HFT managed to catch my attention simply because it sounds so
scary to me. Please do not get me wrong. I am not those old-timers who have
resistant in new IT stuff. In fact, I am very much updated, LOL. The whole
thing sounds scary to me as I can feel the cons and pros since they started (in
local market too?) Well, forget about how I exposed to it. In fact, it is
something P&C and I am not going to discuss further here. After all, this
is a blog about books; not my cpotrader.blogspot.com, LOL.
Ok, so… how scary it could be? Read this from Sal Arnuk &
Joseph C.Saluzzi:
By the time Reg NMS was implemented, the
stock exchanges changed from member owned, nonprofit corporations, to
for-profit exchanges, and many of them became publicly traded companies.
There are reasons why brokerage firms offer
$8 trades to retail investors, when so often that fee doesn’t cover cost. Money
that used to be made mostly through commissions is now made through trading
around that order flows.
Tradebot, an HFT firm based in Kansas City,
Missouri, in 2008 said it had not had a losing day in four years.
Not scary enough? Read this:
In one of our earlier white papers, we made
the following analogy: Imagine you are at the grocery store. You take your cart
to one of the five apparently empty checkout lines. Suddenly, nine carts
instantaneously appear ahead of you. You scratch your head and move to lane
two. The same thing happens. You soon find that whenever you move into the new
lane, a multiple of carts appear ahead of you in line. Why? Because the
supermarket has sold the right for those carts to do so.
You may frequently hear that designated
market makers provide liquidity by always trading. In reality, they provide
liquidity only when they want and turn it off when it gets too risky. When they
do turn it off, market becomes anything but “fair and orderly.” And when do
they turn it off? When the market get stressed. When that happens, they are
delays and inconsistencies between the data feed connecting the plethora of
exchanges and trading venues.
We frequently hear that the reason HFT firms
enter and cancel 95% of their orders without a trade is because HFTs are just
“managing risk” in their market making activities. In reality, HFT firms are
trying to create momentum. They are trying to mislead institutional algorithmic
orders into following along these price changes, which are created with the
intention to manipulate a stock higher after the HFT firm has already bought it
at a cheaper rate.
Amazing, isn’t it? The computer did the whole stuff and we are
exposed to it without really realizing. Wow!!!
Honestly, this book could end up creating a lot of discussions
(arguments?). The points written were part and partial of the stories that
evolve in the real market. However, the author sounds contradict at times. For
example, the author criticized algos that react to news. In my humble opinion,
anything that reacts to news could end up either in winning or losing way.
There is nothing as definite as mentioned by the author. Furthermore, the
author comments about brokerage firms that do not underwrite IPO. To me those
are very harsh words and criticizing them in such a sarcastic way may not be
fair at all.
Secondly, although this is a book about HFT… however, there is no
precise definition on HFT in the first place. According to the author, those
who are involved (accused?) in HFT are market makers, systematic traders and
exchange traded products. Although I am not the right person to verify it, I
thought the author failed to convince me… Obviously, the facts presented just
not enough to support his point of view.
To sum it up, this is a nice book to start with for those who are
keen on HFT. However, there are some conflicts as mentioned above. To make
things worse, the author did put in some chapters written by other authors. Ok,
it sounds to be related at first glance. But, after reading through, I think it
created more confusion, LOL. Lastly, this book was actually read during my
personal holiday. As such, the speed tends to be slower… and my holiday was
disturbed by the scary and confusion (thanks to some conflict points) part of
HFT. Overall, I am rating this book at 5/10. I thought the initial idea is
good. However, the author failed to impress me as evidences are not adequate
throughout the book. I am looking forward to explore further on HFT stuff since
Bursa itself is moving towards an algo stuff (CQG?) sooner or later…HFT being a
devil or an angel? Food for thought today…
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