Fans of Capitalism Message Board › High Frequency Trading Strategies

High Frequency Trading Strategies

Bill
user 2341848
Group Organizer
New York, NY
Post #: 241
The Wikipedia entry on High Frequency Trading Strategies is at http://en.wikipedia.org/wiki/High-frequency_trading­


  • Trading ahead of index fund rebalancing: up to 28 basis points for S&P 500 funds, 77 basis points for Russell 2000 funds. That's quite a bit, and I don't think these guys are helping anyone else, but I don't think you're going to be able to do that forever -- if the index funds get smarter and define themselves so that their rebalancing takes place over a longer period of time (or even find a way to finance doing their purchases ahead of time), this method will quit working.
  • Market Making: This is a perfectly honourable, constructive way to make money. I wish we had high-frequency market makers in corporate bonds, I have to talk to humans on the phone to sell bonds, and they have to talk to human brokers, and I usually lose 2% of the value of the bond in the sale, which is highway robbery. If we had high-frequency market makers trading corporate bonds, I would be able to sell them much more efficiently.
  • Ticker tape trading: I'm not sure how a high frequency algorithm can distinguish between a random fluctuation and a market-moving event. If a price moves up through random fluctuation and you think it's the beginning of market-moving event and buy, congratulations, you're buying high and are about to sell low and take a loss. I'm not sure how this would work.
  • Event arbitrage: I'm not sure what this is.
  • Statistical arbitrage: This seems to be from determining differences between markets globally and adjusting between them. I think this is honourable, getting money and resources to where the demand for it is greatest.
  • News-based trading. I know a guy who is writing software to read English news stories and predict whether the story is predicting the rise or fall of a stock price, and trade on that stock price before a human can even read the story. This is still largely science fiction, though having the reporters who write the story do some insider trading before the story is published probably does happen (and it's probably not legally "insider trading").
  • This isn't in the Wikipedia article (might be covered under "Event Arbitrage"). I've often owned stocks with orders to my broker to "reinvest dividends". Dividends are announced some time in advance of when they are paid, and probably a significant fraction of equities are owned on this basis. This means there will be a spike in demand for an equity after a dividend is paid, which can be predicted, so an algorithm could buy in advance of such an event and sell after it. This would be a form of arbitrage, but I think it's honourable, because if nobody did it the spike in the price of a stock after a dividend was paid would be much higher. Also, brokers could become more sophisticated and offer more sophisticated reinvestment of dividends which might wait awhile before reinvesting.

Bill
user 2341848
Group Organizer
New York, NY
Post #: 242
Another approach to gaming the system, not really a high-frequency method, is "banging the close". If you have a large enough quantity of securities whose value depends on some index that is calculated at market close, it may be cost effective to do a large number of money-losing trades seconds before the close, to manipulate the value of the index, at which point you make more money off the indexed securities than you lose on the unfavourable trades.

This is definitely gaming the system, and it's not beneficial. One countermeasure is to develop indices whose value is calculated as the average of all trades over a day or week, so that the quantity of unfavourable trades you'd have to do to manipulate the index would become too great.
Bill
user 2341848
Group Organizer
New York, NY
Post #: 243
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