High Frequency Trading

Parent Cafe
1

<p>LakeWashington…brought up this video. </p>

<p>I like it a lot…and HFT is pretty big these days…so here is the video that was on PBS…</p>

<p>[Fictional</a> Thriller Tackles Dangers of High-Frequency Trading - YouTube](<a href=“http://www.youtube.com/watch?v=OLeO4MUu_t4]Fictional”>http://www.youtube.com/watch?v=OLeO4MUu_t4)</p>

<p>And I like this interview…</p>

<p><a href=“http://www.hftreview.com/pg/blog/mike/read/5323/debunking-six-myths-of-hft[/url]”>http://www.hftreview.com/pg/blog/mike/read/5323/debunking-six-myths-of-hft&lt;/a&gt;&lt;/p&gt;

<p>"HFTR:*You’re quoted as saying that the way HFTs make their money is by identifying extremely small and extremely transitory trading
opportunities. Without giving away any of your “secret sauce”, can you explain at a high level where these opportunities come from and how they are identified?</p>

<p>MN:<em>The forecasts produced by any quantitative/statistical model follow some distribution.</em> Because stock returns themselves have a distribution that is shaped somewhat like a bell-curve, it is not surprising that most models also produce forecasts which are distributed the same way.* The bell-curve shape of the distribution of return forecasts means that large forecasted returns are very rare (because the tails are “thin”),* whereas small-return forecasts are highly abundant (because they lie in the “fat” center of the distribution).* In the past, these super-small return opportunities were inaccessible because they were smaller than the costs of trading (commissions, SEC fees, exchange fees, etc.).** However, because of advances in technology, the costs of trading have come way down over time.* Nowadays, HFT’s pay commissions to their brokers which are on the order of magnitude of hundredths of a penny per share.* As a result, more and more trading opportunities have become profitable to access after paying trading costs.* This has resulted in a much more efficient market, since smaller and smaller “inefficiencies” in the market are now arbitraged out than was the case before."</p>