Speed Traders and Economic Announcements, from Vic Niederhoffer
Speed Traders Make Peanuts in Profits From Economic Data Plays - Bloomberg News Item
Vic Niederhoffer:
Excellent academic paper with many fascinating facts, e.g. the human reaction time is 200 ms. vic
Paolo Pezzutti adds:
It is called:
"Do High Frequency Traders Need to be Regulated? Evidence from Algorithmic Trading on Macro News" by Tarun Chordia, T. Clifton Green, and Badrinath Kottimukkalur
The link:
http://www.bus.emory.edu/cgreen/docs/Chordia,Green,Kottimukkalur_WP2015.pdf [38 page pdf]
Burgess Humbert comments:
Taking the paper at face value, and Ceteris Paribus, the elimination of excess profit down to a 'utility' rate of return is a natural phenomenon in a field whose technological advance has resembled an arms race of late.
Unfortunately - ( and this does not denigrate the thrust of the paper or its authors ) - a call to ex colleagues in the field just now led to them falling off their chairs laughing at the idea that the marginal returns are ( or are beginning to ) decline.
As to the other part of the paper about the need for regulations etc. Let me answer this way -
Execution via High Frequency execution has both improved and decimated 'liquidity'. ( Here , I refer exclusively to spot FX, commodity futures, long end interest rate futures and stock index futures )
It has improved liquidity for transacting small parcels that are small enough to be executed within the first two levels of the bid/offer depth order book. I find the improvement stunning - particularly FX.
In terms of dealing in size - well, just a year ago, one could call a counterparty and get a stunning bid and or offer in say 75 mio GBP/ USD Spot FX. No more…. a combination of regulatory change and HFT execution has worsened fills by about 0.00015 in this amount. ( please let's not even start with discussion about using market maker provided execution 'algorithms'…. )
A real life example to put some meat on the table ; The last time I sold 50 mio GBP USD the rate going in was 1.4987/89… the following 'fill profile' is typical of a market order of this size nowadays-
3@87
17@86
30@84
Worse case fill at 86 when dealing with senior professionals just a year ago.
There are ways to improve on this, but I wanted to demonstrate how HFT has both improved and decimated liquidity at the same time.
Andrew Goodwin is skeptical:
What is the cost to every resting limit order in every correlated asset? Think of all assets including options, stocks, futures and derivatives or combos. Isn't is a fool's errand to look at profit from S&P 500 futures to generate the conclusion that HFT does not make much money on news breaks?
Burgess Humbert agrees:
Indeed. Let's call it 30 billion a year with a Sharpe of something approaching infinity.
stef says:
The real problems with HFT are the rules and how they protect the manipulators
See "Direct vs SIP Data Feed" http://www.nanex.net/aqck2/4599.html
Burgess Humbert adds:
There are indeed some very nasty yet very legal order types. The description of some of the orders extends to 20 pages ( yes twenty pages ).
But, there are ways to minimise and work with it some of the time.
I encourage all to regularly read;
www.nanex.net
One particularly amusing story on that site ( that caused a change in Federal Reserve data release policy !!!!) is called something like '… Einstein and the great Fed robbery …'
Look it up- it will change your world.
Surely a candidate to be made into a film one day.
Comments
G man on March 30, 2015 7:47 pm
Consider reading Virtu’s IPO paperwork to get an idea of profits, its not peanuts!
Spekulatn on March 31, 2015 12:21 am
MONEY AND SPEED: INSIDE THE BLACK BOX
https://www.youtube.com/watch?v=H4BzsevJthw
Bic on March 31, 2015 6:14 pm
Well, I guess Nanex is at least a step up from Zerohedge…