thing, read most of the middle one and keep it on the shelf for a few years nagging at me guiltily.

I have read Flash Boys but not the books written in response.

How do the other viewpoints explain why the IEX exchange was created and designed specifically to stop HFT? That is the central narrative of the book, and in Lewis's telling it makes complete sense as a way to save the common man from the evil HFT traders. But if Lewis got it all wrong and HFT is perfectly fine, why would a completely new exchange be set up to stop it?

There are hundreds, probably thousands, of little exchanges nobody has ever heard of. Why set one up to "combat HFT"? Because if you can convince companies to trade on it based on nebulous "anti-HFT" features, you can collect fees without having to compete with the major exchanges, who both bid prices down and also have a 100:1 advantage in engineering and support staff.

Believe it or not, that's not even the "cynical" answer.

There are about 40 active registered ATSs for trading US equities. It's a high number but it's not thousands.

There are many multiples more private exchanges, trading all sorts of electronically tradable instruments. I wasn't referring simply to stock exchanges. I was making a point about the return on investment you can get from developing a trading platform.

You should read the other books, but the short answer is that IEX was created not to save the common man, but to save the big block hedge fund traders.

There is a natural and good competition between HFT market makers who provide liquidity and big block traders who consume it. IEX is purpose built to advantage the big block traders at the expense of HFT market makers.

Note: neither side in this is good or evil, they are just natural opponents.

What I would say is dodgy is presenting yourself as "for the common man" when what you are doing is serving the common man up to hedge funds.

A few years back there was a HFT guy that posted a few blog entries describing (and defending through it's liquidity creating properties, IIRC) HFT setups. I don't have the article, but I imagine both tptacek and patio11 (and a slew of others) have a good idea of what I'm talking about, and may be able to dig up a link. You might find it interesting (if it's not already entirely covered by Flash Boys, which I haven't read).

Was that HN's own yummyfajitas?

https://www.chrisstucchio.com/blog/2012/hft_apology.html https://www.chrisstucchio.com/blog/2012/hft_apology2.html

Yes! I can confirm that from the name alone, now that you've reminded me. :)

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