How I Built a Startup High Frequency Trading Firm
howtohft.blogspot.com
howtohft.blogspot.com
does this blog remind anyone else of one of those "how to make money fast at home" advertising thingies you see in pop ups?
I like the post-mortem meme sweeping startup world; I find them very enlightening.
Egg 1: trading lots of shares (check, tens of million shares daily)
Egg 2: track record on trading strategy that is scalable and profitable (probably was profitable then stopped once volatility disappeared or the market changed, but definitely scalable, trading tens of millions daily).
Chicken 1: Volume-based discount (we don't know for sure, but tens of millions of shares daily is enough to qualify as a high-tier class on many houses)
Chicken 2: Clients (check, billion dollar hedge fund)
True: Egg 1 and Chicken 2
Probably true: Egg 2 and Chicken 1
"Fresh out of college... trading tens of millions of shares daily for a billion-dollar hedge fund." "The mid 2000's when I finished college..." "My firm finally went out of business in 2010 for a number of reasons."
He did say more detail was coming in future posts. I'm not sure what you're expecting; this doesn't seem oriented towards developing models or trading strategies per se, but rather all the ancillary things that goes into building a HFT startup, including the execution of those strategies. Which was what the second post was about.
That is far more useful, since there is enough How-To-Be-A-Quant literature out there.
Companies in need of capital and broader ownership 'go public' to secure funds and take in investors with a monetary and intellectual interest in their business model etc.
(I know this is a 'romantic' view of the stock market)
High Speed Trading does NOTHING for owners, investors, the company or anyone but the traders themselves. Essentially it works on the same principle as a the 'worm' in Office Space (geek reference) attempting to make very small amounts of money in mistakes, miscalculations and very short-time discrepancies in valuations of financial instrument.
I feel very old voicing this opinion but it just seems like the very edge of greed and 'money for nothing' attitude to create giant data clusters aimed at just nibbling away at the corners of financial markets for profit.
Just to continue this discussion a bit further, how are these mistakes supposed to be corrected otherwise? :)
That being said, it can, and almost certainly has, been abused. I am thinking mostly of 'quote stuffing'.
Also, there is the potential for a feedback loop between trading systems that can send prices to levels that are way undervalued or overvalued. I think overall these fears are probably way overblown but I suppose they do exist. Basically, I think it HFT fine but I hope the SEC is catching up technologically to prevent both catastrophic situations in time and bad actors from taking advantage of structural exploits.
A very basic question: if you wanted to buy 100 shares of MSFT right now, who takes the other side of the trade?
High Speed Trading does NOTHING for owners, investors, the company or anyone but the traders themselves.
This is a false statement. Owners, long term investors, etc. value the option of immediacy. That is why options have intrinsic value. If there were no market makers (speculators), it would be almost infeasible to enter or exit a stock position without considerable cost. HFT market makers actually decrease the transaction costs of long term investors by tightening the bid-ask spread (for hundreds of stocks, the spread is as tight as legally possible: 1 penny).
A common misconception is that high frequency trading is like operating a money printing machine. This is also false. High frequency traders take on risk every time they take the other side of your trade. On average, if they're intelligent, they'll be compensated for that risk. In the end though, there is no such thing as a risk free trade. Even pure arbitrages have risk inherent in executing all legs of the trade at once. Pure arbs are very hard to build a business off of in practice.
One other point I'd like to make is: what is the point of this ridiculous speed? If you're confident in your ability to adjust the prices you're willing to buy/sell at very quickly in order to react to new information, then you can make tighter markets. Making tighter markets (if you're intelligent and fast) is desirable for the market maker because it allows him to capture more order flow at what he believes is a fair price. Tighter markets also lower transaction fees for end users of the market. In reality, all this HFT cuts profits away from all market makers (per unit), especially compared to when markets were insanely wide back before electronic trading.
Greed has nothing to do with it, and as I pointed out before, "money for nothing" is the complete opposite of what's going on. High frequency traders take on risk in the expectation of some small payoff. The compensation (on average) is the natural result of risk transfer. I don't think high frequency traders are greedier than people in any other business. Are they profit motivated? Of course. But so is Wal-Mart, GE, and almost every person doing a startup. I think "greedy" is an unfair assessment.
The Efficient Market Hypothesis seems to break down over the long term when the market is efficient in the short-term, because bubbles can easily develop - and so genuine pricing information gets diluted by complex emergent effects, destabilising the market (in crop futures markets, for example, this has lead to artificial food shortages, and it probably played a role in the Financial Crisis).
I think a transaction tax is the best way to reduce excess short-term market efficiency; if you have to pay the government a small percentage of each trade, people will trade less frequently and only on better quality information.
I'm looking for some tutorials and may be strategies to make money from Forex. Anyone know a good blog or book?
http://www.amazon.com/Quantitative-Trading-Build-Algorithmic...
Sounds like just an intro. Some of the other books Amazon recommends on that page might be worth checking out too.
More seriously, as someone who trades for a living, here's what I've learned (the hard way, i.e., losing my own money makes for expensive lessons):
Forex is one of the most volatile markets on this side of the "Milky Way". Only Commodities (Natural Gas for instance) beat it. The average range of noise (noise, random movement, not signal) is enough to loose huge amounts of money.
Forex brokers offer a stupid amount of leverage. 50x, 100x (and even 200x) leverage is not trading. It's gambling. Which means that if you want to stay in the game you need a lot of trading capital (want to make a million trading forex? Start with a billion).
Depends on your experience but, if you don't have a lot, start with stocks (CFDs, for instance) or indexes for deep markets.
If you still want to go the "Forex route", some reading material has to include: Macroeconomics and Monetary Policy. You don't need a PhD on it, but you do need to grasp the basics of interest rates, currency parities, inflation, growth, central banking, capital movements.
Statistics. Again, no need for a PhD, but the basics are useful/helpful.
Money Management. People want the "holly grail strategy indicator" that gets you 9 out of 10 profitable trades. That's a myth. The best traders in the industry usually lose 2 out of every 3 trades. The point here is: you make up what you lose with the winning trade. So the real point is not how to enter (though it's still important) but to know when to "exit" the trade.
Basic trading strategies. Some apply better to Forex, other to Stocks, but in general the same principles apply.
And do take care: the Forex market is full of "Win x times your inicial amount in n days with our y fullproof strategy/platform" scammy proposition.
http://howtohft.blogspot.com/2011/02/how-to-build-fast-limit...
Just look at the domain: "howtohft.blogspot.com".
1) Post fake "how I built X startup to do X" post, add juicy terms like "bootstrapped" and "college".
2) Post on HN
3) ????
4) Profit.