The Truth About High-Frequency Trading E-Book

Rishi K. Narang

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 157

Veröffentlichungsjahr: 2014

Beschreibung

The debate about high frequency trading (HFT) has been raging since around the beginning of 2010, after a couple of years of record profits in 2008 and 2009 were reported upon by the press with a generally negative tone. But, it was manageable. Regulators were making careful, but mostly correct moves to fix what needed fixing. Until it all came crashing down. With the release of Michael Lewis's latest best-seller, Flash Boys, potential progress was dramatically and possibly irrevocably set back. This e-only book will provide a close look at the topic of high frequency trading in its various aspects: what it is, how it's done, why it matters, and whether we should have concerns.

Leseprobe

The Truth about High-Frequency Trading

What Is It, How Does It Work, and Is It a Problem?

RISHI K NARANG

Cover Design: Wiley Cover Image: © iStock.com / madrat

Copyright © 2014 by Rishi K Narang. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

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Library of Congress Cataloging-in-Publication Data:

ISBN 978-1-118-96092-9 (ePub)

CONTENTS

Preface

Acknowledgments

CHAPTER 1 An Introduction to High-Speed and High-Frequency Trading

Notes

CHAPTER 2 High-Speed Trading

Why Speed Matters

Sources of Latency

Summary

Notes

CHAPTER 3 High-Frequency Trading

Contractual Market Making

Noncontractual Market Making

Arbitrage

Fast Alpha

HFT Risk Management and Portfolio Construction

Summary

Notes

CHAPTER 4 Controversy Regarding High-Frequency Trading

Does HFT Create Unfair Competition?

Does HFT Lead to Front-Running or Market Manipulation?

Does HFT Lead to Greater Volatility or Structural Instability?

Does HFT Lack Social Value?

Regulatory Considerations

Summary

Notes

About the Author

End User License Agreement

List of Illustrations

Chapter 2

Exhibit 2.1

Mockup of an Order Book for a Fictitious Ticker

Exhibit 2.2

Mockup of an Order Book for a Fictitious Ticker after a Large Market Order to Buy

Exhibit 2.3

Mockup of an Order Book for a Fictitious Ticker after a Limit Order to Sell at the Bid

Exhibit 2.4

Mockup of an Order Book for a Fictitious Ticker after a Limit Order to Sell, Which Joins the Best Offer

Exhibit 2.5

Mockup of an Order Book for a Fictitious Ticker after a Limit Order to Sell, which Improves the Best Offer

Exhibit 2.6

Mockup of an Order Book for a Fictitious Ticker

Exhibit 2.7

Mockup of an Order Book for a Fictitious Ticker with Additional Bids

Exhibit 2.8

Mockup of an Order Book for a Fictitious Ticker after 1,000 Shares Have Been Removed from the Bid

Exhibit 2.9

Mockup of an Order Book for a Fictitious Ticker after All $100.00 Shares Have Been Removed from the Bid

Exhibit 2.10

Mockup of an Order Book for a Fictitious Ticker after Two 2,000 Share Bids at $100.01

Exhibit 2.11

Breakdown of Messages at Various Intervals and Percentiles for EBAY on July 20, 2012

Chapter 3

Exhibit 3.1

Mockup of an Order Book for a Fictitious Ticker

Exhibit 3.2

Mockup of an Order Book for a Fictitious Ticker after a Market ­Order to Buy 10,000 Shares Is Mostly Filled by a CMM Acting as an Agent of the Customer

Chapter 4

Exhibit 4.1

Average Price Movement in SPY

Exhibit 4.2

Median Price Movement in SPY

Exhibit 4.3

Frequency of 3% or Greater Moves in SPY

Exhibit 4.4

Frequency of 4% or Greater Moves in the SPY

Guide

Cover

Table of Contents

Preface

Chapter

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Preface

The debate about high frequency trading (HFT) has been raging since around the beginning of 2010, after a couple of years of record profits in 2008 and 2009 were reported upon by the press with a generally negative tone. In particular, reports of HFTs' profits in 2008 stung, having just lived through the worst economic downturn this country had seen since the Great Depression, a downturn which in some ways remains with us today. Reports of a programmer on Goldman Sachs' market making desk stealing code that could “manipulate markets,” coupled with the Flash Crash of May 2010, added fuel to the proverbial fire.

Aside from the press, who have the job of “selling papers,” (or clicks, or eyeballs), two main groups joined the fray. On the one hand were the ubiquitous conspiracy theorists, who prefer any explanation but the simplest and most likely one. The other constituency of this triumvirate of illumination was people with an incentive, an axe to grind. They were and are mainly high-touch Wall Street traders whose livelihoods had been adversely impacted by the explosion of complexity of the U.S. equity market and the increase in the role of technology in navigating this new reality. Their inability or unwillingness to evolve to compete has led them to cry out for a setting-back of the clock to the good old days when they could make money off their clients more easily.

All of this was fine and manageable. Regulators were making careful, but mostly correct moves to fix what needed fixing. There was an increasing convergence between the anti-HFT crowd and HFTs themselves, in terms of what the actual, solvable problems are in the markets. After all, it is hard to dispute credibly that the U.S. equity market is exceedingly well-functioning and exceedingly cheap to trade. Thus, the changes to market structure that would eliminate most of what the anti-HFT crowd was complaining about were actually roughly in line with what the HFTs believed was wrong with market structure as well. These include potential reforms like speeding up the data feed that basically all market participants have access to by default and ending a ban on a zero-spread market (if tight spreads are good, a zero-spread market is as good as it gets). These two simple changes would have the effect of eliminating a large portion of the strange and new order types that have led to so much of the conspiracy theorizing in the first place.

All that potential progress was dramatically set back with the release of Michael Lewis's latest best-seller, Flash Boys. It has all the typical “Lewisian” story-telling and page-turning that has led him to be such a successful author. But where I found his previous work, like Moneyball and Liar's Poker both well-written and well-researched, Flash Boys was a disaster when it came to facts and objectivity. Lewis threw around claims that cannot be supported by evidence, and his arrogance in asserting these points on television programs over and over, coupled with his hard-won credibility, appear to have set off an explosion of misinformed bad will. What had been simmering somewhat quietly and productively is now boiling over with a lot of heat and virtually no light (sorry for the mixed, chained metaphor).

Therefore, I decided to release an expanded and updated “carve-out” of the HFT portion of my 2013 book, Inside the Black Box. I've tried hard to make it a standalone mini-book without references to the longer, more comprehensive work. The goal was not to provide an exhaustive (and therefore exhausting!) look at market structure and trading, but rather a close look at the topic of high frequency trading in its various aspects: what it is, how it's done, why it matters, and whether we should have concerns. I hope you find it helpful.