Hi-Fi trading - frontrunning?
So what is the esoteric high frequency trading all about, in real terms?
The first idea comes to mind is something from the medium of scalp trading. However, it is highly unlikely the risk conscious and technical analysis wary investment banks suddenly decided to move into day trading . Which leaves another best guess, probably even better - front running. It is illegal to frontrun your own customers, but what about frontrunning other banks? Is it illegal? If you had some kind of pattern recognition software that detects a likely large order coming in,i.e. mutual fund decided to invest, probably split in smaller chunks, but if you can make out the likely size of the order, and with some knowledge of "sells" placed higher, you could have a reasonably high likelihood of doing something close to arbitrage, depending how correct you are in predicting the order and scanning the depth of "supply". What do you think?
From your post, it seems like your bias about 'hifi trading' is already made up.
Regarding frontrunning, its not different than what any specialist did on the floor of the exchanges years back. Except now spreads are so tight the only people making money on them are DMMs / SLPs.. So, IMO, it's a lot better now.
Youre also way off on: "highly unlikely the risk conscious and technical analysis wary investment banks suddenly decided to move into day trading "
All shops trade, mostly prop and flow. Of course after the recent mess desks are being divested so as not to be trading their client's capital (prop), but either way all the BBs participate in 'day trading' if you want to label it that.
Read up on flash orders - thats where the money is if your colo server is the quickest on the racks. Regarding arb on HFTs yes its performed with a specific thesis set in mind (index arb, stat arb, FX etc..).
It's illegal to frontrun, sure, but theres no way of knowing - the broker sends out a quick shout to a buddy letting him know he's gonna fill that 1MM block for his buddy on a desk and boom, instant arb opportunity.
the pattern recognition part is the correct direction. a simple strategy that would have worked in early days of HF is buying a stock immediately after a sizeable order for put options came in. The rational is that institutional money would buy put options (for covered posiitons) before the equity as it's less liquid and takes longer, so you could see large orders for stocks after spikes in options volume. This is just an example, this strategy wouldn't obviously make any money now. Also, don't forget that a lot of high frequency shops are essentially market makers. They provide liquidity and live off rebates from exchanges
I am sure most shops do trade, I am just under impression that the methods they use are somewhat more sophisticated compared to typical day-trading domain, i.e. head & shoulders, candlesticks, momentum and similar type of trades. Day-trading is relatively easy to learn, and should not be a problem to outsource to China or other countries. Plus looking from an academic side, it has mixed views at best. Also, as the money goes up into mm levels, it becomes increasingly difficult to execute trades. That's why I am skeptical prop trading is done on these grounds. There has to be something more concrete and back-test proof to persuade GS or ML to make a move in. But of course, its speculation, I have not worked inside the HF or IB to see the whole process up close.
The option / equity play is an interesting one.
Quisquam aut est ut adipisci. Eaque qui deleniti commodi et velit itaque. Ullam id tenetur ratione sit iure. Natus libero sunt cumque quas. In voluptates hic perferendis.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...