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Projekt Fear!

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Trading Experience: Intermediate
Platform: MultiCharts.NET, S5, Ninj
Broker/Data: AMP, S5, IB
Favorite Futures: ES
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Projekt Fear!

There's always been a boogeyman in trading and in the past few years it's been HFTs and Algo's.

It's like a trading 'cold war' - you name the enemy, you assign a list of sins he's committed - then you claim to be able to protect people from those sins. There is absolutely an ulterior motive in getting people to believe that algos are the cause of their losses.

I think that as a community, we need to come to our senses about all this new boogeyman - and soon. The HFT/Algo stuff is just becoming the modern day version of all the red light/green light bullshit that's been consigned to history.

On this forum earlier today, I read a comment about "stop hunting algos". Now - before I proceed - I am not singling out the poster of that comment. Just using it as an example of the sort of unsubstantiated comments we see on algos and HFTs. Comments that I am sure many traders take as gospel.

Yet, we might as we say "stop hunting zombies" for all the evidence that is given in these discussions.

So - I would like to initiate a discussion with what we KNOW about algos and HFTs, when they help and when they hinder us. To discuss things we THINK are happening or what people SAY are happening, and see if we can qualify them as truth or myth.

If you consider the concept of "stop hunting", you'd have to consider the following:

- which firm is doing it?
- how do they come to the conclusion stops are in a location?
- under what market conditions can they hunt stops?
- what is the cost of them moving the markets into stops - how large a position would they need to build? (or could they do it manipulating the order book)
- how do they exit their position profitably after the move they initiated?
- how often does their stop run attempt work?

In fact, if we use a bit of common sense, we could answer some of these questions already.
- If we can estimate 500 contracts of stops 10 prices below but 5000 contracts of bids between where we are and those stops, then we can say with some confidence that the cost of getting to those stops will outweigh the benefits.
- If the market is heavily directional, with buyers hitting the market aggressively, that is also something someone hunting those stops below will have to overcome.

Of course predatory trading has always been a part of the game. Right now, traders are falling prey to sweeping statements on HFTs/Algos that should need to be properly evaluated before they spend too much time/energy/money on trying to beat them.

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