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Projekt Fear!
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Projekt Fear!

  #1 (permalink)
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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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  #2 (permalink)
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  #3 (permalink)
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@DionysusToast

Pete, you raise very logic points as always - I'd also like to ask, there are some people that claim that stops can even be seen, although they have so far not provided evidence to back it up. What's your take?

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  #4 (permalink)
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stop hunting is not a myth.
the 5000 contracts you mention depends on the instrument and the time of the day (session).

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  #5 (permalink)
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rleplae View Post
stop hunting is not a myth.
the 5000 contracts you mention depends on the instrument and the time of the day (session).

I did not say stop hunting was a myth.

"Of course predatory trading has always been a part of the game"

It's just not something that can be taken as a wide sweeping statement. That stop hunting goes on in all markets, all of the time.

The purpose of this thread is to discuss these things in detail...

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  #6 (permalink)
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xplorer View Post
@DionysusToast

Pete, you raise very logic points as always - I'd also like to ask, there are some people that claim that stops can even be seen, although they have so far not provided evidence to back it up. What's your take?

Here's the thing....

It wouldn't matter if people could see your stops or not. Unless you are trading 1000's of contracts a clip.

If you step back and have a think about what a stop order is (as related to exiting a position).

- It's an order to buy ABOVE current prices
or
- It's an order to sell BELOW current prices

Let's say you were selling oranges. You were in a market where all the other stalls sold oranges for $5 a kilo. If the customers walk to your stall, they pay $3 a kilo. Will people be inclined to buy at $5/kilo or will they pass those deals and pay $3?

Or another way to look at it. If you had a good idea where stops were and only ever entered the market at those advantageous prices - what would be the outcome?

If there is a ton of sell stops below us and we wanted to buy - isn't there an incentive for us to wait for those better prices before buying.

So when a market hits an area with a lot of stops - was it manipulation or just markets doing what markets do best?

If you trade 3 lots, then you aren't going to get stop hunted, it would not matter where you put your stop - it would not be worth the effort to run those stops. If, on the other hand, you put your stops where there's already another 5000 stops - that's a different matter entirely.

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  #7 (permalink)
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DionysusToast View Post
Here's the thing....

It wouldn't matter if people could see your stops or not. Unless you are trading 1000's of contracts a clip.

If you step back and have a think about what a stop order is (as related to exiting a position).

- It's an order to buy ABOVE current prices
or
- It's an order to sell BELOW current prices

Let's say you were selling oranges. You were in a market where all the other stalls sold oranges for $5 a kilo. If the customers walk to your stall, they pay $3 a kilo. Will people be inclined to buy at $5/kilo or will they pass those deals and pay $3?

Or another way to look at it. If you had a good idea where stops were and only ever entered the market at those advantageous prices - what would be the outcome?

If there is a ton of sell stops below us and we wanted to buy - isn't there an incentive for us to wait for those better prices before buying.

So when a market hits an area with a lot of stops - was it manipulation or just markets doing what markets do best?

If you trade 3 lots, then you aren't going to get stop hunted, it would not matter where you put your stop - it would not be worth the effort to run those stops. If, on the other hand, you put your stops where there's already another 5000 stops - that's a different matter entirely.

Yes, completely agree on this. I wrote another post months ago to this effect. Whether someone is stop hunting or not to us retail traders it does not matter. Whomever would have the capacity to stop-hunt wouldn't be certainly after me.

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  #8 (permalink)
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DionysusToast View Post

Let's say you were selling oranges. You were in a market where all the other stalls sold oranges for $5 a kilo. If the customers walk to your stall, they pay $3 a kilo. Will people be inclined to buy at $5/kilo or will they pass those deals and pay $3?

.

Can the other vendor hold up a sign in front of my sign that says $8/Kilo until he sells all his? jk

I've obviously heard the term "stop hunting" but I've never given it much thought, it just doesn't seem like something that I could reliably factor into my trading so I can't justify spending time/energy on it. There are so many paths to explore that can help us become better traders, gotta avoid the dead ends.

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  #9 (permalink)
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@DionysusToast am not sure why you broach this thread. I think in all the videos you have covered over the years you have given good enough explanation to almost everything you touched upon in the initial conversation. Your videos have extensive details. However one also needs to spend time to go over them.

anyways...the problem is just what people think...and not really HFT/Algo. Also if everyone thinks as HFT/Algo as predatory then its probably not the correct thing. Lol there are webinars on Fio and i dont think any of them were advocating use of Algo trading for predatory purposes. Taking example of equities where volume is many fold..if one does not apply HFT/Algo mechanisms the markets would not exist as it does today. When moving 2/3/4/20Mill . shares in equities of instruments which probably trades 30/40Mill a day if a firm does not have ways to buy or Sell without actual spikes in prices...they will loose or cause wild price fluctuations. Yes there maybe some hfts which could front run them...but bottom line its a HFT/Algo strategy a firm uses to trade these. Not sure if this is new info to any over here. Similar strats are ofcourse there in commodities/derivative markets...and used by props/hedge funds and many bigger traders who are either arbing or pair trading, etc against baskets of equities/etfs/etc or just playing the specific instrument.

Also Stop Hunts....if people have been in trading for sometime will know is not a myth and it will be their experience which will tell them when it is being done. I guess screen time and knowing Levels and Interests shown at those levels (Aggressive/Passiveness) should alert folks to what is going on. Sadly there is no 1 or 2 rules which one can spit out.

anyways thnx for the thread. Its a eye opener to understand what people think or know.

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  #10 (permalink)
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Reality Checks


This is actually a great topic which deserves more in depth analysis. As traders, it's important to understand the realities of our universe. As Peter said in so many words, it's a waste of time to worry about HFT's and "stop hunters" because we are not privy to that information. And even if we had that information, the opportunity to capitalize on it would be out of reach for most of us. Worst of all is using these phenomena as an excuse for bad trades - creating fantasies doesn't provide a solution to why we make bad trades. The market gives us only the high, low, open, close. Peter gave us Jigsaw and others have given us footprint charts. The Jigsaw DOM is a phenomenal development - there are so many ways to use it.

There was an article last year in Research in International Business and Finance which describes the current status of high frequency trading and its impact on the market. I'm posting the Abstract, part of the Introduction and Conclusion as well as a few jpgs from the illustrations. If anyone wants the full article, please pm me and I'll send you the pdf - it's only available to institutional subscribers at Science Direct.

The take-home message is don't obsess over it. We have the tools to jump over the gorilla.


The fall of high-frequency trading: A survey of competition and profits

Jean-Philippe Serberaa,b,∗, Pascal PaumardcaBEAR Lab, Université Internationale de Rabat, Rabat Business School, Technopolis – Rocade de Rabat-Salé,11100 Salé El Jadida, MoroccobInstitut Africain de Risk Management, 35 Rue de la Bienfaisance, 75008 Paris, FrancecLaboratoire IRMAPE, Groupe ESC PAU, Campus Universitaire, 3 Rue Saint-John Perse, 64000 Pau, France



a b s t r a c t

We investigate high-frequency trading (HFT) strategies, inventorying the strategies already studied in the literature and introducing innovative strategies detected by private institutional research. To this end, we expand the existing classification, and we offer names for new categories. In a complementary but original manner, we introduce counter reactions from professional traders in response to HFT predatory strategies. These human answers reverse the usual framework of competition between high-frequency traders (HFTs) and low frequency traders (LFTs) and also widen this cadre to HFTs algos (predators) versus execution algos. This survey notes that a continuous increase in competition, between high-speed trading algorithms themselves through predatory strategies and from professional human traders adapting and building adequate responses has made the business more difficult and has led to shrinking profits for HFT. In the end, we believe that excessive competition and a change in the current regulation (favorable to HFT) could kill the goose that laid the golden egg.
© 2015 Elsevier B.V. All rights reserved.


Introduction

Since 2009, when a profit peak was reached, we have witnessed a decline in earnings, volume traded and market shares for the first time in the history of HFT. HFT strategies, which are implemented by complex algorithms to analyze multiple markets and execute orders based on market conditions, are widely studied in the finance literature. Smith (2010), Hoffmann(2014), and Menkveld (2014) examine the impact of HFT strategies on market quality and microstructure. Hendershott andRiordan (2013), Jarnecic and Snape (2014), and Harris (2013) focus more precisely on liquidity, while Boehmer and Wu (2013) investigate on price discovery. Also, Biais and Woolley (2012) modelize asymmetric information problems, and Angel and McCabe (2013) are concerned with the fairness of financial markets. In a complementary manner, authors like Smales (2014) or Kollias et al. (2013) probe HFT’s reactions to exogenous news or shocks such as the London bombings, and analyze theirimpact on market quality. In a more technical way, Brandaouy et al. (2014) survey the impact of (Kolmogorov) algos’ design on price dynamics.

Conclusions

In the following section, we will first sum up our findings as detailed in the whole article, then highlight some limitations and constraints that have truly hampered our research, but which could open up venues for further research and provide better insight into HFT competition and profits. Frequently, HFT has been considered to be a true cash-machine only capped by the boundaries of physics (Kearns et al.,2010), such as the speed of light or the available technology, with profits growing along with the technical progress. The description of competition mechanisms between HFTs and LFTs made by O’Hara (2014) and how the former overcomes the latter to profit from them are related questions in the literature. Although the competition framework already exists, its scope is limited to HFTs versus LFTs, and its understanding remains partial. The reversed competition, which has been largely ignored, where LFTs potentially harm HFTs, constitutes the most important gap. Different types of competition between execution algos and ultra-high speed predatory algos have been partially categorized by Aldridge (2009). However, despite a growing interest in predatory strategies, there seems to have been little investigation into their functioning and performance. In this survey, we tried to gather evidence of a decline in profits.




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