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HFT represents a spectrum of strategies when described in the news. For the most part, I would argue you are describing a "quant trading shop" and would avoid the HFT label since it doesn't apply (HFT really means that you're gaming Reg NMS).

The type of shop you're describing might be able to compete, assuming you've identified a niche product with a margin that will still exist in 6 months. Backtesting is useful, but it is so bloody hard to accurately incorporate liquidity that I place little value on simulated results when it comes to short duration trades. You really have to jump in and test live, which represents the largest barrier to entry: established shops have the infrastructure & capital to try new ideas. When I was trading, we tested half a dozen new ideas every month in addition to "production trades".

High frequency, IMO, should really be used to identify hardware intensive strategies co-located at the exchanges and utilizing telecommunications strategies not readily available to the market. For example, FPGA and dedicated microwave towers.

Lime is excellent, btw, but you really need some volume to justify them. For options at your level of capital, Interactive Brokers and long gamma trades look more attractive to me. Many would disagree and people do starve waiting for long gamma, but my memory is biased after seeing the little group next to me lose $40m in a week on a stupid short gamma "sure thing" based on back tests and other such nonsense. Oh, what a fun time that was.

When you say "HFT really means that you're gaming Reg NMS", are you saying that true HFT strategies all rely on multi-venue arbitrage?

Reg NMS requires that brokers fulfill orders at the lowest possible rate first. So if an HFT shop sets a trap for you on one exchange (offering 100 stocks a tiny bit cheaper), your broker would have to trade in that first. The HFT would then front-run you to the other exchanges, buy up what it can, and sell it back to you a bit higher. They can do this because they have lower latency. Add dark pools to the mix and the opportunities become even bigger.

Sure. But, after interviewing a bunch of HFT developers over the last 6 months (because: reasons), the understanding I've developed is that "latency arbitrage" --- which is what you seem to be describing --- is no longer particularly profitable, or the focus of what most "HFT firms" do. Is my understanding broken?

(I am not a trader or an HFT dev.)

No, the market evolved as it always does. But, so much of the "HFT is evil" belief stemmed from the subprime era and with respect to fair play at the time, you can't ignore the impact of NMS. I went back to grad school in 2010 and had to be careful to whom I told my background, else I'd get roped into some morality debate with a 26 year old Occupy activist who didn't know what a market order was.

Nowadays, I really don't see much edge in trading at all.

I would love to know what those traders you've spoken with think is profitable. I see my old bosses at Rom near the CME almost every Friday and I haven't heard a positive line from them in 5+ years.

Two Sigma Compass (systematic equity) seems to be doing alright (up 30% last year). DE Shaw's main fund is pretty consistently 8%/year.

If that impresses you, you should definitely go into trading. ;) (How much is the S&P up?)

Volatility matters.

I've been out of the industry for a year now. But when I left, simple latency arbitrage strategies were not profitable. They became an arms race.

Simple latency arb strategies are totally an arms race now, with very high barriers to entry. That does not mean however that latency becomes unimportant - if you are a market maker you're essentially playing the same game in reverse - you want to move your quotes out of the way to avoid getting your lunch eaten by those aggressors.

Latency arbitrage is pretty much impossible as a newcomer and many firms are getting squeezed out of that particular opportunity. Think Jump, KCG, and Citadel...Jump/KCG both share satellites across the US...read more about the radio dish networks here: https://sniperinmahwah.wordpress.com/2014/09/22/hft-in-my-ba...

This has been pretty thoroughly debunked. I don't really think this ever happened. There is just way too much uncertainty and risk to ever get an edge.

Remember HFT worship at the alter of the law of large numbers, meaning they get a 51% edge and ratchet up the frequency. So a typical strategy might be 48% profitable, 40% wash and 12% unprofitable.

I took a stab at explaining why here:

https://news.ycombinator.com/item?id=9191473

If you can walk me through a situation where this works then let me know, because Michael Lewis certainly tried and failed:)

0+ orders on the other hand, now that was a profitable strategy while it lasted:)

0+ orders on the other hand, now that was a profitable strategy while it lasted:)

Would avidly read the comment adding some detail to this. :)

The book you link to in that comment (_Flash Boys: Not So Fast_) is really fantastic. It strikes me as being written in a style especially congenial to nerd message board people like me: detailed, episodic, point-by-point takedown. It's like a very long Reddit comment, and I mean that in the best way.

EDIT

Here is the picture I was looking for: http://www.nanex.net/aqck2/4666.html

Here you can see which exchanges use the SIP for their data feeds. Guess which dark pools the HFT guys hang out at:)

Check out:

http://www.zerohedge.com/news/dark-pool-truth-about-what-rea...

and

http://www.zerohedge.com/news/dark-pool-truth-about-what-rea...

and this nanex diagram shows pretty much all you need to know about latency arbitrage.

http://www.nanex.net/aqck2/4599/SIP,%20Direct%20Feeds,%20and...

Long story short. RegNMS said people have to get the best price for their order. Now in a distributed system, which the US fragmented markets are, you know you can't know for cetain what hte state of the world is.

warning simplification ahead

Each market and dark pool has to trade at the price currently listed by the SIP. Now the sip is old and slow. Exchanges offer 2 prices sources,

- the SIP as legally requried

- a direct feed, which serious traders use.

The direct feed is faster, so by the time an exchange (A) reports a trade to another exchange(B) via the sip, the HFT guys who own their own microwave radio lines have notified their computers at exchange B, and moved their orders.

Almost as if they can see forward in time:)

Thanks for curating these articles from 2012!

I was curious about microwave radio lines so I did a little digging[1]. It appears that microwave radio can double the speeds of fiber. Though the towers are limited by distance (max ~60mi separation), HFT shops buy/rent microwave tower networks connecting cities. For example, one HFT firm owns a network of ~30 microwave towers connecting NJ to IL that transmit 1.6 ms faster than fiber.

[1] http://www.bloomberg.com/bw/articles/2014-07-24/high-frequen...

> Thanks for curating these articles from 2012!

My pleasure:) I find there is way to much secrecy around algorithmic trading, and I do what I can to shed some light on it for newbies like your self!

There is an interesting series of blog posts about microwave towers used in HFT entitled "HFT in my backyard" at http://sniperinmahwah.wordpress.com

Several of the individual posts were submitted to HN: https://hn.algolia.com/?query=HFT%20in%20my%20backyard&sort=...

Thanks!

I see your point about the risk, but is there really that much activity in most stocks that getting to the top of the sell pile would be a large enough issue? As I understand some order types were more or less designed to give HFT an edge.

Although I suppose the profits to be made by any strategy dry up pretty quickly as more shops discover it, so it does make sense to me that this doesn't appear to be done any more. I mean, isn't that what worked a few months ago doesn't work any more is the only thing most people posting about HFT can agree about? :D

I have no experience in electronic trading and my knowledge of it mostly comes from HN posts and - as you guessed correctly - Flash Boys, so please forgive my ignorance

> As I understand some order types were more or less designed to give HFT an edge.

And some order types are more or less designed to give large block traders an edge.

Most of the latency game you read about is not getting to trade, its getting the opportunity to cancel your orders. A common misconception is that HFT groups are acting as middle men. They aren't. They are the counter parties on all the exchanges, they are just updating what they are offering faster than others.

He could be saying but if so its not true. RegNMS trading is a thing. Latency arbitrage is also a thing. There are also a wide variety of strategies that may exploit the idiosyncrasies of a specific exchange. Multiple venues, while useful and common, are not needed in all HFT strategies.

I would argue that the HFT that gets all the negative press are those systems taking advantage of Reg NMS. I think the regulations that caused it should be removed. If you're looking for a black & white definition to satisfy the age old quest to define high frequency trading, you could pick worse.

There are other strategies that get a lot of bad press, of course, but they are not novel with respect to strategy, only speed. Deception is par for the course. And sometimes, products are just poorly designed. Leveraged ETFs, for example.

Hello fixxer, thank you for your reply.

My understanding is the reason you advocate for long gamma vs. short gamma because unhedged short gamma trade (e.g., short straddle) could cause theoretical unlimited loss. Long gamma trades like long straddle or long option hedged with delta-neutral stock, you are facing daily theta decay and you are betting for either a rise in implied vol or realized vol.

However, the missing ingredient/secret sauce is (1) you have to figure out at price point you're going to take profit in your scalp; and (2) when implied volatility is considered cheap for the particular ticker you're trading. Much appreciated for your insight and let me know if I'm missing anything.

You've got some model of richness/cheapness. From that, you have your raison d'etre and, when combined with your view on utility and expectations, a money management strategy. Putting all that together is your business.

My only opinion on the matter is that you should try to stick with leading from long gamma. You can sell vol, but you'll survive longer if you keep net long gamma. As soon as you get gamma'd, you're out of business. It can go so far against you before you even realize what happened.

There's a fairly big question of what human capital comes along with this. You will need some guys who are good at low latency programming.

Some strategies that I've seen also depend on having good agreements with brokers, ie you may see an opportunity in the data, but the costs of trading tip you into the red if your guy is margining you in a different way. I don't know what Lime et al charge you, but they aren't a likely name among the people I know.

There's also a question about what exactly you'll be doing in those markets. There are guys who make money market making options over the phone, without relying on colo for anything. Sometimes they'll have a quote machine that needs to be quick to pull, but they don't see it as anything other than a bit of extra money. Other options guys are totally different, relying entirely on speed to make their dough.

Also keep in mind you are only competing with HFT in as far as what you're doing is similar, ie there's a high chance you'll both want to grab the same trade.

I would say that even options/futures/and other products markets are just as hard to market make compared to the equities markets. In my opinion, you need some sort of edge not through hardware but through your model or your market outlook, combined with market-making/hft/statistical-arbitrage in order to be profitable and compete.

1) Capital in the magnitude of >$500k seems reasonable for a small operation

2) Lime Brokerage (a friend has started a hft strategy with a professor on campus and has tested out lime) is okay, I'd look into some other execution services as well

3) Yes you should be backtesting on tick-level data from multiple exchanges ideally. Be wary of lookahead bias and try to build some sort of execution model to account for how your executions might actually be filled and how your orders might affect the market microstructure

Ultimately, I wouldn't rely on pure hft and latency sensitive strategies...latency is always important but you should try to find your edge elsewhere.

This is something that comes to my mind every time there is a press release talking about HFT and the milliseconds advantage they use to make a profit.

I would love some comments from a seasoned HFT (tech) guy.

There exist in the trading space entities that look essentially like what the OP is suggesting. They are called prop trading firms, or quantitative trading firms, etc.

There are even entities that act like incubators for those entities.