So I met a guy who makes Algorithmic Trading Programs for High Frequency Trading

[niemivh]

It was at a political meet up group here in Portland.  I met a man who works for a company back east that works on writing Algorithms for automated trading systems.

The irony was that I was there trying to recruit people to help me build a Tobin Tax website.  What a small world.


He said the following:

Algorithmic trading is financial warfare.
Algorithmic trading is a financial arms-race.
It is really a form of 'scalping', and admitted that it serves no role whatsoever to anyone but the person doing the HFT
The average ratio of dollar-earned-to-dollar-lost is about 6-to-1, meaning that every 6 dollars they make they lose 1
He was working on an algorithm that was getting 30-to-1 and 40-to-1 ratios
He called the whole line of business a 'printing press'
He was a web-developer but sort of fell into this line of work, now he makes multiple times what he used to, he said there is nowhere else he could ever make the money he is now
It was clear he was making so much money writing short programs in visual pascal that it was probably over $100k, bare minimum, probably in the $100k to $200k range
But even what he was making paled in comparison to the true experts that work on algorithms for the biggest players (literal million dollar bonuses were given out)
He also told me that everyone he knows pays an incredibly low tax rate due to loopholes (18% for millionaires, etc)
He told me about a hedge fund managers plan to build an 'oil derrick' out in the mid Atlantic ocean (where there is no oil) directly over the fiber lines running between the Euro and London exchanges and the US just to get a 1/600th of a second lead on the rest of the market


I'm going back next week to learn more.  He laughed when I told him about the Tobin Tax plan, he said it would never work and that there are so many fortunes being made in this that there are literally armies of millionaires and billionaires that would oppose it.  I'm starting to believe him as the only 2 people that knew about HFT (High Frequency Trading) and algorithmic trading at that event were myself and him... and he worked for a company that did it.


Enjoy your 'free market'.

[MatthewLM]

Tobin tax website? I guessing you are for this monstrosity?

It is really a form of 'scalping', and admitted that it serves no role whatsoever to anyone but the person doing the HFT

I don't think he knows very much about markets then. As people make money from price changes, prices are smoothed out and reflect longer term pictures (HFT is short term however, longer term is for usual human investment).

[Murwa]

Tobin tax website? I guessing you are for this monstrosity?

It is really a form of 'scalping', and admitted that it serves no role whatsoever to anyone but the person doing the HFT

I don't think he knows very much about markets then. As people make money from price changes, prices are smoothed out and reflect longer term pictures (HFT is short term however, longer term is for usual human investment).

Making money everyday on markets is statistical improbability. Even the best day-traders have days on loses.

Free market is a code word for rigged market. Every empirical evidence suggest just that.

No one in his right mind promotes 'free market' so he exposes him-self to competition over basic resources needed to survive unless he is sure to win.

[MatthewLM]

If they don't make money, why would they do it?

[niemivh]

Tobin tax website? I guessing you are for this monstrosity?

It is really a form of 'scalping', and admitted that it serves no role whatsoever to anyone but the person doing the HFT

I don't think he knows very much about markets then. As people make money from price changes, prices are smoothed out and reflect longer term pictures (HFT is short term however, longer term is for usual human investment).

Not anymore.  I think I'll try to 'join them'.  All attempts to point out to the cow-people that they're being taken advantage of have been met with indigence and scorn.  I think I'll just pull up a stool and a bucket and start milking.

It's apparently what people want.  They don't feel useful unless they are being taken advantage of.

[tvbcof]

...
The average ratio of dollar-earned-to-dollar-lost is about 6-to-1, meaning that every 6 dollars they make they lose 1
He was working on an algorithm that was getting 30-to-1 and 40-to-1 ratios
He called the whole line of business a 'printing press'
...

Some things are not really jiving with other things I've run across (many of which may be wrong or overstated.)

I've heard that somewhere over half of the trades nowadays are algorithmic.  After a decade of going nowhere but backward, many flesh and blood people are exiting the game.

So, if 50% are high-speed algorithm trades and they have win rates of the numbers your friend claims, where's the money coming from?

Here is a hypothesis of mine which I believe is completely my own (vs. just thinking I invented it after reading or hearing it somewhere else):

What if the high-speed juggling act is a mechanism to deal with 'naked shorts' (aka 'strategic failures to deliver'.)  That would be paper which purposely was sold short and never borrowed.  Depending on who you listen to, the number of certs in that category is alarmingly large, and there is no way to determine if the shares in ones brokerage account are real or IOU's.   I hypothesis that keeping a large number of shares in motion helps avoid pesky reporting rules.  And the 'cops' are doing everything possible to avoid looking anyway.

[Palmdetroit]

Over 90% of all trades are algos.. only way to win is to not play.  as far as 'who's money is it' .. its yours..if you are wise enough to not directly invest, all those taxes you pay into public servant pensions gets pennied every millisecond and you pay the bill.


Check out "stop loss killa algo" here.. this is natural gas.... so you pay there as well

[hugolp]

Enjoy your 'free market'.

Nice strawman.

Enjoy the progresive Federal Reserve.

The progressive and conservative policies have taken us down this path, and you still have the audacity of blaming it on non-existing free markets? Do you have any kind of honesty limits or morals?

[cunicula]

Over 90% of all trades are algos.. only way to win is to not play.  as far as 'who's money is it' .. its yours..if you are wise enough to not directly invest, all those taxes you pay into public servant pensions gets pennied every millisecond and you pay the bill.


Check out "stop loss killa algo" here.. this is natural gas.... so you pay there as well

To give a simplified example, many institutional investors follow explicit divisions of their portfolio (say 60% stocks 40% bonds). They follow these rules to keep the risk-reward profile of their portfolio approximately constant.  If bonds go up in value, the institutional investor will have to rebalance their portfolio (sell some bonds, buy some stocks). The purpose of the algorithm and massive computing power is to predict the automated responses of these investors. If you can get in and buy the stocks a millisecond before the pension fund does, then you can profit by reselling the stock to the pension fund for at a tiny mark up. The pension fund pays slightly more for the asset than it would have if it had a faster computer.

I would be very happy with a block chain that raised revenue for maintenance purposes using a 0.1% tax on all transactions rather than by printing money like bitcoin. Is that what you are after?

[wumpus]

I don't think he knows very much about markets then. As people make money from price changes, prices are smoothed out and reflect longer term pictures (HFT is short term however, longer term is for usual human investment).

I don't think you can say anything about the effect in general. For the individual trading bot it depends on the algorithm and strategy. It can stabilize the price, but it can also cause instability (for example - fake a trend) and profit from that. And as there's zillion bots active all competing and reacting to each other, the overall emergent effect is hard to quantify. It's like trying to determine what you brain will do from studying one neuron.

[hugolp]

I don't think he knows very much about markets then. As people make money from price changes, prices are smoothed out and reflect longer term pictures (HFT is short term however, longer term is for usual human investment).

I don't think you can say anything about the effect in general. For the individual trading bot it depends on the algorithm and strategy. It can stabilize the price, but it can also cause instability (for example - fake a trend) and profit from that. And as there's zillion bots active all competing and reacting to each other, the overall emergent effect is hard to quantify. It's like trying to determine what you brain will do from studying one neuron.

Yep.

The real problem with bot trading is that the stock markets are willing to undo trades when a bot goes crazy. This way the bot owners have no incentive to make the bots better. If they lost big time everytime a bot goes crazy, they would think twice about using a bot or if the did, they would do it more carefully.

[MatthewLM]

If bots make more volatility rather than reduce it, them overall they lose money.

[kiba]

Let face it, there will be an exchange that allow bots even if all the other exchanges will not. Bitcoin economy is a free market.

[wallet.dat]

How do HFTs work?  What do they pay for a transaction?  I was thinking of writing my own bot to use with my Ameritrade account, but there's probably better tools to do this with.

[MatthewLM]

There are a few different platforms for algorithmic trading. Some use their proprietary programming languages and libraries and others use APIs. I don't know much about them but google will help. :-P

[Murwa]

Enjoy your 'free market'.

Nice strawman.

Enjoy the progresive Federal Reserve.

The progressive and conservative policies have taken us down this path, and you still have the audacity of blaming it on non-existing free markets? Do you have any kind of honesty limits or morals?

How freedom to trade with whatever techniques you want is not a "free market" policy ?

Reality sometimes is painful and i understand you may have some difficult time to adjust.

[hugolp]

How freedom to trade with whatever techniques you want is not a "free market" policy ?

Reality sometimes is painful and i understand you may have some difficult time to adjust.

First, we dont need your condescending tone here. Try speaking like a normal person.

Second, the free market works because of the price signals represent the real choices of the people. When you distort those signals the outcome is not a free market outcome, even when apparently were done "freely" by someone. Its a constant in history that when a inflationary period starts it develops a financial boom and fostering reckless speculation. The financial system in the western countries is completely out of control and hypertrofiated, and that is thanks to the progressive policies. You would not be seeing the crazyness or inequalities you see around in a free market.

I have already said that I dont have anything against HFT and the problems I see. I dont believe what the op is saying and he has demonstrated quite a few time that he has not much idea about economics and likes to go over the top. I know someone dedicated to HFT and he is not doing by far that kind of money. It could be that it just happens that the guy I know is very bad at his job I guess.

[Murwa]

Second, the free market works because of the price signals represent the real choices of the people. When you distort those signals the outcome is not a free market outcome, even when apparently were done "freely" by someone.

According to your own logic, free market can never happen because "freedom" gives ability to distort signal those signals ( for example speculation in general or HFT in particular )  or many more .

Its a constant in history that when a inflationary period starts it develops a financial boom and fostering reckless speculation. The financial system in the western countries is completely out of control and hypertrofiated, and that is thanks to the progressive policies. You would not be seeing the crazyness or inequalities you see around in a free market.

As you pointed out free market can never happen.

I have already said that I dont have anything against HFT and the problems I see. I dont believe what the op is saying and he has demonstrated quite a few time that he has not much idea about economics and likes to go over the top. I know someone dedicated to HFT and he is not doing by far that kind of money. It could be that it just happens that the guy I know is very bad at his job I guess.

Still my question has not been answered

How freedom to trade with whatever techniques you want is not a "free market" policy ?

[cbeast]

Enjoy your 'free market'.

Nice strawman.

Enjoy the progresive Federal Reserve.

The progressive and conservative policies have taken us down this path, and you still have the audacity of blaming it on non-existing free markets? Do you have any kind of honesty limits or morals?

How freedom to trade with whatever techniques you want is not a "free market" policy ?

Reality sometimes is painful and i understand you may have some difficult time to adjust.

It depends on the techniques you choose. Idealism doesn't make good policy in the real world. Ideologues rarely see beyond their bias and the repercussions of their actions. For instance, there comes a point in every civilization where trading with gold becomes trading with lead. At one point lead becomes more valuable than gold when your magazine is reaching empty and you are no longer thinking about your portfolio. The freedom to be greedy and wasteful is paid for by the blood of our forefathers and it is very disrespectful to abuse that freedom. Ideologues write interesting books, but make terrible policies.

[MatthewLM]

Second, the free market works because of the price signals represent the real choices of the people. When you distort those signals the outcome is not a free market outcome, even when apparently were done "freely" by someone.

According to your own logic, free market can never happen because "freedom" gives ability to distort signal those signals ( for example speculation in general or HFT in particular )  or many more .

Who would want to waste their money distorting prices? High frequency trading algorithms make money buying low and sell high (Or going long low and short high) just like any other trading. Human traders help long term prices buy holding positions in investments which they believe are undervalued for the future. High frequency trading works upon the short term noise.