Also, is 130k really a huge loss? I run HFT strategies, and while it would definitely be a big loss even for one of my strategies, it wouldn't be a phenomenal outlier. How small was this guy trading before?
I'm glad you laughed, as I tried my best to make it humorous. You're absolutely right, it is total amateur hour. Sometimes I can't believe this is how I make money! Price-action based trading can be so intellectually vapid. And that is why I feel so blessed to have this job and to be able to make it work. I don't try to pretend to be anything more than what I am. I don't make 7-figures but I make consistent, steady, low drawdown thousands that add up to a 1%-er income. I'm only 25 so I like to think there's room for improvement too. If you're doing better than that, congratulations.
130k is just a number in the middle of the drawdown that I arbitrarily referenced to give some context. You'll have to read the rest to see what the final number was when the full loss was realized.
Well, I'm getting "stop submitting too quickly" msgs and I'm sure there will be no shortage of people telling me this will never work, it's all random, no edge when backtesting, etc. So I'm done debating for the night, best of luck to you guys, hope you read part II!
1) Are there places / markets that ST Arb and HFT won't go because it's too illiquid or too idiosyncratically volatile?
2) Are there edges so small that you won't chase?
3) Are there one-off opportunities (2010 flash crash, UST flash crash recently, etc.)?
4) Is there a set of strategies that manual traders know (which they should probably transfer to HFT strategies) that the HFT/ST arb shops don't know?
I think the answer to all of those questions is "yes". They probably take on a lot more risk per trade. They would also be better served by automating their strategies. But I think it's not as cut and dry as you state.
Each individual trader might be "amateur" -- but the firm as a whole might end up with a decent return / risk.
We have 2 spectrums for all known strategies (the amount of gold in the veins is another question):
* Strats that are automatable vs non-automatable.
* Strats that are unique (known to a few) vs well-known strats
Automatable:
Well-Known - This is where HFT becomes an engineering problem. It's also the easiest business decision to make. I hire some engineers + buy some computers and I can mint some money for a time. This is also a race to the bottom -- where there will be some easy money to be made at equilibrium, but it'll be unsustainable for HFT firms at the margin. I would say manual trading has 0 impact here -- and they'll likely get crushed.
Unique - These are strategies that only a small set of firms know. Eventually these strategies become well-known as people move around companies. There must be some secret strategies, though. Otherwise, why would Rentech & Citadel sue their own employees (unless we are to believe Simons & Griffin are simply vindictive). I think manual trading could work here if there is a strategy that simply haven't been discovered by the HFT & quant. It's might be hard, but not impossible. These secrets aren't anything you'll find online or in some trading forum, though. Or perhaps they are, but no self-respecting quant would go there (lest they become laughing stocks in their fund).
Non-Automatable:
Well-Known - PE is an example of one. In terms of liquid assets, maybe penny stocks are another area. If a group of "manual" traders couldn't get permission to delve there... it's probably even harder for a quant fund. It's also the territory of insider info and rumors.
Unique - Maybe being there for the liquidity crashes I stated earlier is a good example. But there are certainly non-automatable unique strats around.
Depending on how much gold you believe is in the veins, all strategies are heading towards automatable & well-known. However, in the interim, I can see manual traders still making money (even with a sharpe > 1). In fact, I would say there are well-known strats you can execute manually (in say, your PA, that return sharpe ~0.8ish).
Is it less efficient? Yes. It is also orders of magnitude easier to get into. You need PhD mathematicians, computer scientists/engineers to build real hardcore HFT systems. The manual stuff takes what, a high speed internet connection as its infrastructure.
Suppose you do want to market make on a pair A,B. You notice they are out of whack so you open an ALO order to sell A and buy B. The market moves and both stocks go up in sync. You've now opened a short position on A with no offsetting position in B. Oops.
If you want to save part of the spread, you can often do add liquidity, then the minute you get a fill you can cancel and take liquidity on the other side.
I've tried this but I haven't made it work, though my strategies are pretty amateur (I only trade as a hobby).
Amateur hour? The traders could be monkeys, since it's only the salesman who matter.
When you bet other people's money, the strategy is fairly simple: Go long (or short). Somebody at another company goes short (or long). One wins, one loses (it's guaranteed) and the winner gets a percentage of the "win". This is why they love volatility so much, as it determines the size of the profits, even in a zero-sum game.
Sure, mathematicians can beat the house. Doesn't matter to these guys. Other people's money? Flip a coin.
There are no sales reps with prop trading, it isn't an agency.
A single strategy is easily capable of losing that much. Any bond futures or cash bond strategy post-FOMC. Any equity index futures strategy during Twitter "flash crash". Any strategy taking large size in a big future during early-mid October this year. Any strategy taking large size in a big future during August 2011. Any Nikkei futures strategy right after the recent QE announcement from Japan.
All of those are easily capable of dropping 130k in a day.
But... now that I've examined the facts, I admit what you say may be true. Are HFTs really operating in sub-microsecond time for trades nowadays?
The "serious dough" part is a little harder to quantify. I've not looked into NASDAQ specifically but server colocation is usually on the order of a couple of thousand dollars a month. This is a drop in the bucket compared to the real costs of a professional trading outfit (namely employees and margin/risk costs).
Anecdotally, it's also almost exactly what I paid for a tier 1 co-located server at my first job in a startup during the first dotcom boom.
And the crazy expensive switch is guaranteed to be the cheap part. Now add the all the ip required to make that fpga smart enough to place orders, and you're talking huge bills in dev hours and third party licensing.
http://www.bittware.com/fpga-dsp-applications/applications-s...
Want to work in that field? Know VHDL/Verilog, Linux, networking down to the wire level?
Tl;dr even if trades happen in ms, you still care about us.
No one was happy about it, but it was part of the job and considered reasonable volatility for a portfolio of our (middle) size. While I wasn't a fan of Consz's tone, his numbers check out from my personal experience at a trading firm. Not HFT, but in the end it's all about return on capital and the P&L's should be similar.
I'm skeptical that there are really that many players out there who are in a position where a single microsecond would really make a difference. There are definitely companies out there in this situation, but not many.
So for instance, I've worked on systems that were "fairly" latency sensitive (~tens of micro seconds in latency budget), not very high volume (100s of trades a day) and had virtually no human interaction. I've also worked on systems that were "not very" latency sensitive (co-lo'd but never actually measured tick to trade times, which were assumedly in the tens of milliseconds), high volume (10s of thousands of trades a day) and had a team of clerks looking over it.
I would call both of those systems HFT systems, but some people wouldn't consider either of them HFT.
In both of those cases a 130k loss would be an outlier, but not a phenomenal one. I've worked with people who have lost millions of dollars in seconds and it blew up the group. I've met others that million dollar swings on a given strategy was par for the course (and there hedge funds doing manual trades that won't notice that trade in a graph).
That is, the world of computerized trading is pretty varied. If you are going to say someone is or is not HFT, let them know what your definition is first, as that is the only way the discussion can move forward.