Trade what you see, not what you think....

[Liquid validity]

For those ultra thick instruments like STOXX, I have heard that this has pretty much died from a prop perspective but isn't it just like C was before the split and how BAC is now? BACs average volume is 122,203,560 shares per day and the ATR is 30c. When I think of algos killing something, that's what I think of.

Nanex ~ 01-Nov-2012 ~ The Denial of Service Algo
Agree, its been caning more than BAC as well.
I think in terms of the predatory algos cornering a market,
its usually brought on by the exchange creating conditions that favour
these types of algos - NYSE and LIFFE.

Really, instead of thinking of trans taxes, if they just shut down the co-location
legalised front running, that would curb a lot of the problem.
As far as a trans tax goes, it would make more sense to impose it after a
threshold had been breached, that would at least influence HFT without
shafting everyone else in the process.
To keep things simple, batch tax the transactions quarterly or
something like that, minimises the hassle of realtime tracking.

Personally, I think some form of transaction tax is probably the biggest
threat posed by HFT to most people.
Harkin and DeFazio are stoking the fire again...:
The 0.03% Solution to Washington's Budget Problems - NYTimes.com

I don't think of algos in terms of dicking around with outright directional positions but I could be wrong.

There's been a bit of a debate over directional algos over the last few pages.
I've no personal experience but RSJ openly say they trade directional here:
Principles - RSJ a.s.
Although its arguable that form of directional is just the HFT front running.

 

[robster970]

I think there is still good structure to the market right now.

Hola Pedro. You back for a bit now?

 

[random12345]

Random

Do you keep your systems up all the time or you do turn it off at times "market news or volatility changes... etc" ?

Sorry for my lack of activity on this thread. I will get around to answering all the points when I have a chance as I'm all the way back on page 12 right now it seems.

In answer to your question tar, I only close down my auto traders on Federal holidays and the week before Christmas. I scale down my positions by half during August due to being a bit old school there. Volatility is my friend as I use broker side stop reversals (that update every bar) in order to mimic low latency as best I can, I do not use auto traders to open market price deals as most broker feeds are just too slow, but can still fill your stop order so long as they have it in place. You probably wouldn't be surprised how often you can get filled at or very near your price even during a huge instant bar by having stop reversals or opens. Sometimes I will close my short term trader if it draws down twice in a row - as it just has on the USDJPY due to the massive change in PA that occurred on Friday and has persisted since. (Oh I also close them on Friday night as I don't hold over the weekend, though the interesting thing is that it would have been very +VE to keep them open over the past 8 years as weekend movements tend to be in the direction of the final intraday trend on Friday night, almost 80% of the time. Again though this is an old habit and I guess theoretically we could have a surprise bank collapse over the weekend... in theory....)

It's true that I am biased towards algorithmic trading, but I do feel I have the general direction of the industry on my side right now and that a lot of people don't know quite how advanced the systems are that they are up against and quite how unfair it is at a latency level alone. Now that I am a retail trader myself, I feel a decent discussion about it was a worthy use of our time and I make my apologies for any unnecessary barbed comments made.

 

[DionysusToast]

Hola Pedro. You back for a bit now?

Dunno - sort of bit off more than I could chew for a bit there

 

[tar]

It's true that I am biased towards algorithmic trading, but I do feel I have the general direction of the industry on my side right now and that a lot of people don't know quite how advanced the systems are that they are up against and quite how unfair it is at a latency level alone. Now that I am a retail trader myself, I feel a decent discussion about it was a worthy use of our time and I make my apologies for any unnecessary barbed comments made.

Nothing wrong with being biased towards algorithmic trading , infact its great if you have the ability and the requirements but it is not easy and its costly , for me algo trading is for market making and front running advanced scalping techniques , cant imagine why would algos bother with outright trading when they can just scalp the markets as market makers it is the bread and butter , unless ofcourse you have a runner and you let it run in that case i wouldn't call it directional , the algo didnt know where the markets are going in the first place but when the market gave more the algo took more !

 

[robster970]

It's true that I am biased towards algorithmic trading, but I do feel I have the general direction of the industry on my side right now and that a lot of people don't know quite how advanced the systems are that they are up against and quite how unfair it is at a latency level alone. Now that I am a retail trader myself, I feel a decent discussion about it was a worthy use of our time and I make my apologies for any unnecessary barbed comments made.

Most of the enlightened end of discussion on this thread has come from the more mature and experienced end of this forums participants. As an ex-developer and discretionary trader, I have a lot to learn from your knowledge and associated posts and I for one, warmly welcome and appreciate your insights and contribution. This information can only serve to make me a more efficient, albeit human participant.

 

[Thermal Ebb]

In the spirit of the title of the thread and the mostly very interesting posts, even with the proliferation of algos and HFT, apart from them flattening themselves out, they still leave a footprint which can be observed and acted upon.

Doesn't matter how much technology, Phd-power, and acreage of computing assigned, the individual savvy trader, pro or retail, will still make a good job of what they're given.

 

[random12345]

BTW, the basis for my assertion on performance is that even a sophisticated algo does not have the capacity for adaptation and improvement that a person has and is comparatively limited in it's function. This is based upon the brains massively parallel processing capability which is (currently) far superior to that of any quadcore/hexacore CPU. Speed is not important for many trading styles, parallelism is.

The human brain is broadly comparable to about 100 dual cores operating in parallel but it's clock speed is about 400mhz. It has two processing areas, conscious (pre-frontal cortex) which can process data at about 40 bit/s and the subconscious (rest of brain) which handles about 10mbit/s of data without us knowing, mainly from our senses.

Unconscious competence as performed by any expert in their field, especially wrt cognitive behaviour (like trading or driving) is the process of moving processes from the pre-frontal cortex which is slow and laboured in it's processing into the area of the brain responsible for running routine behaviour and reaction. This is what I am referring to as trained - using internalised and learnt processes and constantly adapting and improving them.

Finally, the only figure I can give you for algo trading performance which I can substantiate but unfortunately it is a single data point is about 60% pa off a fund size of about $1bio which is as an oversimplification, trend trading. I do better than this, and most importantly the head of trading at this fund can outperform this as a human. It's just the case that to get people into the fund, investors want algo based trading. In short their fund would not have grown had they not developed algos. These investment decisions weren't made based upon returns - they were made based upon fashion. If fashion was involved, human folly isn't too far behind and all I can see is an industry that believe's it's own propaganda - the madness of crowds in action once again.

Ergo, if algo trading is prevalent because it is a good way to scale a trading operation and investors want it, it is easy to believe that this is the right and best way to trade. I think you carry this confirmation bias with you Random and although your arguments and clearly your knowledge is way beyond the retail trading world, I just think you have bought into the industry dogma. Anyone for a Tulip?

I don't know Robster - speaking very literally and high level there are mathematical systems out there that adapt to waves better than others and since the market is always limited to move in waves, it is not difficult to create a system that takes into account every tick into its adaptive ability and that does not suffer from market changes like an MA etc does. Such mathematics is far beyond any human - not least because it's impossible to feed electronic exchange information fast enough. However, I will concede that such systems are only worthwhile insofar as total liqudity exists in their trading. I can always get filled around ~600-800 CTs on the EURUSD and thus my systems work. If I were dealing with 60 or 80 thousand, it's a different story. It is mathematically easier to follow than to make, which is why a retail system can have hugely less complex code than something trading huge lots.

So if you're saying a human can adapt to a swing style or dynamically trading S&R better than a machine, I may be inclined to agree. However, since machines can accumulate and unwind so much more rapidly, overall this would have no real application to a big fund, but I think you have mentioned that yourself.

Cablemonster has a few good posts about the lies of liquidity in forex re your hedge fund return point - if you had a billion under control, you would not perform the same, even if you had the same exposure rate per trade. Total liquidity doesn't exist which is why most HFTs play arbitrage as often as anything else.

 

[random12345]

Good post and you may be right about the fashion, and if so, then that's good news for us, however, I would like to challenge your statement about the power of the human brain. It's one thing saying the human brain is capable of this sort of level of calculation, and is equivalent to such and such processing power, and it is quite another to apply that level of computation to a task. A calculator with next to no processing can perform better calculations than almost all humans. My computer can remember large documents faultlessly, I can't remember my previous post before this one. Actually I can't even recall this one. So while we may have that level of processing potential, we're mostly unable to use it, as it's occupied in several other tasks.


In trading I believe a high level of processing can be seen over time by the human brain, whether it is being applied at the subconscious level, I don't know, I'm not an expert in how brains work, but certainly there are various 'a-ha' moments along the way, and they come from somewhere. These algos can't do that. They can't write a novel, they can't do maths proofs, creatively they're weak. No doubt about that. So then in a way this thread comes down to whether creativity is an advantage in live trading. Of course it is in trading overall. But the creativity in trading is outside of actual live trading (for me!). I come to the trade with my trading strategy, and I play that strategy all day. Any deviation from changing the rules mid trade etc has ended in poor results for me in the past. Which is not to say that you or anyone else can't do it. In fact I have followed the S&P thread and you seem to do that, but it's hard to know how much of what you do could be automated. Perhaps it's the next step for me in my learning, but i'm not there yet, and I like my fixed rules, it gives me a base to judge things from. The creativity can take place outside of actual trading (for me).

Agree with most of what you say here Shakone - like with like comparisons haven't always been made in this thread. Making comments about the theoretical abilities of the brain when measured as electrical impulses doesn't dismiss the point that if I put my thoughts into code and then get my computer to execute those thoughts, the combination of my initiative and my system's speed are much more profitable and consistent than my brainpower alone. Certainly the way I trade is like one huge ongoing formula and since I can barely do long multiplication in my head, then I cannot help but agree with you.

Not to mention I hate sitting in front of the market in my pyjamas all day long - I have done it, but I used to mainly brainlessly watch iPlayer and then fire off a bet when it finally hit my channel and signal. It seemed like a waste of life to me when my computer can do that...

For me, automation is the main advantage of DMA, not the spread or real time feed.

 

[random12345]

Well good luck , but for me it is a counterproductive argument to say there is a directional mechanical system that if you followed to the letter you will make money forever let alone automating it , if such a codeable system exist it will definitely be a holy grail and is worth billions but then again these developers and fx traders you've mentioned are not even self employed and still depend on their daily jobs , any system if it exist it will become obsolete in no time in these competitive markets that's why we've never seen or heard of such a system . I exclude market making , HFT front running , arb ... etc which is a totally different animal and it is not related to predicting the next move " directional " .

I get you, but as I recently mentioned above, it is much easier to extract money from the market as an automated market follower - when you start to make and trade institutional size, it's hugely more difficult. No bank would be interested in my systems for this reason - a good retail coded system is not worth billions to anyone. Any system I could code for them would not outpace their current setup and thus is worth nothing.

That's why truly institutional scale systems are so insanely complex in design and have many developers specialising in many different things. I know you know otherwise, but the most uneducated posts are ones that describe moving the market and picking up the move as the balance, even when people don't seem to understand said institution bought the whole move and make zero money from it. An extremely basic example, but one people don't get. I'm convinced they literally believe they can move the market and sell the gross move for a profit... it really should be in the T2W FAQs that this isn't true!

 

[Pat494]

The tabloids " go to town " on the bad news of Leeson, the whale et. al. Almost in glee at their failures. Not a word about the successful traders. These guy's seem to live in anonymity . Is that because of gagging contracts with their employers or personal preference ? I don't know. Figures like spanish do pop up regularly here claiming mega amounts of winnings and are howled down.

Oh to be a spy in the bowels of Goldman etc.

 

[random12345]

The tabloids " go to town " on the bad news of Leeson, the whale et. al. Almost in glee at their failures. Not a word about the successful traders. These guy's seem to live in anonymity . Is that because of gagging contracts with their employers or personal preference ? I don't know. Figures like spanish do pop up regularly here claiming mega amounts of winnings and are howled down.

Oh to be a spy in the bowels of Goldman etc.

I think it's mainly because it's not particularly newsworthy. Most traders don't earn all that much (not headline amounts anyway) - and the ones that have been around for the longest tend to be money market types playing the Bund et al, who really are quite boring.

I do think it gets reported in purple patches. There was a lot of news about how the Fortress guys earning 10s of millions each a few years back and now they're having some major drawdown, no-one cares, but they're still distributing a few million to each general partner this year.

 

[VielGeld]

Random, I'm curious, would you be able to give an example of these high-level systems? You come from a world 99% of us don't have access to, so your perspective is a very interesting one. I think it's only normal most of us would be ignorant since we've never seen the kind of trading the big players participate in!

I also have another question, if you don't mind. Would you say that it is easier to be profitable as a big or a small player? Does the tech advantage overcome the liquidity issues, etc.?

 

[random12345]

Random, I'm curious, would you be able to give an example of these high-level systems? You come from a world 99% of us don't have access to, so your perspective is a very interesting one. I think it's only normal most of us would be ignorant since we've never seen the kind of trading the big players participate in!

I also have another question, if you don't mind. Would you say that it is easier to be profitable as a big or a small player? Does the tech advantage overcome the liquidity issues, etc.?

Do you mean an example of how it works or an example of a system? I think I have mentioned JP Morgan's Athena (FX) already, which is a monster of a system that integrates all of their own current, legacy and inherited systems under one banner. Its core operation is far beyond me - I would only be able to assist the Python developers who make tweaks and extensions. If you're looking for example code, then I've been out of that game since 2006 - god knows what the current trend is. Some things work better than others and using low latency fractals was very popular for major pairs when I was around, as were the continued development of self adjusting parabolas for intra day results, which was my interest.

Well you can look at UFJ's accounts online - (http://www.mufg.jp/english/ir/fs/backnumber/2013mufg/pdf/3q/highlights1212_e.pdf), their net trading income was 1.4 bn GBP per quarter this past year. Obviously this is very nice money, but nothing like a 15% return per month based on their total exposure, that may run to 100s of billions. So technically it is harder to make money when you're running into other market makers, but that's only based on a return value. I guess it's easier to make any money as a maker, though followers can manage much better returns.

 

[VielGeld]

Thanks for the response. And yes, an example of a system would be cool. I mean, these systems would be setup to take advantage of an edge, and I'm just wondering how they would go about programming such things. You're talking about "low latency fractals" and "self adjusting parabolas", but I've no idea what these would refer to as my knowledge is limited to maybe market auction theory, mean reversion, liquidity, and knowing when to take a punt.

So basically you're saying the most reliable edge in the market would be that of a market maker's? I don't think I'd doubt that given what I know of the practice. Us retails likely don't have access to such a strat, though.

Tangentially, would you say the retail player has any potential edge, or that his small size is his best asset? That's perhaps what I'm really asking.

On some level, I find all this looking at charts stuff as a retail player to reek of BS (as much as I keep doing it!). A tangible edge such as market making, stat arb, etc. would perhaps be more palatable if it were available. What's your take on that? Are retails stuck to finding edges in charts (or a DoM), or is there some other potential avenue for an edge?

 

[Pat494]

An interesting point is - supposing you are suddenly the CEO of a company with billions to invest. Would you split it up over the markets and sub divide it between different people ? Or use it as a sledgehammer to sway market prices by investing in smaller cap stocks on a pump and dump methodology ? Yes indeed, an interesting proposition.
I think I would put a billion aside to invest in people trading. Advertise around and employ the best out there on a share profits scheme.
Perhaps a billion for start ups from all ages not just youngsters.
etc.

 

[Triggerfish]

"Trade what you see, not what you think....."

They both work hand in hand, one cannot operate without the other.
One might use their eyes but without the mind, one is clearly blind.
One who can think but with no eyes, one is also clearly blind.
So you see, there is a saying.....when one use his eyes, one is clearly blind!

Computers are nothing without a human mind providing an instruction.....brain dead!

 

[wackypete2]

How about one who can post but without the mind?

Peter

 

[Triggerfish]

How about one who can post but without the mind?
Peter

Well, one clearly CANNOT post if one is without a mind!
Can a dead person say "hello!".....?

 

[wackypete2]

Well, one clearly CANNOT post if one is without a mind!

There are plenty of members here who are very proficient at that.

Can a dead person say "hello!".....?

If one can trade what they see but currently aren't seeing anything then they are still in the process of trading but being passive at the moment. By that logic then dead men can also trade what they see, no?

Peter