A possibly naive question re HFT

[RobGiles]

Hi All

My experience in trading and investing is probably best described as longer term position trading based primarily on a technical view with a fundamental overlay, hence my knowledge on shorter term approaches is relatively low, which is one of the reasons why I’m here. So, when I look at High Frequency Trading systems or day trading systems, I am both intrigued and confused. Intrigued as I see an opportunity to diversify systems, possibly compound returns on a shorter time frame, generate some great returns, learn something new.

Where does the confusion come from? I recently listened to a talk by the ex CEO of ABN Amro NY about where the individual trader can get an edge against the “big boys”. One of the key take-away’s was that the “little guys” have to know what game they’re playing. We shouldn’t attempt to play the same game as them (i.e the big boys). Amongst other things, this included doing ultra high frequency trading as we simply don’t have the IT horsepower to throw at the algorithms and hardware required to successfully pull it off (he quoted an example of a firm that spent millions relocating its office directly under the exchange & connecting it with fibre optic in order to get its HFT orders to market quicker than it’s competitors). One has to pay attention to the possibly superior intellectual horsepower that these firms can afford to pay for as well, in order to write the trading algorithms they use (no offense to the IQ of anyone in this forum, but I can say that they employ people a lot smarter than me that’s for sure). So, where do we as individual traders stand on shorter term systems. How can we play that game and win? Are we playing a different game (i.e. not as “high frequency” as them), hence we have a niche we can exploit?

Looking forward to some discussion on the topic.

Cheers

Rob

[JulianCohen]

Hi Rob,

Those particular HFT traders are trying to exploit idiosyncrasies in the market that exist for micro seconds. I don’t think any of us are trying to do that, so our competition are the hedge funds and the banks that have masses of computer power and funds to throw at trying to exploit the edges that can exist in the longer term time frame of short term trading. ie daily trades, what we call MOC, where you buy during the day and close at night to go home square, or swing systems which hold for typically between 3 to 20 days. These are the systems we are trying to develop when we talk of mean reversion and shorter term systems.

[Nick Radge]

Julian is quite correct and I guess my using the term “HFT” only confuses the matter.

‘Real’ HFT firms are like market makers and do some 50,000 trades or more a day which is why the need the latency and proximity to the exchange.

[RobGiles]

Hi Julien

Thanks for that. Don’t get me wrong, I want to trade these shorter term systems (the longer term time frame of short term), but I want to understand what our edge is, especially if, as you say, we are competing with ‘hedge funds and banks with masses of computing power’. We’re still playing the same game as these bigger boys. Maybe we are just exploiting the same edge and because we are by trade size comparison, minute, it doesn’t matter if we are trying to exploit the same edge?

Don’t know, just trying to get my head around it.

[RobGiles]

Ok, thanks for that clarification Nick

[SaidBitar]

Rob Giles wrote:

Hi Julien

Thanks for that. Don’t get me wrong, I want to trade these shorter term systems (the longer term time frame of short term), but I want to understand what our edge is, especially if, as you say, we are competing with ‘hedge funds and banks with masses of computing power’. We’re still playing the same game as these bigger boys. Maybe we are just exploiting the same edge and because we are by trade size comparison, minute, it doesn’t matter if we are trying to exploit the same edge?

Don’t know, just trying to get my head around it.

I think the advantage that we have over them is our size we are smaller so it is easier to jump in and out without any effect on the market so this makes our trading universe a bit larger for them due to their size their universe is smaller and concentrated on the high volume stocks
the edge in short term is taking small nibbles and doing it over and over.

regarding the real HFT firms they are playing different game and for them we are like very long term traders they talk about nano seconds and millions of trades per day

here is the interview with one guy from Virtu

122: Virtu. Hitting singles all day long—on a global scale w/ Doug Cifu

[LeeDanello]

Yep there are plenty of inefficiencies in the market created by the fundamental traders. The other “95%” that fail don’t have the structure or discipline in place to punch out the trades. Isn’t that why we are here!

[KevinPenny]

Totally agree, Maurice.

[RobGiles]

Agree, liquidity is not an issue for the size that retail traders typically trade. thanks for the link

[RobGiles]

Hi Maurice…definitely here to adopt strategies based on structure and discipline, can’t argue with that. What I was seeking clarification on was our edge in the space of HFT vs the large players, given I’ve never been a day trader before. So my take away as to our intra-day edges are; small posn size (means we can play the same game without materially moving the market against us), the fact that we’re not playing a true HFT game (i.e. longer end of short term), disciplined systematic approach. I would add prudent position sizing as well.

thanks for the insights

[Author]

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