Analysis: how the high-frequency trading market on the exchange works
Evgeny Avrakhov, Alteus hedge fund, talks about how the business of traders using trading robots to work on the stock exchange is arranged.
According to the Bank of Russia, at the moment, a significant trading volume (30-50% depending on the financial instrument) on the Moscow Exchange is generated by trading algorithms (robots). The impact of algorithmic trading on the market will only grow. The head of the company, which manages the Alteus hedge fund, told us about the structure of the HFT / Low latency trading market and its main trends.
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About the start of work, initial costs and prospects
Usually, people who are looking for something new come to the field of algorithmic trading and want to get away from simple investments by hand. And the more they immerse themselves in the industry, the better they realize that it is extremely fragmented and includes strategies of various types.
For example, I was interested in earning with minimal risk, so I was originally involved in the creation of mechanical trading systems (MTS), based on following trends. However, I quickly realized that there are not only pronounced market movements in the market that you can use to make money, but also periods of calm, “sideways” - when prices move up and down with a small amplitude. In such periods, trend strategies show poor results, there may be a drawdown in the account, so I quickly switched to arbitrage strategies - I have been working on them until now.
The entry threshold in this area depends on the selected segment. The mentioned trend strategies are usually quite simple to implement and do not require a lot of capital, so the amount of investment can be quite small - 100,000 rubles is enough. If you need to create something more high-tech and complex, then it will not be easy to develop a competitive product here.
For example, our foundation has been doing roughly the same thing for 10 years, the code of our robots is measured in many hundreds of thousands of lines. To start from scratch and reach a level of a company like ours, a decent investment of time and resources will be required. In our business, the phrase from Alice through the Looking Glass is popular: “To just stand still, you need to run as hard as you can.” Including, therefore, the main expense item for us is the salaries of financial engineers and developers. The competition is very great, so you have to constantly think about improving strategies so as not to be left behind.
About types of players in the market
Algo traders in their internal structure are divided into various types. In addition to individual traders, there are independent proprietary trading companies (from the English proprietary trading) that conduct operations on the exchange with their own funds, and not with clients' money. Accordingly, all the profit goes to the company, not to the customers.
Sometimes subsidiary high-frequency units may exist with broker-dealer companies. In this case, the broker simply has a separate “prop-trading desk”, whose employees carry out high-frequency trading. The company should separate the directions of client trading and prop-trading - such operations should be performed at the organization’s own funds.
Sometimes HFT firms can work as hedge funds. The arbitration strategies they use are aimed at making profit from the inefficiencies in pricing different stocks and financial instruments in various markets and exchanges.
A few years ago, an article with a detailed analysis of the Russian HFT market and Low latency trading was published in the FO profile magazine: the authors listed all the main players - both domestic and foreign firms and funds trading in the Russian stock market.
As it is easy to see, already at that time there were quite a few serious companies on the Russian market, and over the past years, trade has only become more difficult from both a technological and economic point of view. All this affects the earnings of individual traders: it becomes increasingly difficult for loners to compete with institutional traders.
Who gives money to algo traders
Market development and increasing competition complicate the work for single traders. To increase their chances of success, often such specialists are united in teams. The next logical step in the development of such a team is the transition from trading only on our own funds to attracting investments.
This is how hedge funds arise that can raise funds from investors who want their money to work and make a profit with moderate risk. As a rule, the entry threshold for hedge fund clients is large enough - this is the only way the company can attract a sufficient amount of funds.
As a result, clients of hedge funds can most often be classified as High Net Worth Individuals - wealthy people with large capital and the ability to invest. The minimum investment amount is usually several hundred thousand dollars. The minimum investment in our fund is $ 100,000.
Major industry trends
The capacity of the Russian market of Low latency / arbitration on a global scale is small. And in recent years, after the well-known political cataclysms and the introduction of various sanctions, liquidity, and, accordingly, the earning potential with the help of algorithmic strategies only decreased.
On the other hand, today, in order to start making money on trading robots in Russia, you will need several times less investments than in the case of developed markets. Therefore, new teams of algo traders more often try their hand at home, and only then they begin to think about global expansion.
The main trend is also a plus and a problem for our industry: it is developing very quickly. We have to constantly improve algorithms, increase the speed of trading systems - for this we need to learn and implement new technologies and approaches. At the same time, one cannot sacrifice reliability, since real money is at stake.
For example, we first wrote our trading robots in C #, but then we had to rewrite everything in a faster C ++ programming language. Also, initially our solutions worked on Windows, and then we switched to Linux.
It is important to understand that it will be difficult for beginners to create immediately a super-innovative product that will work quickly and bring money. It is better to move gradually, first creating something workable and relatively fast, using familiar technologies, and only then go deeper into studying issues of reducing delays in trade.
Does HFT benefit the market?
In general, the activities of algo traders are useful in that they generate additional liquidity in the market - the Bank of Russia also acknowledges this. This means that more investors get more opportunities to earn, even those who do not use robots. However, during periods of sharp movements in the market, the activity of algo traders can exacerbate the negative consequences. Alteus strategies basically create liquidity, not take it away.
So, in 2012, the American market experienced an instant collapse of 20%, provoked by a trading robot. Later, already in 2018, experts linked the fall of markets around the world with the work of trading algorithms. Then, within a few days, the markets could collapse repeatedly - as was the case, for example, with the American Dow Jones: on February 5, it collapsed by 4.6%, and on February 8 it lost another 4.15%. In such situations, non-high-frequency traders suffer the greatest losses.
At the same time, market self-regulation ensures that only robots do not work on it. Everything develops in a circle: increasing liquidity and market efficiency leads to an increase in the number of algo traders, which entails a decrease in the profitability of their operations. At the same time, expenses (for example, for technology and equipment) continue to grow, which means that soon work in the Low latency trading niche will become unprofitable for many traders. As a result, they become smaller, again there will be market inefficiencies that can be exploited, which will again lead to the development of this segment. It is very difficult not to fly out of the market at the next round, for this you need to work very hard and look for new niches.
For example, since competition is becoming tougher, and at the same time, the volatility of financial markets is decreasing, the following trend has emerged: algorithmic strategies are being actively used in cryptocurrencies, where everything is in order with volatility for now.
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Source: https://habr.com/ru/post/461003/
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