[atomicnumber3]

I worked in this industry. 2 more common issues:

* Doing a latency-sensitive trade when you don't have good execution. It's easy to go wild in simulation and think you can flip in and out of positions. But if you're a retail trader (and in this context, by that I mean "not connected directly to the exchanges, at the minimum")

* Not taking into account the impact of your own trading on markets. This is obviously impossible to really simulate. Sometimes you can ignore it (if there's enough liquidity) but I've seen trades that looked great on paper and when trading at small-ish sizes, but then when you try to crank it up and do more volume, prices run away from you.

Obviously, there is money to be made in algo trading. It's big business and obviously not everyone is doing crazy latency sensitive stuff- there are quant trades that you could probably do with execution available to retail traders. And honestly I wouldn't be surprised if some retail traders manage it. But I will say that I think for an individual, it's not worth the effort even if you are ones of the ones who can consistently make a profit. Just buy sp500 ETFs and sit on them and do something else with your time.

[IgorPartola]

Would you mind if I asked you a question since I have never worked in this industry but did play with crypto trading a while back. Before Mt Gox was shut down I was trading on a couple of tertiary small exchanges and at the time there was a lot of talk of arbitrage between different exchanges and how transaction latency and fees made it very risky at best and a losing proposition in most cases. But what I was wondering about is whether in a situation like that (one large exchange dominating the market, several smaller exchanges trading the same commodity) if it was possible to use the large exchange as a sort of oracle. Essentially my hypothesis was that Mt Gox sets the price and other exchanges follow on a delay so if I watch Mt Gox I can predict where the price on the secondary exchanges will go a few seconds to a few minutes ahead of it moving. I ran a bunch of historical data through some basic analysis scripts and noticed that indeed there was a pattern but when I actually implemented a bot to trade BTC it lost money more often than not. I am curious if (a) that idea has any validity and (b) was me losing money on this strategy due to latency and implementation errors or due to some fundamental principle of trading that I am missing.

[caffeine]

Your idea is right but the timescale is much shorter. Essentially it's a race. And in 2014 you could make good money doing exactly what you described, the timescale was millis. In 2016-2017 even more money, but different venues.

What you are describing is the most basic, canonical form of latency arbitrage.

That idea is implemented widely in the HFT industry across all sorts of products, not just crypto, with billions spent on trading the information faster

(Source: this is my job).

[andrepd]

Honest question: do you feel comfortable knowing that your job is doing something which is essentially net zero value to society? Negative in fact, you're burning resources which are needed elsewhere, and contributing to concentration of wealth.

Not being rude or judgemental, just want to know how you feel about this.

[caffeine]

Short answer: I am comfortable with my job.

I think your question makes some incorrect factual assumptions, but also it incorporates a world view that I don't subscribe to (not wrong, but also not what I believe).

I think that if I had your belief system and your set of facts, I would probably feel uncomfortable about it.

[andrepd]

The world view is simply that this technology arms race performs no useful work to society. It's simply people with capital investing enormous sums into gaming a system and extracting $$. Okay, this so far is not even a view, it's just how things are. The "view" is that it is wrong x) Much like one could argue that e.g. the yacht industry diverts resources and people from other more pressing needs.

As for "my" set of facts... well they're just facts :) not "mine" or "yours".

[qw3rty01]

This is a pretty loaded question to then say "not trying to be judgemental"...take out the bias if that's actually the case: "What kind of benefit do you believe your work provides to society?" or "How do you justify the extra resources taken away from society that may be more beneficial elsewhere, such as X?"

[andrepd]

Well I don't know how to make it less loaded x) It's just how things are, it's a work that does no useful work in any meaningful sense, but serves to make some already fabulously rich people even richer (in fact, it extracts that value from non-HFT traders, so even those are shafted here).

My point is that I'm curious regarding how the people who work in these things feel about their job. Do they think they're doing a right thing? Do they "own it" to themselves that they don't care as long as they make money? Do they not think about it too much?

[sbeller]

> (in fact, it extracts that value from non-HFT traders, so even those are shafted here).

in return HFT provides liquidity (and by that smaller spreads) to the market, I would think.

If you ever bought or sold a stock with a market order, you profited from the work the HFT is doing.

[logifail]

> it's a work that does no useful work in any meaningful sense, but serves to make some already fabulously rich people even richer

Isn't Robinhood able to offer free trading to customers solely because they sell their order flow on to, among others, HFT firms?[0]

[0] https://www.cnbc.com/2020/08/13/how-robinhood-makes-money-on...

[MockObject]

The abstraction of "society", that is presumably supposed to benefit from everyone's job, is hiding the crucial details.

His job facilitates trades between people who want to trade with each other. Since they are part of society, our society benefits from his work.

Evidently it's doing more than "make some already fabulously rich people even richer", because it's paying salaries for some programmers, as well.

[wizzwizz4]

I'd argue that “how do you justify” is more loaded. “Do you feel comfortable with [objective description of the reason one might be uncomfortable with it]?” is better than how I'd ask it.

[KittenInABox]

Intuitively, providing more flow + allowing more efficient allocation of resources via algo is pretty valuable to society. Problem is that society is squandering that efficiency.

[wizzwizz4]

The stock market is about allocation of profits, and high-frequency trading is about extracting profits from the profit allocation system. This isn't investment we're talking about; this is the stock market.

[IgorPartola]

Thank you. That makes a lot of sense. The problem was that I was doing this on my residential cable connection from the US and the exchange where I was executing trades would be in Eastern Europe. The ironic thing is that even back then I had a good idea of how to set up communications with a server like theirs to be significantly faster but it didn’t occur to me that milliseconds mattered. A typical trade if they executed it almost instantly still took 300ms. And they didn’t execute instantly so it was closer to 2 seconds more likely than not. Out of curiosity, what are the fancy examples of this vs this simplistic one?

[caffeine]

Trading the same product on two exchanges is the most basic one because you know it's the same product, so correlation should be 1, assuming the cost to transfer between exchanges is zero. Example is arbing US equities.

Crypto is one level more complicated, because you don't share inventory across exchanges and transaction costs are high, which means a coin on Exchange1 isn't perfectly fungible with a coin on Exchange2.

One level more indirect than that might be basis trades, where you trade a derivative ( like SP500 futures) vs it's underlying (the SP500 stocks, although in practice it's SP500 ETFs). So here the correlation is very high but there is a difference between futures, stocks, and ETFs fundamentally, and those play into the pricing.

Going even further might be trading correlated products that don't have the same underlying, example is Nasdaq futures vs SP500 futures.

To simplify: It's basically about the level of correlation between the products. The strategies used to trade different correlations look qualitatively different.

[IgorPartola]

That makes sense and sounds pretty interesting. How “exciting” is this field in terms of innovation currently? Is it mostly about getting high level access to exchanges to speed up trading (which presumably requires paying your way in), or is it more about finding novel signals and ways to use them?

[lordnacho]

Quant trading guy here. Most likely your simulation didn't account for market impact. It's maybe the hardest bit. See liquidity based bullet points above.

Other place to look is whether the data was recorded with timestamps of where the trading happened, but you probably thought of that one.

Idea makes sense though.

[IgorPartola]

I was moving very small amounts. I think my Max trade was set at like $50 equivalent so it wasn’t anything crazy. It seems my main issue was latency and not realizing that my time scales should have been significantly shorter.

[tim333]

>prices run away from you

I've found that stuff a lot. People forget that on the other end of the price is a thinking human or robo delegate thereof trying to outsmart you. It's really hard to say what will happen until you try it with real money / assets.

[UnpossibleJim]

I see a question, so I'm sorry to ask another but as someone who hasn't done algo trading I'm curious. How quickly are you actually able to trade. I understand with low level trading, through a broker, the trades can be pretty instantaneous. On penny stocks, though, sans broker and with just an API or website that you set up with a field bot, how quickly can you expect for these trades to go through, really?

I hear these horrid tales of people killing themselves over bad trades and lines of credit and I wonder how much is poorly written code and how much is the chaos and whim of the market (don't worry, I'm not going to try algo trading).

[sitzkrieg]

same here, aits definitely worth pointing out (as you me tion) simulating execution and realisitic fills (and dont forget rt commissions!) is extremely difficult and also will absolutely kill strategies that casually look profitable