<p>The interview was interesting but I have a question which wasn’t asked:</p>
<p>Do HFT’s lose money?
Do they go out of business?</p>
<p>I actually do believe that fundamentals matter in the long run and that technical indicators are useful in the short term for entries and exits. The author stated that he started trading with software to pick the pockets of the HFTs - the market is a living, breathing thing. Yes, some have advantages but do those HFT programs walk into stores to see how long the lines are or how good the food is or how happy the employees are or how excited they are to do their jobs?</p>
<p>"HFT affects all investors to an extent, because stocks are now priced differently than in the past. The market used to consist mostly of investors analyzing cash flows and balance sheets, trying to calculate a company’s fair value. HFTs, on the other hand, react to movements in stock prices alone. That is not necessarily a bad thing, but since HFTs are responsible for two-thirds of the trading volume, we have the strange situation where they can set the price based on what they perceive others’ perceptions to be. </p>
<p>Also, even long-term investors have to enter and exit their trades at some point, which is where the most risk is. You might enter the trade when the computers are doing their trending movements and inadvertently buy at a peak.</p>
<p>TCR: What are trending movements?</p>
<p>GARRETT: Trending movements are when an HFT deliberately moves a stock price up or down for its own benefit. For example, a computer can submit an overwhelming number of sell orders, knock the price of a stock down a few percentage points, then buy the stock back cheaply.</p>
<p>TCR: That sounds like overt manipulation.</p>
<p>GARRETT: It is, which is why investors need to understand how to protect themselves. One of the most important tips I can give you is to never enter stop-losses into the market. There are algos designed to sniff out stop-losses and manipulate them against you.</p>
<p>I’ve seen this many times: prices drop 2-4%, clear out stop-losses, then run up for substantial profits. So the poor retail investor gets his stop-loss tripped and sells on the cheap to an HFT, whereas the HFT buys cheap and profits once the price ramps back up."</p>
<p>I bolded the part that surprised me the most. Stunning.</p>
<p>You could program a local trading application for stops that MMs can’t see too.</p>
<p>We’re also in a sideways market as we were last summer until the end of July. A lot of people get pretty frustrated in sideways markets. When they’re trending, especially up, there are fewer that complain because you can always just hold and wait when the trading stuff happens.</p>
<p>On a side note, thinking back to Lou Ruckheyser. Did you guys watch the show where Marty Zweig said he was afraid a crash was imminent? And then Monday Oct. 19 (black Monday) 1986 was like the next day??? Lou said Marty, you sound really nervous. Marty said I’m always nervous. Yeah. Memories!!! (((I was on my last ever business trip that Monday - new baby (now college grad and off in the world) was home with new Poppa. Felt like the end of the world.)))</p>
<p>I understand HFT but I still do not understand how they make money. If everyone is running an algo they all cannot be making money. It seems like one algo would wipe out the other algo.</p>
<p>Running stops isn’t a new HFT thing. It has been around a long time in the futures market. I don’t use stops.</p>
<p>I remember that show with Zweig. The 3 trading days leading up to the crash were 3 of my worst days of my career. I remember that Friday before the crash sitting near a park and thinking, “I am screwed. I am caught super long.” </p>
<p>Then I watched Zweig.
In those days, options were a form of financial destruction because the margin rules were too lax. I was short a lot of puts and I couldn’t buy them in because there were no sellers of puts leading up to the crash. Volatilites in option classes went from 20 to 100+. echhh.</p>
<p>"Do HFT’s lose money?
Yes
Do they go out of business?
Yes…but the industry is dominated by a few firms and they don’t go out of business…well, we will see what happens to Knight. These firms make money almost every single day. At least they did coming into this year. The
light volumes are hurting these firms. The hft firms are pretty secretive. The firms don’t talk too much about what they do or how much they make.</p>
<p>I have found that most discussions about hft on CNBC are devoid of facts, become shouting matches, and the participants are self serving and ignorant.</p>
<p>Maybe that clip I can’t see is an exception.</p>
<p>Ok…that clip from 2009 was one of the better clips. There wasn’t too much screaming. Should have run longer, but I guess viewers have short attention spans.</p>
<p>Both participants with differing views are right. There are pros and cons to hft. There are many different strategies and some strategies help investors and some don’t. </p>
<p>These strategies were done before hft existed. I don’t think there is anything new here. Arbitrage, front running, changing markets depending on customer orders, market makers having advantages…none of this is new. None of it.</p>
<p>What is new is that the winners now are different firms. Most of the specialists got wiped out. Floor traders got wiped out.</p>
<p>A majority of arguments really center on who is going to make the market and make the money.</p>
<p>I think investors removed money out of the markets because after 2001 and 2008 investors realized that the stock market was not a sure thing. You can lose investing in stocks. You can hold stocks for many years and lose.</p>
<p>The stock market had a huge run for 20 years. Stocks were supposed to return 11 percent a year for eternity. Remember that talk. Jeremy Siegal’s book, “Stocks for the Long Run”. The Dow was going to go to 36,000. Stuff like that.</p>
<p>Hasn’t quite worked out that way the last 12 years. Now the public is in poor financial shape. Can’t afford to buy stocks.</p>
<p>“I think investors removed money out of the markets because after 2001 and 2008 investors realized that the stock market was not a sure thing. You can lose investing in stocks. You can hold stocks for many years and lose.”</p>
<p>You’re mostly right. There have been options traders that said that those have exploded over the past few years and that a lot of investors have moved into them. I guess I’m one of those - I find huge advantages of options over stocks and that is why I mainly focus on them. My returns are significantly better since I’ve moved into options.</p>
<p>“That Aldridge lady is in both the 2009 and the one from the other day. She hasn’t aged well in the last three years.”</p>
<p>When I was watching the 2009 clip, I was thinking that Aldridge lady is very, very good looking.
I am sorry to read she hasn’t aged well.</p>
<p>“You’re mostly right. There have been options traders that said that those have exploded over the past few years and that a lot of investors have moved into them. I guess I’m one of those - I find huge advantages of options over stocks and that is why I mainly focus on them. My returns are significantly better since I’ve moved into options.”</p>
<p>I am always mostly right. I am very careful with what I write on this BB. :)</p>
<p>Option volume has increased. I can think of many reasons. I am just going to name one so I will be mostly right. The weeklys have been a big success. (I know option volume has been increasing for a long time and the weeklys have not been around a long time).</p>
<p>Maybe you have an affinity for option trading, doct. I am glad option trading is working out for you.</p>
<p>So are you trading bigger positions because of your use of ditm calls?</p>
<p>For example, just an example, instead of buying 500 shares of Aapl and selling 5 of the aug 630 calls, are you buying 15 of the aug 500 calls and selling 15 of the aug 630 calls?</p>
<p>NOOOOOOO! I try not to do this - it introduces too much volatility even though I’ve been guilty of this from time to time and gotten burnt. If I’m going to buy 500 aapl, I replace it with 5 contracts with a delta > .9 and use the difference to buy put spreads.</p>
The weeklys have been a big success. (I know option volume has been increasing for a long time and the weeklys have not been around a long time).</p>