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HFT for dummies

Posted: Mon Aug 06, 2012 9:27 am
by rhc
A good read over at zerohedge for those interested in the basics of High frequency trading and the impact these kind of trades may be having on market fills & market movements. ... ncy-trader

Personally, I have started to employ stop-limit orders to enter a position whereas previously I would have used a stop order. If I miss out on a trade then so be it. I’m not overly fussed.
Fellow forum member ‘Jez liberty’ produced an excellent series of articles over at his blog that showed (for the particular tests performed) that by using stop limit orders you will miss some winning trades but you will be compensated by slippage savings on nearly all other trades and over the long haul it’s more or less balanced. (again, for the particular tests performed)

To exit a position I still use a stop order but it’s now held in my head.
Of course I run the risk of exiting at a price worse than a stop held in the market, since I’m not watching the screen all day, but I also might be able to avoid the odd price spike through my stop & the subsequent reversal.
A good way to test this would be if price closes below your stop (if long) you simply exit at MOO the next day. You could set up your system in this way and you can see what difference it makes to your simulation bottom line.

These changes have been made by me due to a run of bad fills over the last 6 months or so. When I say bad I mean fills right at the top or right at the bottom of the price bar as well as fills at prices that exist for less than a second.
As I’ve said in a previous post, I do not and never will begrudge any market maker, broker, HFT-er or ‘vampire squid’ his/her fair share of clip or gouge . . . . but Guys, c’mon, it’s gotta be fair.

Perhaps HFT is not responsible for this sort of thing but just in case it is and just in case this sort of thing is destined become the new norm I’ve decided to rethink the situation and use the afore-mentioned tactics.

Has anyone else implemented any strategies/countermeasures to combat this relatively new (and here to stay!) market phenomenon? (i.e. HFT)

Would be happy to hear thoughts/opinions/rambles.

Posted: Mon Aug 06, 2012 12:26 pm
by Moto moto
Rhc - similarly I have modified slightly what I was doing.
My longer term trades are now with established trend followers :), but I am doing more short term trading where you notice slippage quite a lot. While maybe not 100% relevant FWIW the basics are similar - looking for trends and letting them run - portfolio management is not as important.
As such missing a few trades is not such an issue and I find that I use limit orders that often get hit to enter and then stop limit orders to exit. I replay the automation v any manual changes at the EOD.

To date - apart from a few times it seems to about even out - the late entires and exits are made up for the lack of slippage. This is based on 4-10 trades a day in a few instruments (it depends on how early or good the timing is to get a run). (Slowly expanding as I bed some automation issues down). Occasionally you save heartache more often than not and have to be strict about not chasing.
Not so relevant maybe as I dont have any market impact issues yet which seems to be what most Phds spend their time on.
(I recommended Dark Pools about the history/growth of HFT in the book section - a good read to help understand a lot. Especially when you realise that many so far are not really trading but clipping)

I have changed some of my views on the HFT, however I still am a little doubtfull at some of the claims made by detractors.....

eg; From the article on Zero Hedge.....
Garrett seems to complain about HFTs that arbitrage between different exchanges - not sure how this is new or manipulative.
Computer liquidity dries up just before reports - what is new about this - anyone who has worked on a floor knows there a periods when liquidity dries up, or is practically non existent.
I thought also right at the start - "We used traditional fundamental analysis to calculate company prices. Beginning with the July 2011 crash, our strategy no longer seemed to be working. We lost a lot of our clients’ money – nearly 40%. It was brutal." - seems to be a mish mash of blaming the HFT traders as opposed to bad analysis maybe - unless his orders were constantly getting gunned - but shouldn't a value investor have limit orders - without automatic stops??
His solution - "GARRETT: Yes, but I also think it’s possible that companies like PIMCO and BlackRock create their own exchanges and compete to make things fairer for their clients. That would be a viable alternative to our national exchanges, which are losing credibility fast." - ummmm, where did these dark pools and multiple exchanges originate from????
and this one "Pillaging unsophisticated investors is bad for everyone in the long run, so I want this information out in the open." ....thats why I created a system to profit from this????

I am clearly too cynical, but I dont think anything new is here, except maybe instiutionalised insider trading (front running) that has been encouraged by computers =, exchanges and the regulators as opposed to old style market makers (i used to be one :)) (I am also not condoning any of the manipulation etc)

- IMHO the real risk if the playing field was level still remains a contagion feedback loop like the flash crash, manipulation and hackers - otherwise it seems the same game, just different players, tighter spreads, less costs and more liquidity for smaller players. (the larger ones might see it differently)

Maybe the answer is sacrilege = nationalise the market places and have them as not for profit exchanges regulated to provide a level playing field (the pipe dream), for a fair and orderly market rather than a series of incentivised companies and a dislocated market place made up of many competing exchanges? (some countries actually used to have this :) or attempt it at least)

Posted: Tue Aug 07, 2012 8:07 am
by rhc
Picture, in your mind’s eye, the leaning tower of Pisa. . . . .that’s what my unread book pile looks like.
I will be adding "Dark Pools" to that pile and will be crossing my fingers that my ‘tower’ doesn’t come tumbling down.
Thanks for the tip.

Posted: Tue Aug 07, 2012 9:25 am
by Moto moto
thats why a bought a kindle (another dark pool) I was much the same.... :) (London commutes when required are much quicker and easier now)

I have to say - the Dark pools explained a lot (entertaining historically more than purely educational), was interesting, can be read in quick period of time. - It puts into perspective a lot of the extra readings I seem to waste my time on scrounging around the bottomless pit of the internet. (The joys of waiting on trades when you intraday trade)