Learn Algorithmic Trading
by Sebastien Donadio · 7 Nov 2019
of market participants also now have access to microwave networks that can transmit data between locations much faster than physical fiber connections can, leading to latency-arbitrage opportunities. Time and time again, participants who have maintained their technological edge and kept up with the technological advancements made by their competition have been
Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio
by Sal Arnuk and Joseph Saluzzi · 21 May 2012 · 318pp · 87,570 words
Pulled Back on High Frequency Trading What Is High Frequency Trading, and Who Is Doing It? Market Making Rebate Arbitrage Statistical Arbitrage Market Structure and Latency Arbitrage Momentum Ignition How the World Began to Learn About HFT The SEC’s Round Table on Equity Market Structure—or Sal Goes to Washington 60
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Heart of Darkness The Birth of Dark Pools Dark Pools Cross Over...to the Dark Side How HFT Internalization in Dark Pools Hurts Investors How Latency Arbitrage in Dark Pools Hurts Investors What Else Is Being Done to Stop Dark Pool Abuse? Endnotes Chapter 9 Dude, Where’s My Order? How Algorithms
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making” rebate arbitrage (we use quotations around “market making” because we really don’t see how it even closely resembles real market making) • Statistical arbitrage • Latency arbitrage • Momentum ignition Market Making Rebate Arbitrage This is probably the largest bucket of HFT. It is the style and strategy especially catered to by all
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and other securities within those ETFs. You might even have experienced one of your stop loss orders trigged unintentionally as a result. Market Structure and Latency Arbitrage This strategy is designed to exploit built-in weaknesses in the market structure. While Reg NMS was being proposed, debated, and enacted between 2004 and
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tax on investors. The money garnished comes directly from investors, who pay more for stocks they buy and receive less for stocks they sell. HFT latency arbitrage has as its roots the predatory trading of past market structures. In the late 1980s and 1990s, a group of trading participants, collectively called SOES
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goal was not accomplished. We went on to detail the conflicts of interests of the for-profit exchange model, the timing issues that led to latency arbitrage, and the poorly designed market data revenue model (see the Appendix for the entire letter). The SEC received hundreds of letters from many industry participants
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data feeds, HFT firms can calculate their own, much more accurate index values seconds faster than what the public sees. This could easily create valuable latency arbitrage opportunities in the trading of ETFs and other tradable products linked to indexes (see Chapter 2, “The Curtain Pulled Back on High Frequency Trading”). Machine
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for investors to display their quotes when those quotes can be used, in turn, to disadvantage them? How Latency Arbitrage in Dark Pools Hurts Investors Another way HFTs hurt investors in dark pools is through latency arbitrage. Latency arbitrage arises from the two speeds in the markets. On one hand, HFT firms, who colocate at the
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2009 article, describing the HFT advantage, while everybody else is “looking at stale prices.” The 2010 article reported how Gates set about to prove how latency arbitrage damaged his firm and its clients. Gates sent an order to buy Nordson Corp (NDSN) into a midpoint priced dark pool, with a limit not
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InRush Ticker Plant product to speed up Sigma X’s NBBO calculation.11 To us, this is an acknowledgment of the harm latency arbitrage causes investors. In a white paper we published in December 2009, “Latency Arbitrage: The Real Power Behind Predatory High Frequency Trading,” we raised three serious questions about market integrity surrounding
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Latency Arbitrage:12 1. The primary response from HFTs or market centers is typically “a penny or two should not matter to long-term investors; this is
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matters. It’s that a differential exists at all. Who would bet on a horse race if a select group already knew who won? 2. Latency Arbitrage has created a two-tiered market of technology-enhanced insiders (composed of a handful of large banks, brokerage firms, and hedge funds) and the rest
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to Stop Dark Pool Abuse? In December 2010, SEC Chair Mary Schapiro testified before Congress that the Commission was looking into “abusive colocation and data latency arbitrage activity in potential violation of Regulation NMS.”13 At the close of 2011, however, there had been no action on this subject, and the SEC
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. 25, 2011), Low-Latency website, http://low-latency.com/article/qa-redlines-mark-skalabrin-goldman-and-why-cell-better. 12. Sal Arnuk and Joseph Saluzzi, “Latency Arbitrage: The Real Power Behind Predatory High Frequency Trading” (Dec. 4, 2009), Themis Trading website, http://www.themistrading.com/article_files/0000/0519/THEMIS_TRADING_White
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_Paper_--_Latency_Arbitrage_--_December_4__2009.pdf. 13. Mary Schapiro, “Testimony on U.S. Equity Market Structure by the U.S. Securities and Exchange Commission” (Dec. 8, 2010
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which exchange you pick, your stock will help investors create wealth by investing in your company for the long term. Ever hear of rebate arbitrage? Latency arbitrage? Colocation? Private data feeds? Actionable IOIs or dark pools? Probably not, but that’s what stock trading is all about nowadays. Your stock will now
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colocation and access to private data feeds and can calculate the quote faster than the SIP. This has led to the HFT trading strategy called latency arbitrage that has been siphoning profits from investors for years. These two quotes should be synchronized. • Eliminate “phantom” indexes: What you see when viewing an index
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intraday is different from what most HFTs see, creating additional opportunities for latency arbitrage. Most major indexes contain only trades from the primary listing exchange, which represents only approximately 25% of all trades. In addition, index values are updated
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and equal low cost access for all might be a steep price to pay for sub-penny price improvement and increasingly opaque and multitiered markets. Latency Arbitrage: The Real Power Behind Predatory High Frequency Trading December 4, 2009 Introduction In previous white papers, we have discussed several High Frequency Trading (HFT) strategies
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that first alerted us to HFT because of its detrimental impact on traditional institutional and retail investors. In this paper we address the practice of Latency Arbitrage, which is more than a simple case of technological evolution but raises serious questions about the fairness and equal access of U.S. equity markets
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that have made them the envy of the world. Most industry professionals have been aware of the term Latency Arbitrage as it applies to HFT. The common assumption is that it refers to the spending or “arms” race in which high frequency traders employ high
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-speed hardware, software, and bandwidth to execute orders as fast as possible to gain an edge in trading. Because lower latency equals faster speed, Latency Arbitrage was viewed as a natural technological evolution that eventually would translate into more efficiency in the marketplace as the speed cascaded down to all investors
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no restrictions on which firms can colocate. Theoretically, any institutional or retail brokerage firm could do it to serve clients better. The Reality of Latency Arbitrage In practice, however, Latency Arbitrage means something completely different to HFTs. First, it is about using cutting edge technology and colocated servers at exchanges and ATSs, combined with
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that arbitrageurs and hedge-fund managers drool over,” Richard Gates, a portfolio manager for TFS Market Neutral fund in West Chester, PA, who has studied latency arbitrage, told a blogger for The Wall Street Journal.7 Following is an example of how an HFT trading computer takes advantage of a typical institutional
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algo VWAP order to buy ABC stock: 1. The market for ABC is $25.53 bid/offered at $25.54. 2. Due to Latency Arbitrage, an HFT computer knows that there is an order that in a moment will move the NBBO quote higher, to $25.54 bid/offered at
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to market centers. Broker-dealers account for half... exchanges 23%, proprietary trading firms 13%, asset managers 10%, and hedge funds 4%.”11 Questions We believe Latency Arbitrage raises three serious questions about market integrity. 1. The primary response from HFTs or market centers is typically “A penny or two should not matter
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speed among colocated firms is an important “must” for the exchanges, but not so when it comes to all other institutional and retail investors. 2. Latency Arbitrage has created a two-tiered market of technology-enhanced insiders (composed of a handful of large banks, brokerage firms, and hedge funds) and the rest
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the negative aspects of HFT.15 • Media: Trade media, such as Securities Industry News, have published by-lined articles, like “The Un(?)fair Advantage of Latency Arbitrage,” by Ralph Frankel, CTO of Solace Systems.16 As a result, the mainstream media is also becoming more aware of HFT. For example, The New
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, awareness and concern among institutional investors, especially those responsible for public and private pension funds, will continue to gain traction. Conclusion Many professionals believed that Latency Arbitrage referred to the race by HFT firms to be faster than other traders in delivering their orders. We cared little about their technology war, as
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the market in general, as front-end functionality, speed, and efficiency filtered down. We have since found this not to be entirely true. HFTs use Latency Arbitrage to reengineer the NBBO from end sources directly versus relying on the publically available standard SIP quote. HFTs can do this by paying exchanges and
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, a rebate arbitrage still exists because the NASDAQ rebate for adding liquidity (20bps) is greater than the NASDAQ BX rate (15bps) for taking liquidity. II. Latency Arbitrage Latency Arbitrage has become one of the fastest growing strategies on Wall Street. Latency has been steadily decreasing as hardware, software, and networking have improved and through
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retail investors. Is it fair to sell these rights to the highest bidders when market centers are supposed to be protecting all participants’ interests equally? Latency Arbitrage has created a two-tiered market of technology-enhanced insiders (composed of a handful of large banks, brokerage firms, and hedge funds) and the rest
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customers as part of their everyday business strategy? Not exactly identity theft, perhaps, but clearly theft of highly proprietary information. In our previous white paper (“Latency Arbitrage: The Real Power Behind Predatory High Frequency Trading”), we illustrated how the exchanges provide raw data feeds that help high frequency traders figure out market
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Services, “The Impact of High Frequency Trading on the Canadian Market,” (BMO Capital Markets, July 22, 2009). 16. Ralph Frankel, “The Un(?)fair Advantage of Latency Arbitrage” (July 24, 2009), Traders Magazine.com, http://www.securitiesindustry.com/issues/19_100/-23732-1.html. 17. Charles Duhigg, “Stock Traders Find Speed Pays, in
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algos, 144 dark pools, 31, 62, 105, 127 birth of, 127-130 demise of, 130-132 groups, 131 how HFT internalization hurts investors, 132-133 Latency Arbitrage, pain for investors, 133-136 real-time identification of, 228 stopping abuse of, 136-137 data, owner of, 123-124 Data Theft, 123 Datek Securities
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Commissions, 75 International Securities Exchange (ISE), 52 investors institutional investors, 224-225 pain caused by HFT internalization of dark pools, 132-133 pain caused by Latency Arbitrage, 133-136 retail investors, 223-224 IPO market, 200-202 collapse of, 198-200 decline in success rate, 207, 209 difficulties of, 203 ISE (International
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Knight Capital, 58 Kroft, Steve, 41 L Laffer Curve, 211 large trader reporting rule, 92-93 latency arbitrage, 31, 248-250, 264-268, dark pools, pain for investors, 133-136 market integrity, 251-252 speed, 250 “Latency Arbitrage: The Real Power Behind Predatory High Frequency Trading,” 135-136, 247-254 Leuchtkafter, R.T., 152
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, 78 market center inducements for high frequency traders, 238-239 market data proposal, 78 market data revenue, 268-269 market integrity, Latency Arbitrage, 251-252 market makers, 15 market structure and latency arbitrage, 30-32 market structure, complexity of, 148-150 Maschler, Sheldon, 51 McCaughan, Jim, 220 McNamee, Roger, 220 McTague, Jim, 40 “Measuring
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SOES, 50-52 SOES Bandits, 31, 51, 54 SOR (smart order router), 145-148 Sotheby’s, 162 Spatt, Chester, 104, 170 speed eliminating differentials, 227 latency arbitrage, 250 Spitzer, Elliot, 77 sponsored rule access, 92 spot market, 184 statistical arbitrage, 28-30 staying informed, 226 stock market alternative markets, 220-222 blueprint
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providers (SLPs), 26 T Teza Technologies, 34 TFS, 134 Themis Trading, 3 white papers “Exchanges and Data Feeds: Data Theft on Wall Street,” 272-277 “Latency Arbitrage: The Real Power Behind Predatory High Frequency Trading,” 247-254 “Phantom Indexes: Major Market Indexes Reflect Only 30% of All Trades Intraday,” 278-283 “SEC
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, 221 “What Ails Us About High Frequency Trading,” 242-246 white papers “Data Theft,” 123 “Exchanges and Data Feeds: Data Theft on Wall Street,” 116 “Latency Arbitrage: The Real Power Behind Predatory High Frequency Trading,” 135-136 “Phantom Indexes,” 120 Themis Trading “Exchanges and Data Feeds: Data Theft on Wall Street,” 272
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-277 “Latency Arbitrage: The Real Power Behind Predatory High Frequency Trading,” 247-254 “Phantom Indexes: Major Market Indexes Reflect Only 30% of All Trades Intraday,” 278-283 “SEC
High-Frequency Trading
by David Easley, Marcos López de Prado and Maureen O'Hara · 28 Sep 2013
has transformed liquidity provision into a tactical game. We now list a few examples that are discussed in the literature. • Quote stuffers: these engage in “latency arbitrage”. The strat- egy involves overwhelming an exchange with messages, with the sole intention of slowing down competing algorithms, which are forced to parse messages that
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, 160–4 and execution shortfall, 164–6, 165 see also AlphaMax; BadMax L large clusters, high alpha of, 170–4 Large Hadron Collider, 125–41 latency arbitrage, 9 leakage of information: and algorithmic execution, 159–83, 176–7, 178–9 BadMax approach and data sample, 166–8, 168 and BadMax and gross
Why Aren't They Shouting?: A Banker’s Tale of Change, Computers and Perpetual Crisis
by Kevin Rodgers · 13 Jul 2016 · 318pp · 99,524 words
to 23/25 – an immediate gain for the fund and a loss for Deutsche. The e-traders quickly realised that the fund was engaging in ‘latency arbitrage’. Its computers would constantly monitor the market and wait for a large order or an information release to move prices on EBS or elsewhere. Then
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ahead of the slowest gazelle. As we and other banks fought back on latency, funds brought other, more sophisticated techniques to bear. Rather than pure latency arbitrage (where, rather like the canny shopper in Loic’s jumper market we met in Chapter 1, a fund could buy at one price and sell
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, Morgan Stanley, Lehman Brothers, Bear Stearns. latency Delay in the processing of buying or selling signals caused by physical effects or the design of software. ‘Latency arbitrage’ is the activity of exploiting other market participants’ latency for profit. leverage Using borrowing to enhance the returns on an investment strategy. An everyday example
Flash Boys: A Wall Street Revolt
by Michael Lewis · 30 Mar 2014 · 250pp · 87,722 words
was no value to reacting, why would anyone react at all?” The arrival of the prey awakened the predator, who deployed his strategies—rebate arbitrage, latency arbitrage, slow market arbitrage. Brad didn’t need to dwell on these; he’d already walked each of the investors through his earlier discoveries. It was
Advances in Financial Machine Learning
by Marcos Lopez de Prado · 2 Feb 2018 · 571pp · 105,054 words
liquidity, as participants are publishing quotes that do not intend to get filled. They discuss four categories of predatory algorithms: Quote stuffers: They engage in “latency arbitrage.” Their strategy involves overwhelming an exchange with messages, with the sole intention of slowing down competing algorithms, which are forced to parse messages that only
Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market
by Scott Patterson · 11 Jun 2012 · 356pp · 105,533 words
away from the new breed of high-speed traders, like Tradebot, the speed traders devised methods to swim in the dark as well. Known as “latency arbitrage,” the strategy involved gaming the difference between the price of a stock in a dark pool and its price in the lit markets. Tradebot was
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disseminated trade data around the market, the Securities Information Processor, or SIP (the same SIP that high-speed firms such as Tradebot exploited for their latency arbitrage strategies). In the early 2000s, the SIP feed was notoriously slow—giving quick-draw firms opportunities to arbitrage a stock trading at slightly different prices