high-frequency trading

How High-Frequency Trading Makes the World a Better Place (part 1)

flash-boys-not-so-fast

A high-frequency trader gave me this book on high-frequency trading many months ago, and I promised I would review it. It has taken me a long time to get to this because reading the book was like chewing through cardboard.

Not So Fast is a line-by-line takedown of Michael Lewis’s Flash Boys, from the perspective of a high-frequency trader.

In summary:
The stock market isn’t rigged. Michael Lewis and Brad Katsuyama mistook the price impact of large orders for front-running. Thirty-eight miles of fiber-optic cable in a shoebox could have been implemented in a line of code. The End.

There’s a reason why Flash Boys resulted in a class-action lawsuit against exchanges and Not So Fast didn’t result in a class-action lawsuit against Michael Lewis. Lewis is a NY Times bestselling storyteller, and Kovac is a guy who writes software.

See Also:
How High-Frequency Trading Makes the World a Better Place (part 2)

A Half-Second of Trading Activity

I think this is really cool.

The bottom box (SIP) shows the National Best Bid and Offer. The shapes represent quote changes which are the result of a change to the top of the book at each exchange.

[youtube http://www.youtube.com/watch?v=rB5jJuMP84E&w=560&h=315]

From Nanex:

Watch High Frequency Traders (HFT) at the millisecond level jam thousands of quotes in the stock of Johnson and Johnson (JNJ) through our financial networks on May 2, 2013. Video shows 1/2 second of time. If any of the connections are not running perfectly, High Frequency Traders can profit from the price discrepancies that result. There is no economic justification for this abusive behavior.

Now now, I don’t think that last sentence is quite fair. First of all, this abusive behavior serves as gainful employment for thousands of parasites who might otherwise become debt collectors or personal injury attorneys or used car salesmen. At least this way nobody has to look at them.

Second, I have a soft spot in my heart for high-frequency traders because the very first research funding I secured while teaching at the University of Sydney was from an HFT firm. I wrote a grant proposal to build machine-learning algorithms in reconfigurable hardware and spent weeks kissing ass and turning tricks all over town. The shop finally threw me a few drops of funding to hire two graduate students.

That’s how a trickle-down economy works!