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Comment by Animats | Hacker News Reader

This is short-term trading. "Every two seconds they predicted the average price movement (on OKcoin) over the following 10 seconds. If the price movement was higher than a certain threshold, they bought a Bitcoin; if it was lower than the opposite threshold, they sold one; and if it was in-between, they did nothing." I don't see them allowing for commissions and fees.

OKcoin, at peak, had a trading volume so high that it's generally considered to be fake - the exchange operators manipulating the price. What this group at MIT may have done is reverse-engineered the fake trade generation algorithm.

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> What this group at MIT may have done is reverse-engineered the fake trade generation algorithm.

Just to be clear, there is nothing wrong with this. Infact, sitting around and reverse engineering what other traders are doing is what many funds do. I'm in this group so I"m happy to answer questions if anyone has any.

> Every two seconds they predicted the average price movement (on OKcoin) over the following 10 seconds. If the price movement was higher than a certain threshold, they bought a Bitcoin; if it was lower than the opposite threshold, they sold one; and if it was in-between, they did nothing.

To be clear, this is the core of what most HFT systems do these days. Consume many different factors, give each factor a decay factor to tell the system when the signal goes stale and distill them all into a value that says, but or sell or stay.

It's worked well for Renaissance Technologies:)

http://en.wikipedia.org/wiki/Renaissance_Technologies

> Just to be clear, there is nothing wrong with this. Infact, sitting around and reverse engineering what other traders are doing is what many funds do. I'm in this group so I"m happy to answer questions if anyone has any.

His point is that the posted trades were not in fact tradeable.

Where can I read about the actual strategies used? Perhaps some that aren't used any more. I've read an absolute ton about how to set up a trading system with hadoop and cassandra and blah blah but that's all pretty trivial. I'd be more interested in the strategies... this decay factor is interesting. Where did you find out about this?

A simple signal would be more shares bid than offered at the inside market. Imagine a market with 1000000 shares bid at $4 and 100 shares offered at $4.01, it's more likely to tick up than down in the very near-term. This isn't tradable though since the predictions aren't large enough to overcome the spread and you can't expect to join the 1000000 share bid and trade when it's good (the 1000000 shares that made you think it was going to move up all have to trade or cancel for you to trade, not looking so great anymore).

Real HFTs use other features of the order book, movements in related products (maybe a move in oil futures in the last minute impacts the price of an airline stock in the next 10 seconds, etc.), and so on. The signals are not really that complicated, but competitors eventually converge on knowing the same signals and compete them out of existence/profitability. Also, how you execute around your prediction matters just as much if not more.

http://queue.acm.org/detail.cfm?id=2534976 and http://queue.acm.org/detail.cfm?id=2536492 have some more examples. http://www.decal.org/file/2945 also has some ideas for old signals that probably won't work anymore.

Plus, from a quick glance, it looks like in-sample data with optimisation of parameters around scaling and holding periods.

Fee-less trading on in-sample data. You can get the same return on futures markets with that.

This is how I trade currencies, usually a Yen pair on a 30min timeframe. It does work and money can be made, but it is a lot less profitable then they claim (on the Yen pairs I trade). Generally, a very outsized event can erase quite a lot of gains. Even smaller ones can make you give back a bit (such as NY ebola news or surprise BoJ news). Over time those commissions/fees add up. Still, over time I would bet they could be profitable on this strategy on some timeframe. Of course, just profitability is a very different claim than their own.

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