Wolves of Wall Street: A story about high-frequency trading from the expert Thomson Reuters

One of the heroes of the book by Michael Lewis Flash Boys (translation adaptation published in our blog: one , two , three , four ) Brennan Carley, head of the department of analytical platforms and solutions of Thomson Reuters, in an interview for the Youtube channel ITinvest answered popular questions high-frequency trading raised by Michael Luce in his bestseller. Decoding conversation in our today's material.

Why high frequency trading has become widespread in the US

The development of high-frequency trading was due to the course of the history of markets. First, over time, the trades themselves on many exchanges went into electronic mode. The second important point is that for a long time the American stock market worked in the system of simple fractions, but later a kind of revolution took place on it.
')
Previously, the unit for measuring the price of a stock (or derivative financial instrument ) was $ 1/16 (about six cents). The main players in the market at that time were large brokerage companies, market makers. They could operate with huge amounts of orders for the purchase and sale of shares, which allowed them not to strive to get more profit on each transaction - the profit of $ 1/8 per share was considered optimal.



Brannan Carley

After the decimation of the shares on the New York Stock Exchange NYSE began in 2001, they began to trade using the decimal system - the minimum price change was 1 cent, not 1/16 of a dollar. A smaller price change pitch means greater liquidity of the shares in the decimal price, which reduces the risks and expands the number of available trading strategies and ultimately makes the shares more attractive.

Here's how the consequences of this step are described in the Wired Bulls article: how Wall Street became dependent on high-speed trades (we translated it here: one , two , three , four , five ):

Some algorithms are “market makers” of the exchange - they are trying to buy shares at the minimum purchase price and quickly sell them at a slightly higher selling price, collecting the difference, called the spread. People who did this were formerly called experts, and earned good money when spreads reached the eighth part of a dollar. Since the decimelization was announced on the New York Stock Exchange in 2001, the size of the spread has dropped to a penny or two, which means that in order to earn the same money, now you need to process many more transactions and several times faster. This area of ​​trading on the stock market has ceased to be a lot of people.

Is it true that HF ​​trading is harmful to the economy and “distorts” the real prices of financial instruments?

Steadily developing markets are characterized by fragmentation (the presence of several exchange platforms, which allows to implement arbitrage strategies) and fractality - alongside larger participants, there are always smaller ones that work with smaller amounts of finance and for shorter time periods, while making more deals ( so as a result, their turnover may exceed the turnovers of large investors).

Under normal market conditions, HF-traders are at the very end of this chain, but this is not always the case (for example, in Russia at the moment there are more such traders than long-term investors, which upsets the market balance somewhat).

The book by Michael Lews describes the situation where trader Brad Katsuyama sends an order to purchase 100,000 AMD shares, and thereby “moves” the market, creating a disparity between supply and demand for a short time. The market function is to find the equilibrium price between supply and demand. HF traders cannot change this market function and only adapt to supply and demand.

Does the volume of high-frequency trade depend on the development of the economy of a particular country?

For some high-frequency trading strategies, situations like the one that is now in the Russian economy are well suited - crises, panic in the markets create volatility, everything changes very quickly. On such price movements, you can make good money using arbitrage strategies. Therefore, in Russia there are some prospects for the development of this kind of trade.

It is important to understand that in Russia there is one large stock exchange, and arbitrage strategies are most often created for working with shares traded on the Moscow Exchange and, for example, on the London Stock Exchange. In the US, traders can create arbitration strategies within the country, since there are a large number of exchange platforms.

In addition, in order for one trader in the market to work, another must lose money, and here the total amount of finance in the market comes to the fore. HF-traders can only work “against” other market players (medium and long-term investors). If there are fewer such investors, and the market itself shrinks, this is badly reflected in the earnings of HF traders.

How HFT merchants make their strategies more effective

One of the most popular trends of recent HF and algorithmic trading is the machine analysis of news and their tonality (including in social media) - such information can be used by arbitration robots for more efficient operation.



If the system notices a surge in the discussion of the company whose shares are included in the strategy, say, Twitter, then it can analyze the tone of these references and make adjustments to the strategy (correct the dependencies between the basket of securities used in the arbitration model) in real time (at the same time orders to buy or sell such a stock will not necessarily be generated, it is more likely to stop trading for a while).

Who is more successful in the market: "ordinary" investors or HF-traders

When an investor makes a decision to buy or sell a particular stock, he makes a very definite bet on it. The result of such a decision can be either profit or loss. Large investors risk large sums of money.

At the same time, HF-merchants make very, very small bets, but their number is simply enormous (tens of thousands per day), which allows them to flexibly change their behavior in the market. Therefore, if 70% of these small bets play a plus, and 30% lead to losses, the HF trader will remain in the black. The amount of profit will not be so great due to the small size of that very “rate”, but in the long run, HF trading is more profitable than the usual investment activity.

The video version of the interview is available on YouTube:



Thanks for attention!