Algorithmic trading

[nimzov]

Disclamer : I have no background whatsoever in economics.

Hi to all.

My question is : What is the impact of algorithmic trading relative to real people trading in the stock market.

According to wikipedia nearly 70% of the trading in main stock exchange is algorithmic (that is trading done automatically by computer). And that most of this algorithmic trading is high-frequency (HFT) where stocks change hands within fraction of seconds.

Then how can some people say that emotion plays a big part in the stock exchange when 3/4 (and rising) of the trades are done by computer ?

These are my (hopefully not to stupid) questions.

Thanks

[psionl0]

Originally Posted by nimzov

Then how can some people say that emotion plays a big part in the stock exchange when 3/4 (and rising) of the trades are done by computer ?

1/4 (or rather, 30%) of trades are done by people and not computers according to the numbers you present. There is still plenty of scope for emotion there.

[Pup]

Originally Posted by psionl0

1/4 (or rather, 30%) of trades are done by people and not computers according to the numbers you present. There is still plenty of scope for emotion there.

And also, those who set the algorithms have to set them based on emotion carefully researched logic, like if the price falls below its recent support point, the algorithm says it's time to panic sell. So really, with automated trading, you get automated panic, but there are built-in "circuit breakers" to supposedly address the problem.

[ThunderChunky]

The algorithms are for very specific types of trades

[kevsta]

I think that as emotion has always defined the markets, the Fibonacci retracement levels, support and resistance etc, and the algos are programmed to manipulate work from the charts, so in essence they are programmed to frontrun trade around system that was itself based on emotion originally.

[kevsta]

Originally Posted by ThunderChunky

The algorithms are for very specific types of trades

yes, trades that are thousands of times quicker per second than yours.

[kevsta]

as I stated in another thread Nanex is pretty much the (public) authority on HFTs and their activities. there are of course private authorities keeping their knowledge to themselves for gain.

here's a good overview of the trading landscape these days

http://www.nanex.net/Research/EMini2/EMini2.html

Quote:

HFT is sucking the life blood out of the markets: liquidity. It is almost comical, because this is what they claim to supply. No one with any sense wants to post a bid or ask, because they know it will only get hit when it's at their disadvantage. Some give in, and join the arms race. Others leave.

Take the electronic S&P 500 futures contract, known as the emini, for example. This is, or used to be, a very liquid market. The cumulative size in the 10 levels in the depth of book was often 20,000 contracts on each side. That means a trader could buy or sell 20,000 contracts "instantly" and only move the market 10 ticks or price levels. Even during the flash crash, before the CME halt, when hot potatoes were flying everywhere, the depth would still accommodate an instant sale of 2,000 contracts.
What used to be the most liquid and active contract in the world, which served as a proxy for the true price of the US stock market for decades, is getting strangled by the speed of light, a weapon wielded by HFT.

Not anymore. On Friday, 2,000 contracts would have sliced right through the entire book. Not during a quiet period, or before a news event. Pretty much any minute of trading that day after the 9:54 slide. And it wasn't just Friday, the trend in the depth of book size has been declining rapidly over the last few week. What used to be the most liquid and active contract in the world, which served as a proxy for the true price of the US stock market for decades, is getting strangled by the speed of light, a weapon wielded by HFT.

there are of course other players in the HFT arena, it is not only the large banks, but the banks resources make them the heavyweights. There are after all not many companies that can afford to co-locate their trading box in the NYSE for speed advantage.

Good overview of the landscape here
http://ftalphaville.ft.com/blog/2009...uency-trading/

Quote:

The Cold War in high frequency trading
Posted by Tracy Alloway on Jul 08 10:10.
This April 2009 quote from Rick Bookstaber, with its overtones of Cold War mutually-assured destruction, seems eerily prophetic given recent events involving the alleged theft of Goldman Sachs’ proprietary high-frequency trading code by a programmer of Russian origin:

Quote:

. . . high frequency trading is embroiled in an arms race. And arms races are negative sum games. The arms in this case are not tanks and jets, but computer chips and throughput. But like any arms race, the result is a cycle of spending which leaves everyone in the same relative position, only poorer.

While Bookstaber, who quite literally wrote the book on financial technology and quantitative trading strategies, was emphasising computer chips rather than code, the sentiment is easily transferable. Banks spend millions developing the types of proprietary trading programmes Serge Aleynikov stands accused of stealing as well as the actual hardware that enables them.

In fact, high frequency trading has boomed in recent years, to reportedly account for an estimated 70 per cent of average daily trading volume. The technology essentially involves automated tick-by-tick, high turnover buying and selling, which relies heavily on the speed and sophistication of the network and computer systems involved. These are lightning fast and voluminous trades to take advantage of minute and fleeting changes in prices. Speed is obviously essential — as is beating the competition to an arbitrage opportunity.

Quote:

Goldman has presumably worked hard to achieve its place as one of the leaders in HFT. In fact, Goldman’s dark pool platform Sigma X appears to be the biggest of its kind. The bank has also been the most active programme trader on the NYSE for some time — though it’s not without its HFT competition.

Citadel, for instance, the US-based hedge fund linked via its former head of HFT to Serge Aleynikov, is one of the top players in HFT — claiming to account for up to 10 per cent of global equity volumes in a single day, according to this very convenient presentation by the fund. Aleynikov was due to start work at Teza LLC, a Chicago-based fund co-founded by Misha Malyshev, the HFT expert who left Citadel in February.

Zerohedge have been consistently exposing Nanex' research to a wider audience since inception, here is a great example of the evolution of predatory HFT algos designed to not only beat you to it, but to actually manipulate the bid/ask as it does it

http://www.zerohedge.com/article/are...orld-etfs-next

Quote:

From Nanex: Market manipulation visualized (pic)

On May 2, 2011 we began noticing a strange algo phenomena that would begin immediately after the official market close. It started with one issue, affecting only the ask price. It soon progressed into more stocks and soon began affecting both the bid and ask price. As of 6/10/2011 it is seen in over two dozen issues. The algo has several unique characteristics:

To date we have only seen the algo run after normal market hours (specifically between 16:00:00 EST and 16:15:00 EST).

It runs in short and long ETF issues (i.e. an ETF and it's Inverse ETF).

It averages approx. 2000 quotes per second on each issue it runs on.

Quotes from multiple exchanges follow the price.

It consistently raises the ask price and recently began dropping the bid price (many times until the bid hits zero). In the majority of cases it also moves the NBBO to the same outrageous price levels.

We have not seen any trades occur while the algo is running (yet). As it runs in fairly illiquid ETF's and after hours, this is likely due to the fact that there are no trading opportunities at the time.

It has increased it's scope of ETF issues every week.

It would be easy to say this algo is a test of some type -- if it was only seen on one or two days. However, seeing it run every day for six solid weeks (as of this writing), increasing in both symbol scope and frequency, raises many questions. One thing however is painfully clear; all one needs to bring a stocks quoting price to zero (on the bid side) or into the stratosphere (on the ask side) is the will to do so (and an algo that will blast thousands of quotes a second to raise/lower the NBBO in small increments, thus not violating the recently implemented stub quote rule).

[nimzov]

Originally Posted by psionl0

1/4 (or rather, 30%) of trades are done by people and not computers according to the numbers you present. There is still plenty of scope for emotion there.

Hi and thanks for your comment.

I said 3/4 computer (and 1/4 people), thinking it was a conservative figure as the numbers reflected the situation as it was 3-4 years ago. And according to the following quote HFT is rising some 40% a year, so I guess that if the trend has not changed we are now over 80%.

Quote:

According to data from the NYSE, high-frequency trading grew by about 164% between 2005 and 2009

http://en.wikipedia.org/wiki/High-frequency_trading

[nimzov]

Hi.

Originally Posted by ThunderChunky

The algorithms are for very specific types of trades

Originally Posted by kevsta

yes, trades that are thousands of times quicker per second than yours.

From what I read, algorithmic trading is not necessarily high-frequency. HFT is a special case of algorithmic trading if I understand correctly ? I could not find what proportion of algorithmic is high speed vs regular speed.

Quote:

A special class of algorithmic trading is "high-frequency trading" (HFT), in which computers make elaborate decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information they observe.

http://en.wikipedia.org/wiki/Algorithmic_trading

@kevsta 02:07 AM
Thanks interesting reading.

[ThunderChunky]

Originally Posted by kevsta

yes, trades that are thousands of times quicker per second than yours.

And that make fractions of a penny per unit.

[nimzov]

Originally Posted by ThunderChunky

And that make fractions of a penny per unit.

Hi.

Is what you call unit a transaction or something else ?

[JJM 777]

Originally Posted by nimzov

how can some people say that emotion plays a big part in the stock exchange when 3/4 (and rising) of the trades are done by computer ?

If 70% of trading is done by computers, which are programmed to react to what others are doing on the market, the computers are a relatively stable factor on the market. But when the 30% of humans react emotionally, the 70% of computers react to it in the programmed way. Thus the whole market is affected by emotion, 30% because they are emotional, and 70% because they react to the changed behaviour of the 30% of traders in the programmed way.

[nimzov]

Originally Posted by JJM 777

If 70% of trading is done by computers, which are programmed to react to what others are doing on the market, the computers are a relatively stable factor on the market. But when the 30% of humans react emotionally, the 70% of computers react to it in the programmed way. Thus the whole market is affected by emotion, 30% because they are emotional, and 70% because they react to the changed behaviour of the 30% of traders in the programmed way.

Fine. Then I wonder how a market would react if it consisted of 100% computer trading.
We would have a situation where all human emotions is removed from the system.

Have simulation been done of that ?

[ThunderChunky]

Originally Posted by nimzov

Hi.

Is what you call unit a transaction or something else ?

I meant per unit of trade, which in the case of stocks would be shares. I was referring the HFT.

[JJM 777]

Originally Posted by nimzov

Fine. Then I wonder how a market would react if it consisted of 100% computer trading.
We would have a situation where all human emotions is removed from the system.

Have simulation been done of that ?

It would react in the programmed way to economical factors (unless the programs include random generators). Still it would not be fully predictable, because economical factors are not predictable -- which company develops the next hit product, and whose next product flops, and where the weather destroys half of the grain harvest, and where a war drives the price of oil up...

[kevsta]

brilliant graphic from Nanex showing the rise of the HFTs since 2007 to present.

it starts to get interesting from 2010 onwards, but check out the madness around the time of the S&P USA downgrade Aug 2011



good luck trading in that with an eTrade account.

[kevsta]

Quote:

Translation: all your electronic barrels are belong to SkyNet.

http://www.zerohedge.com/news/crude-...-market-halted

[kevsta]

http://www.nanex.net/aqck/2815.HTML

Quote:

NYMEX Black Swan ~ The March 2012 Crude Oil Futures Quote Loop

On February 13, 2012, starting 13:59:57, quotes for crude oil began queuing. At 14:00:35, all of the queued quotes were sent at once. Again at 14:01:08 the same 38 second block of quotes sent earlier was sent again -- old timestamps and all plus a few new quotes. Again at 14:01:18, all quotes since 13:59:57 were sent again. This repeated 12 times.

From a programmer's perspective, it looks like a system problem caused a blast of quotes that corrupted a memory queue causing the software to believe the queue was full all the time.

[kevsta]

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I AGREE

doesnt sound like its an algo to me, I could have written this.

1 buy
2 goto:1

http://www.zerohedge.com/news/broken...-what-happened

[kevsta]

pre tax losses of $0.44 billion in 45 minutes. good effort

http://www.streetinsider.com/Corpora...M/7625111.html

edit, or just over 2 working hours new debt accumulation by the US

[PixyMisa]

Originally Posted by nimzov

Fine. Then I wonder how a market would react if it consisted of 100% computer trading.
We would have a situation where all human emotions is removed from the system.

Have simulation been done of that ?

Yep.

[kevsta]

Originally Posted by PixyMisa

Yep.

lol. yes. exactly. although actually yesterday proved they can eat other too

[Northern_warrior]

I say its about high time we took an axe to those HFT cables..