The Accidental HFT Firm (2018)
Comments
SkipperCat
Twixes
I'm always impressed how direct the relationship between profit and mathematics/physics/electronics is in HFT. It feels like a marker of civilizational advancement – it's not enough abstraction to just have fungible means of payment and slices of enterprises, not enough to have instruments derived from these, not even enough to have the ability to trade from afar using electricity. At this point there's value even in making the trades as close to instant as possible. Is it _good_? That's what I don't know – in some way it seems more divorced from reality than the engineering of F1, in another it seems more grounded
jacquesm
Optimization for latency is a completely different game than optimization for throughput. The flip side has similar but opposite hacks and you can get a lot of hints on what to do by looking at that polar opposite as things to avoid.
roflyear
Necessity is an amazing thing: at a company I worked for, the dev team (which I was a part of) "couldn't make things cheaper" than $14k/m for a small app.
We spun them into their own org, and now its "their money" they are spending. Their bill is $2k/m! Amazing!
thr_low_latency
It's easy to make things cheap by making them wrong.
Making things fast though is a whole other world.
roflyear
"You can't get better by scaling out" disagrees with you. That's my point - if you scale out, it's more expensive.
thr_low_latency
The first step of getting decent latency out of modern computers is to build a pile of cash that's taller than you then set it on fire.
They are optimized for throughput, not latency. If you want to do things in microseconds instead of anything from milliseconds to seconds you look at all the lovely code everyone has written in the last 40 years then throw it on top of the burning pile of cash.
I work in an area where microseconds matter and have to write everything from scratch in kernel mode C because nothing else cuts it.
smabie
This is my experience as well: almost no existing software is written with ultra low latency in mind (it's optimized for throughput instead).
Getting latency in the micros with low jitter is extremely difficult and requires a bunch of custom software. And getting into the nanos requires a bunch of custom hardware.
SkipperCat
The cost of writing software isn't as horrible as the cost of colocating in the various financial exchanges. The market data feed costs are massive and you really need to make a significant amount of money trading just to cover the infrastructure costs.
smabie
Compensation for employees in HFT tend to be extremely high. Employee comp number one cost for any trading firm.
SkipperCat
Yes, the cost is very high. But the cost of an good software engineer at Google, Facebook or another top tier firm is also very high.
However, when Google buys a WAN link from NYC to CHI, they pay $XX dollars because they don't care about the latency too much. When a HFT buys that same link, they'll spend three times that much just to get a link that is a few milliseconds faster.
Also, the colocation costs at the major exchanges (NASDAQ, NYSE, CBOE) are insane. A cabinet in one of those data centers can be 3x as much as a cabinet somewhere else.
I guess what I'm saying is there are a lot things in the HFT world where you have to spend a lot more money than you would if you were doing similar amounts of work at any other tech firm.
smabie
Yep totally agree: HFT pays out the ass for any tech due to their very particular requirements.
thr_low_latency
The salaries of the people doing this sort of thing start at mid six figures out of university and go up substantially from there.
boppo1
> write everything from scratch in kernel mode C because nothing else cuts it.
Neat. Is that all for custom processors too?
winstonprivacy
Exactly my experience as well.
mgaunard
It depends on the market. Most trading venues don't really require a latency much below 100us. The only ones that do are the ones that are fully deterministic. If fastest guy wins, then all you have to do is throw a good tech team at the problem and then money comes in.
Targeting a non-deterministic venue comes with its own set of challenges which are not purely technical. You don't know how long it will take for your order to reach the matching engine nor the likelihood of things changing before it gets there. Simulation is also more difficult. So you have to rely on alpha instead, which is a different game.
parrot987
I'm not too familiar with the space, but what kind of market is fully deterministic?
HolyLampshade
Fully is a hard threshold to meet, but most of the US Equity markets have determinism windows in the ballpark of 1-3us. Some Futures markets have got under the 1us window, though I don’t recall exactly what the threshold minimum is there.
mgaunard
The most deterministic market is Eurex, which is mostly for trading the eurostoxx and the bund.
The CME is also quite deterministic (largest derivative exchange in the world, big names there are the S&P, treasury notes, eurodollar, wti..)
Off-the-shelf best-in-class solutions run at 30ns (see STAC T0). The fastest people are faster than this.
SkipperCat
No market is fully deterministic, however there are a lot of correlations in all markets. Take options. The option is a derivative and therefore its price is defined by the underlying stock. This was mathematically proven by Black & Scholes (and they got a Nobel prize for it).
So, when the underlying moves (the stock) the option should move according to the model. But there are time inefficiencies in the market so a HFT can trade against the misplaced option and lock in a bit of profit. Do that a million times a day any you may make a few bucks.
mgaunard
The parent post is talking about the determinism of the order gateway/matching engine/market data publisher, not the price.
Determinism is achieved there by ensuring there is only one path to the order gateway with everyone having cables of equal length, and that the order in which network packets hit the gateway is guaranteed to be the order the matching engine processes the packets in. Likewise you need to ensure everyone sees the market data at the same time (equal length cables, multicast). Most exchanges fail hard at guaranteeing this.
For your option example, I think you paint a somewhat misleading picture of options trading. You can't trivially arbitrage the spot and the option. There are several unknown factors between the two. An options market-maker works by taking on risk, decomposing it based on the sensitivities of the price to the various inputs, spreading it across the option universe and biasing its prices so that trades statistically take them back to zero. It's closer to a dispersion strategy. For some markets, delta (sensitivity to the underlying) risk is bad to take on so you try to hedge out of it fast, or you avoid trading options with too much delta in them. Trading high-delta requires being fast to react on underlying moves. But that's just an extra requirement when operating this kind of strategy and isn't how you make profit. Even taking out mispriced options after a move is usually mostly done as a way to get out of risk for cheap, and what you'd care about most there is modelling the spot-volatility dynamics.
falcor84
Everything in computer science can be solved by adding another layer of indirection, other than latency.
andrepd
It's definitely a very interesting field in software engineering terms. Pity it's for such an unproductive use) end x)
amelius
It fits in the "our smartest people are making people click ads" category.
hef19898
I'd say it beats big ad tech by miles. First, in the current financial system, HFT serves a tengible purpose, an easily quantifiable one. Well, easier than selling ads so. Also, HFT is not spying on it users to turn a buck. And if HFTs screw up, they loose their own money. If ad tech screws up, they risk screwing up democracy (Cambridge Analytica was a thing, least we forget).
For me, HFT is the more honest, and less evil, way of making a buck.
delecti
Isn't HFT just being a middle man lots of times? If that understanding is correct, then I disagree that it serves any purpose. At least ads help enable new economic activity, being a middle-man just skims off the top of things that are already happening. Also, HFT has contributed to a flash crash before, so it's not free of externalities either.
growse
> ...being a middle-man just skims off the top of things that are already happening.
Presumably you buy all your goods directly from growers / manufacturers, rather than using retailers who are simply there to skim off the top?
> Also, HFT has contributed to a flash crash before, so it's not free of externalities either.
You're confusing the effects of the industry with the effects of incompetent actors within that industry. Besides, the negative externalities are trivial. Institutional holders barely notice or care about flash crashes.
knodi123
> Presumably you buy all your goods directly from growers / manufacturers, rather than using retailers who are simply there to skim off the top?
Grocery stores to the things that are difficult for me to do, like sourcing and sorting a wide variety of produce and products. Also, they use economies of scale to make it cheaper than if I were to do the same thing myself without an intermediary.
HFT firms neither enable customers to do things they can't accomplish on their own, nor do they save customers money by exploiting economies of scale.
growse
> HFT firms neither enable customers to do things they can't accomplish on their own, nor do they save customers money by exploiting economies of scale.
Study after study has shown this empirically the be false. It's uncontroversial and established that spreads have significantly tightened (that means it's cheaper for market participants to trade) because of the rise of HFT market makers.
knodi123
> that means it's cheaper for market participants to trade because of the rise of HFT market makers.
Okay, so it makes it easier for some people to become market traders.... but is that beneficial? The money that HFT firms are making has to come from somewhere. The only way an average person can be a market participant and come out ahead, is if they have some inside information that the HFT firms do not. Risky stuff. And the ability for people to make trades that turn out to be winners, is reduced by the massive and aggressive trading done by HFT firms.
The massive profits from HFT come from somewhere. Someone is making less because the HFT guys made more.
HFT firms do not benefit the average person- unless you define "benefit" as allowing them to have an easier time gambling at a game that has become harder to win.
growse
Firstly, HFTs do not generate "massive profits". Not sure where that myth comes from. It's extraordinarily difficult to make profit as a market maker, let alone a "massive" one.
Secondly, their income comes from the spread, same as any other market maker. They're able to operate at much lower profit margins exactly because they're HFTs. Making a cent a trade makes no sense if you're doing 3 trades a day. However, it'll quickly become an attractive business if you're doing millions of trades per day. Because spread is what they compete on (and competition is pretty healthy), this drives trading costs down for everyone else.
knodi123
> Firstly, HFTs do not generate "massive profits". Not sure where that myth comes from
From places like the Tabb Group? "According to research conducted by the Tabb Group, the top 5 High Frequency Trading (HFT) firms make an average of $2 billion a year in profits."
> However, it'll quickly become an attractive business if you're doing millions of trades per day
Attractive as in profitable? Honestly I don't know what you're trying to get at here. Yeah, their margin is small, and they make massive profits by replacing that with volume. Why is that a controversial claim?
> this drives trading costs down for everyone else
It really feels like you didn't even read my last comment. Okay, let's grant that they lower trading costs, while extracting many, many billions of dollars from the market.
I have a great idea for a business. I'll lower the door charge at vegas casinos, in exchange for bumping the house edge up by a fraction of a percent. There you go, I have made it a lot cheaper for everyone to get in and participate in the craps market. I have offered a valuable service and am in no way a parasite.
What's the difference between my business plan, and what you're describing?
andrepd
> It's uncontroversial and established that spreads have significantly tightened (that means it's cheaper for market participants to trade) because of the rise of HFT market makers.
In more concrete terms, what does it achieve? Genuinely curious. It seems to me that "enabling capital to get better returns" is not a noble goal in itself (especially considering the gilded age levels of inequality we experience in the developed world today).
dahfizz
Have you noticed that anyone can get an online brokerage account and have direct market access for zero fees?
The liquidity from market makers and HFT firms have ushered in this age of free trading for the lay man. This was not possible even 10 years ago.
> It seems to me that "enabling capital to get better returns" is not a noble goal in itself
The majority of Americans own stock. Sabotaging the middle class's retirement to give a middle finger to some billionaires does not seem noble to me.
delecti
The point of the stock market is to be a market. And when possible I do like to buy from companies that sell their product directly.
> You're confusing the effects of the industry with the effects of incompetent actors within that industry
Doesn't that same point apply to Cambridge Analytica, the singular example of a negative externality from ads in the comment I replied to?
Whether HFTs and/or the broader concept of middle-men are better or worse than ads, they're at least still in the same ballpark. I definitely agree with the GP comment's sentiment:
> It fits in the "our smartest people are making people click ads" category.
growse
> The point of the stock market is to be a market. And when possible I do like to buy from companies that sell their product directly.
What if you're in the northern hemisphere and want to buy strawberries in December? Or you want a pint of milk, but your local dairy only sells it by the tanker?
The point is effective middlemen help markets function even better than if it were just people with things to sell and people who wanted to buy them. They provide a valuable service, which the market also coenienhly ascribes a value to.
> > You're confusing the effects of the industry with the effects of incompetent actors within that industry
> Doesn't that same point apply to Cambridge Analytica, the singular example of a negative externality from ads in the comment I replied to?
I think there's a difference between incompetence and malice. But broadly, yes. I don't think you can write off the ad / data broker industry because of a few bad actors.
> Whether HFTs and/or the broader concept of middle-men are better or worse than ads, they're at least still in the same ballpark. I definitely agree with the GP comment's sentiment:
> > It fits in the "our smartest people are making people click ads" category.
The difference I see is that it's possible to externally measure and quantify the benefits / externalities of HFTs to the market participants. It's much less clear cut in ads, which is why some people feel ickier about that particular industry.
But I don't buy the whole "smartest people doing useless things" argument. You can't make people work on "useful" things, and you can't discount everything that a smart person does in the ad industry as useless to humanity. It's much more complicated than that.
polygamous_bat
> What if you're in the northern hemisphere and want to buy strawberries in December? Or you want a pint of milk, but your local dairy only sells it by the tanker?
You do understand how that's different from HFT, right? That's more of a market making job. HFT is like hiring The Flash to be your grocery store clerk, who notices you reaching for the milk, and runs in to empty out the shelf and raise the price by 0.003 cents by the time your hand gets there.
dahfizz
That's not how it works. They can't "see you reaching for the milk".
growse
> You do understand how that's different from HFT, right?
HFTs provide liquidity, which by definition is providing what people want to buy/sell, when they want to trade it and it the desired quantity.
> HFT is like hiring The Flash to be your grocery store clerk, who notices you reaching for the milk, and runs in to empty out the shelf and raise the price by 0.003 cents by the time your hand gets there.
This is not what HFTs do. They can't see your "hand reaching", they see your quote hit the book at the same time as everyone else. It's not magic.
They're literally the market makers. Your complaint appears to be that they're good at reacting to new information, i.e. being good market makers.
HDThoreaun
> they see your quote hit the book at the same time as everyone else. It's not magic.
Every exchange gives "good standing market participants" aka HFT market makers first dibs on orders. If a gallon of milk goes on sale and I'm waiting in line with a market maker I will never make the sale, it'll go the the HFT firm every time.
growse
Care to link to a major equity exchange's product page and/or sec declaration that details exactly how this works (ie, criteria for getting "first dibs", what that actually means etc)?
Or are you talking about exchange hosting, where you get lower latency if you pay more to colocate?
smabie
Middle men provide real value, that's why you buy almost all of your stuff thru them.
HDThoreaun
Not when the market is already liquid enough for my liking without them.
smabie
What market are you referring to? Certainly not financial markets where market makers make up majority of volume?
lordnacho
What's wrong with middle men? People would just cut them out if all they did was skim a bit from everyone.
amelius
Eh, perhaps they set themselves up so that it becomes impossible to cut them out.
If you don't know how that works, just look e.g. at TicketMaster:
https://en.wikipedia.org/wiki/Ticketmaster#Criticism_and_con...
lordnacho
But that's not an argument against all middlemen. Do you think your fishmonger has any value?
amelius
Not against all middlemen. But it's a response to your argument:
> People would just cut them out if all they did was skim a bit from everyone.
The point is that "just cut them out" is not so simple in many cases. See TicketMaster and the fact that even artists hate them but have to deal with them.
amelius
If HFT was so great then why didn't any HFT firm produce any layman-understandable evidence of it?
fisf
Because not everything that's useful is layman-understandable.
kajaktum
HFT provides liquidity and depth to the market tho. It does serve a purpose. How much? Not sure. Does it need to be super duper fast? Not sure. But that is natural in industries like this, because if you don't do it then someone else will.
skippyboxedhero
It provides unbelievable amounts of value. Most people who complain about HFT, even those who work in the industry, say this from a position of total ignorance about what things were like before.
Even ten years ago, commissions were sky-high in comparison. Twenty years ago, it wasn't possible for most investors to access markets directly at all. You had to go through several layers of intermediaries just to get market exposure (it isn't just execution costs, HFT is an enabler for other innovation like ETFs)...you paid your wealth manager, the fund manager, who paid the broker, etc. Your returns were getting cut by a significant amount.
This trend is still working it's way through the industry but even versus ten years ago, you have seen massive improvements for consumers.
amelius
It just raises an enormous barrier of entry to access the market.
nradov
In theory, HFT firms boost growth for the entire economy by reducing the liquidity premium portion of the cost of capital. But in practice it's hard to determine whether that social benefit actually outweighs the value they extract. This would be an interesting area for further economics research.
For retail investors like me, HFT firms allow me to get better trade execution.
latency-guy2
It's not unproductive at all - you just don't like what it's being used for, and you should explicitly say that rather than proclaiming an industry to be unproductive.
Avoid the tendency to exaggerate your feelings.
maest
It's kind of funny because, on the one hand, yes, you need to be fast and have clever hacks.
On the other hand, your edge can be explained in very simple terms: in the article, their edge comes from the fact that they had a closer colo than other market participants. ITG made money by front running customers[0], cheaper financing means you can arb an ETF more aggressively than the other guy etc.
Like, there are straightforward mechanical reasons why you're making money. No amount of clever hacks can help you if you're at a structural speed, informational or cost disadvantage.
[0]: https://www.reuters.com/article/us-securities-regulation-itg...
SkipperCat
I've found that most of the HFT strategies are pretty simple. Its exercising a proven mathematical stat/arb condition in the market. The tricky part is finding it first and getting to execute on it first.
However, there are plenty of firms that operate in the low frequency space. Long/short shops are typical for this type of trading. They don't care about order speed. They spend all their time trying to find inefficiencies or hidden correlations between financial instruments and profit from them.
Low frequency tends to be highly research compute focused, while HFT is highly trade compute focused.
aldanor
Here comes the tricky part: "finding it first" may imply you're have more and more false positives as you speed things up beyond crazy. And so, even if you have a "deterministic" model (and no, it's neither "pretty simple" nor "proven mathematical" most of time), it will get fuzzier and fuzzier. Also, HFT is execution-centric, indeed, but it doesn't mean you can't use complicated math models and all that, it's just much harder to do and is more of a computational challenge (which is part of what makes it fun).
Source: hft quant
dahfizz
I love it. It feels like a rare opportunity to do "real" software engineering for a job.
intelVISA
It's like wearing glasses and seeing things As They Should Be whilst everybody else is telling you to just accept and deal with their blurry abstractions.
smabie
This is the best post I've found that actually describes what it's like to run a HFT firm / desk. Probably best article ever written about HFT.
For me HFT is the most interesting job one can have and it requires you to be good at a variety of things to make money: low level tech, quant modeling, risk management, business sense so you can cut good deals, etc.
Unfortunate the industry is unfairly maligned by people who really don't know what they're talking about (like Michael Lewis in Flash Boys). It's cheaper to trade now (especially for retail) than it ever has been in history and the positive effect this has had on the capital markets and the economy in general cannot be understated.
quickthrower2
Had a skim. The "An asset manager’s conclusion" section is very interesting. If you are the HFT, you may not be selling to idiots. Something I always wondered about Market Making HFT, what happens when the market moves suddenly because of fresh info, all those orders you have to fulfill that are smart.
tel
As an MM, you manage your spread, the distance away from the midprice (say) that you're quoting. The tighter your spread, the more trades you pick up, the more profit you make against noise trading. The looser, the fewer you pick up and, importantly, the more time you get to react to seeing informed/toxic flow.
So that's a huge part of the game, try to detect toxicity early and widen your spread as much as needed to stay out of it. In practice it means that whenever toxic flow hits a book the book's spread (the distance between the bid and ask) will widen as well as the new price is sought.
Pay for Order Flow is a big tool here because you pretty much know that all trades done on free brokers are non-informed. If you subtract that out you increase the signal-to-noise ratio on predicting toxic flow.
Finally, lets say you are hit and take on a bunch of toxic inventory. Now you need a place to dump it to. Your options depend heavily on your situation, but you might either hope you have complementary non-MM strategies which can absorb this inventory or you might hope that you can quickly shovel it off to another venue (another exchange, a dark pool) where you won't get hurt so badly.
And if you can't do any of that, you take a loss.
jacquesm
Great comment, thank you very much!
WJW
Taking a diff between retail and informed order flows to detect when someone has new information is a cool trick.
lopatin
It’s called adverse selection and informed order flow, and it’s one of the major challenges of market making. I believe they use trade secrets to try to prevent it as much as possible but they also instantly hedge if it does happen.
benmanns
This is why HFTs pay so much for order flow from retail firms. Large orders on the books at public exchanges are subject to informed traders, while retail orders from Robinhood are random (or worse).
kajaktum
I got sucked into a finance rabbit hole and I have been reading about some "tricks" in market making and I don't see why these are problematic? Even if it is a problem, how would you even prove it? Is it wrong to place an ask order at much lower price, then backing off if it doesn't work out? Should I just put my limit order and let it stay there?
1. https://en.wikipedia.org/wiki/Spoofing_(financhttps://en.wik...
reverend_gonzo
It’s all about intent. If you place a bonafide order with the intent of it getting, but at a later time (1ms is fine) decide that is no longer a good price, you are cancel it.
However, if you place an order that you do not intend to get filled to make the market think there is demand when there actually isn’t, that is illegal.
So, how do they prove this? Well, proving intent is hard, unless you’re dumb enough to send emails saying, for example, you want a smart order type that won’t get filled.
alexpetralia
No, placing orders and then canceling them is very common and makes up the majority of orders. It is not spoofing. Spoofing is about the intent to mislead the market.
reisse
Gosh, seeing someone actually posting in the public about their experience using Orc gives me very strange feeling.
Some context here. Software design-wise, Orc was stuck in 00s. Not scalable, hard to support, hard to add new features, etc. And the corporate structure did not allow for innovations.
Somewhere in the end of 00s group of engineers left Orc (the company) to rebuild the trading platform from the ground up, and formed a new company, called Tbricks. Tbricks was such a success that Orc (again, the company) spend a lot of cash to acquire it, put key people from Tbricks to the leading positions and sunset legacy (classic, as we called them) Orc products.
After the merger, the company was renamed to Itiviti. I came there ~a year after the merger and worked for five years as an SWE in the Tbricks team. The goal of the merger was to migrate all Orc customers to Tbricks in a year or two. Five years later I left the company, and there still were a few of major customers not migrated yet. Orc was supported by one or two persons full-time, and a few of greybeards who moved on to the new projects, but still had the knowledge. And I think it is still bringing few millions USD a year in license costs.
pjanoman
While I'm generally pro-HFT and market making, I'm seeing some comments that are equating market making and high frequency trading. They're not the same thing. As an HFT firm, you can have two kinds of strategies: Liquidity providing and liquidity taking. This article calls these two strategies market making and "being an aggressor" in the "Strategy Zero" and "Survival!" sections. The HFT describes their aggressor strategy as follows:
"Mr. F., one of the original hires, coded what we called Strategy Zero. It was simple: have no position, wait for an option edge of a reasonable size, at least a tick. Then, hit it. Wait. Dump it out and take a tick profit."
In this case, the strategy involves 1) seeing that you can buy a security at $10, 2) knowing that the security is actually worth $10.01 and will move to this price in a few seconds, 3) lifting someone's $10 offer, 4) waiting the few seconds for the market to move, and 5) hitting someone's $10.01 bid for a $.01/share profit.
This liquidity taking strategy is not similar to a liquidity providing strategy. Liquidity providing is leaving orders on the order book for anyone to take and gaining money from one person who buys your shares for $10 and from another who sells shares to you at $10.01. This involves more risk to your business.
I think that if you want to debate the merits of whether working at an HFT firm is an actually useful service, you have to look at how often the HFT firm provides liquidity versus takes liquidity. Providing liquidity more obviously tightens spreads and improves prices, as you can't be a successful liquidity provider unless you provide the best prices first. Liquidity taking, however, involves lifting orders from exchanges that you know are incorrectly priced, which seems to me like a more obvious "bad" (or at least less good than liquidity providing).
usefulcat
> Liquidity providing is leaving orders on the order book for anyone to take and gaining money from one person who buys your shares for $10 and from another who sells shares to you at $10.01.
I think you have that backwards. If you always sell at $10 and buy at $10.01 you lose on every trade.
__d
I'm still hoping that Matt is one day able to complete this book.
scrlk
If you're looking for a HFT history book, I found "Trading at the Speed of Light" to be a good read: https://press.princeton.edu/books/hardcover/9780691211381/tr...
HolyLampshade
It’s a little dry, but that’s by design. It is far and away the best book on the subject.
futevolei
For real, especially considering since I contributed to the kickstarter or whatever. I’ve dm’d him once or twice over the years on Twitter asking about it and no response.
__d
I'm a backer too. From what I've gleaned, he's had a few family/life issues that have ended up being pretty all-consuming.
renewiltord
Author is https://news.ycombinator.com/threads?id=mhurd
I'd pay $100 for the book
momofarm
So these HFT guys doing is daytrade with options? That's quite risky.....if you are not with the trend you may blow up account quickly
lordnacho
Great blog, I learned a lot from it over the years. The confluence of market making and options is especially interesting.
I also used Orc back in the day to trade options, and it's complicated. The thing about options is you have a whole bunch of instruments that are closely related, priced off the same underlying. So there's a smoothness constraint in there that you need to think about (have a google for "non-arbitrage vol surface").
Quickie options tutorial: when you trade an option, you have curvature risk. Meaning that when the price moves, the hedge is not some fixed number of contracts. This can be good or bad for you, depending on whether it's concave or convex. On top of that, normally if your gamma is positive (ie you make money either way it goes) you are paying for it by the option losing value (theta is negative). There's a bunch of these greeks, which are just the sensitivities of the option price to various inputs like price, implied volatility, interest rates, etc. Different parts of the surface have different greeks.
So it's a bit of a balancing act. A sophisticated MM might decide to hold all their greeks within some range. This would mean slightly skewing your prices in some area of the surface in order to entice someone into trading with you, plus keeping an eye on the underlying.
As for market making, it would be nice if prices just stayed the same. People would come and buy things from you for 101 and they would come and sell things to you at 99. You'd just be transporting one order to the other one in time, the perfect middle-man business. The customers win because they don't have to meet each other, and you win because you have 2 more in the account.
Sadly that isn't what happens. Sometimes a guy comes by who wants to buy at 101, and then 102, and then 103. The market has moved, and you being such a nice guy have sold at those prices and are now short when the thing is more expensive. This not cool, but the real problem is that you were standing there the whole time offering product while not knowing what it was worth. What's worse is that you're more likely to get deals when this is the case. This is the adverse selection issue: you have a bunch of competitors when things are plain sailing but then when things move you "win" the deals.
So, what to do? One thing you can do is just not trade with that guy with the massive orders. Find a bunch of punters who aren't dealing massive orders, and deal in opposite ways to each other. Often what actually happens is some guy who is good at marketing builds a business doing this, and since he doesn't know how to also do the market making, he cuts a deal with a market maker. This is what you might have read about. You split the earnings between the marketing business and the risk business.
All of the above is of course helped by being really fast. If you see a bunch of sellers, you pull your bids quickly so they don't sell to you. If you see that you need to move your prices, you do it fast so that you're first on the new price.
There's even more to this game in the form of arbitraging other people's orders, but we'll leave that for now.
ironSkillet
This blog is fascinating. Thanks for sharing.
marsupialtail_2
Perhaps I charged too little when I contracted away my 10x random forest inference solution...
metadat
Discussed at the time:
https://news.ycombinator.com/item?id=16222530 (5 years ago, 32 comments)
euroderf
I have yet to be convinced that HFT is anything other than a big scam for skimming fractions of percentage points off of everything it can get its mitts on.
thr_low_latency
A bit of background around the company: They received the largest fine (until that point in history) for trying to use this to front run the market from their dark pool.
https://www.reuters.com/article/us-securities-regulation-itg...
logicchains
This is what Alameda was doing on FTX right? Crazy that they managed to lose money even though they had priority access to front run customer orders.
lordnacho
I think Alameda lost money doing silly bets and just losing it in the "don't know where I put it" way.
Their MM operation was making lots of money according to someone I talked to. Just not enough to offset them setting it on fire.
landoftheice
[dead]
TacticalCoder
> This is what Alameda was doing on FTX right?
Alameda did many illegal things, including lying to investors about their returns to get funding. And pump and dumping a huge lot of shitcoins which SBF created or funded.
So I don't doubt they'd also frontrun their customers.
thr_low_latency
To be fair so did ITG.
One thing I love about the HFT world is the race to be fast. You cant get better by scaling out, you have to make your trading server as fast as possible. This leads to some whacky but clever hacks. I've always felt like I was working on a F1 race team when working in HFT.
I never came across isolating CPUs, TCP offload, FPGAs, layer 1 switching until I joined a HFT shop. Its like a whole different way of looking at computing system architecture.