Algorithmic surrealism: A slow-motion guide to high-frequency trading

> This is one of the better overviews of HFT I have come across.

Really, I found it to be long on words and almost completely devoid of any content what so ever.

I mean this in all seriousness, What specifically can one point to in this article that has any actual content and isnt' just a collection of links to other sites for common definitions.

At no point did the article actually say how HFT firms design their systems or even how their algorithms might work.

> t hits on all the points I consider to be important (having worked in HFT for over six years)

I too am in the industry:)

> the perception of constant "war".

It's not a perception though. Short-term trading opportunities are zero-sum. To win trades you either must undercut your competitor by trading for less edge, or beat him to realizing the opportunity by either predicting better or getting faster, usually some combination of all those. All of that means effectively working your ass off to take food off another man's table before he takes it from yours. That probably happened less in the pit days because there was a camaraderie between the locals facing off against paper. Nowadays I never see the guy I'm trying to beat into the queue. We aren't going out for beers. It's just business.

I'd say being successful in this business feels less like war and more like riding a bear. You never get to rest and there's a constant fear that someone, somewhere is hungrier and smarter than you are, plus the bear might snap and eat you.

>Traders are generally hired for the trading strategies they have been exposed to and the potential value within. There are very few individuals who create new and successful ideas.

The better firms tend to hire people out of school and train them up so they can do novel research. It's a smarter long-term play. I agree that few people are up to the task, even the best and brightest. It does amuse me that some guy a couple blocks away probably runs a super similar model with a different cool code-name and we battle each other for years in Sisyphean fashion. I'll never even know his name. A zipless fuck.

I don't like the author's characterization of HFTs as "parasites." Someone can be a middle-man and still add value. Market users don't need to trade with HFT dealers. They can easily work their own orders or wait around in a block trading facility hoping to find a natural match instead. For most of them, it's a bad trade-off. Even though the HFTs make money on average, trading with them costs less than becoming an expert in market microstructure, finding good hedges, facing non-execution risk, etc. CarMax makes money when they buy/sell your car in the same way, but it's usually more convenient or cheaper than doing it yourself.

In a way, HFT is like insurance in that they only provide a valuable service when they lose, but overall people prefer paying for certainty. Almost every winning trade I make is one where two natural counter parties could have found one another had they waited a short period of time or were in the right place/product, but I lose on a huge % of trades as well. If HFTs weren't in a competitive environment or if one firm had a clairvoyant pricing model, this would be problematic but unfortunately for me, that's not the case.

> One facet which always fascinated me was the dispersion of trading ideas, including the code behind algorithms and any sort of research. Successful ideas are constantly being updated, adapted, and often times stolen. Traders are generally hired for the trading strategies they have been exposed to and the potential value within. There are very few individuals who create new and successful ideas. The rest are just copying what they have been exposed to and hoping that it sticks when they throw it all the wall, which eventually runs each successful idea into the ground as the value being captured disappears quickly.

So exactly like Silicon Valley?

Since people still make money trading manually, yes, there's room at all levels.

Yes, there’s a "frequency spectrum" of sorts and HFT is at the short end of it. Here, your models monitor and react to trading tick-by-tick, and execution speed is paramount. It’s also where you have the fiercest arms race for the fastest systems, colocation, FPGAs, etc. Next up comes what’s often called “statistical arbitrage,” where you have models that no longer look at tick-by-tick trading but may look at what happens at 30-second, 1-minute, or 5-minute windows. Here you have more interesting relations emerge between stocks and the market, e.g., what does IBM do relative to the tech index, or relative to MSFT, etc. (Such cross sectional relationships don’t seem to matter as much in HFT.) Actually stat-arb was the domain where the earliest statistical approaches such as "pairs trading" emerged. Next up come models that trade daily (or less frequently), and here you begin to see the long-short market-neutral relative-value type of approaches, where some quantitative [mutual] funds may operate. Next up will be the traditional mutual funds, and beyond that you have your Warren Buffett’s, etc.

One thing to keep in mind is that the higher your trading frequency, the smaller the price moves you can hope to capture, which limits how much capital you can deploy in your models. This is why HFT models are usually small in size but have high Sharpe ratios. As you reduce your trading frequency, you can expect to capture larger price movements and deploy more capital but you’ll also be exposed to more of the vicissitudes of the general market, so your Sharpe ratio will decline. Market participants usually carve themselves a happy spot on this frequency spectrum and stay there. I don’t know of any firm who is successful at every spot.

Yes. Quantopian.

Not HFT by any definition (unless your definition of HFT is on the order of minutes), but purely algorithmic and data-driven. You can backtest your algorithms with up to 13 years of historical data, live trade your algorithm with paper money, and even link your algorithm to a broker and trade your algorithms with real money.

It's the single most disruptive financial service I know of, and I've had tremendous success with it, even without linking a brokerage account (just checking it daily for trade signals in my super-low-frequency algorithm on paper money).

https://www.quantopian.com/

Where's your value add, your USP? If you're not going to be the fastest then you can't make money as a market-neutral market maker. You have to be able to offer a better price, by predicting the future value better than other market participants.

For the "faster than a human, slower than HST" niche all I can think of is the traders who automatically react to press releases, twitter and the like. If you're getting data that no-one else has and it affects the price, it doesn't matter whether you're as fast as HST. (Of course if you get competitors who are doing the same thing you still have to be faster than them).

Beyond that most stuff happens at human speed - which doesn't mean you can't do market analysis with algorithms, competing with humans. But speed is always going to be a factor - even if we're talking about e.g. a multi-month analyst investigation that figures out that company X is really a massive fraud (there are trading firms who make their business figuring this stuff out), that still becomes worthless if your competitor finishes their investigation a day earlier than yours.

Bad quote, I agree, but it does express how risk management in the HFT world is often short sighted.

Care to explain why? (unethical)

Aside from stating your own skills, employability, and high standard of ethics, your post is lacking useful info about HFT.

last semester a chicago HFT group came to my school (Wisconsin-Madison) and spent a short time trying to tell us why they weren't unethical.

They didn't convince me at all. The gist of what they were saying is that they're merely making the market more efficient. That's such bullshit. The money they're making is surely coming from someone's pocket, and that probably means the middle class day-trader rather than the NYC firms with billions to spend on diversification. Later on in their presentation their tone made me feel that they were so extremely proud of what they were doing. It really irked me.