sigh i got really excited about this because I was considering the interpretation of the word "hackers" like we use it in "Hacker News" (relevant: http://paulgraham.com/gba.html)
I know that the startup community at large doesn't largely respect short term trading, particularly HFT. I understand it, though I honestly think its misguided and the outrage is disproportionately large, but thats another story.
The reason why this article TITLE excited me was because I think its totally true, or least close to true. I think awesome HTFs and algo traders have a very similar skillset to top notch startup hackers.
Small prop shops ARE startups. You:
1. wear a lot of hats
2. release early, release often
3. write really fast code, really fast
4. validate theories against the market (or consumers)
5. if you're right, keep going, if not, pivot
6. success is dependent on understanding lots of different sub-specialties
7. lots of overlapping skills: big data, distributed computing, machine learning
At some point, I'd love to get a bunch of hackers together and start a small prop shop. The jobs are different, but in so many ways it takes the same kind of person to succeed at either.
Oddly enough, I was originally expecting that same thing.
Still, I think it's reasonable to ask the question: where does the boundary between good, useful hacking and evil, insidious hacking lie? And I think it's reasonable to not assume that the boundary lies at what is legal or that the boundary lies at what is "interesting".
I mean, how you produce and profit from spam is a hard, interesting problem. Flame and Stuxnet might, in some courts, be legal. In fact, a lot of "Black hats" satisfy many if not all of your list items.
The argument that HFT is working with a nearly zero-sum situation needs to be addressed. A "normal" startup is usually trying to create "new usefulness". Where do "props" fit in to this question?
Trading is a zero-sum game, but investing is not, and trading exists to make markets and snipe inefficiencies. The amount of money that can be made here can be surprising, until you consider that they're oiling the gears for manifold trillions of dollars in commerce and wealth. Some of that is gambling, but most of it isn't. Stuff like institutional hedgers and investment funds are huge sources of market activity.
It's is very hard to see how predicting short term market position unrolling by individual institutions is making a market or sniping inefficiency. That is an arms race that creates a minimum cost to enter to compete.
When success at sniping depends upon privileged network access, both human and technical, it's more a matter of profiting on an inefficiency you enforce upon everyone else.
I want to make an important note here: trading is not a zero-sum game. It generates value through the exact mechanisms that you noted, market making (liquidity) and inefficiency elimination (accuracy). Via the efficient market hypothesis, the value created by adding this asset liquidity and price accuracy finds its way back into the hands of the traders, often through real value increases in the assets going to traders with call positions.
This functions to keep demand for trading moving by making the average market return stay close to or above the market discount rate. So stock trading doesn't end up as zero-sum, but rather benefits parties at the market discount rate. If it didn't, no one would trade but those seeking to gamble, and there would be no notion of fundamental analysis in the market.
In reality, outside of an ideally efficient market, it's easy to intuitively suspect that the average return associated with trading is above the discount rate, and that more savvy investors obviously earn higher returns. This is more or less correct: the S&P averaged around 8.5% annual returns over the last few decades [1], and that only increases the farther you go back and lower the more recent your range's early bound is, corroborating the association between unideal market efficiency and high returns. Both "investing" and "trading" are less distinct in the stock market than in, say, VC, and so that 8.5% applies equally in aggregate.
But trading is most certainly not a zero-sum game. Like all market activity, it converges to producing value at the market discount rate in an efficient market. What that rate is is incredibly hard to say, but it can vaguely be associated with S&P returns, which have hovered around 5-6% in recent years on time-weighted rolling averages.
I think the zero sum nature of HFT is already providing an answer.
There is so much competition in the U.S. that HFT firms are having to expand to other markets like London and beyond that don't have the same level of saturation.
There are only so many markets in the world, so in about 10 years (probably much less) when they are all saturated with very low margin HFT, equilibrium will be reached firms will simply evaporate and/or glom together.
I find HFT is a lot similar to SEO, and the perception is similar as well.
People just don't like either because they feel it's not bringing any extra value to society, and it's all about gaming something for your own personal wealth. But most people aren't looking out for your personal interest anyway, so you should ignore them.
The thing is that "good" SEO isn't gaming the system but rather working to make sure that your site is a "notable authority" in whatever niche you're targeting. If the article is the counter-argument, what is the argument that HFT provides some similar kind of usefulness.
I disagree. SEO serves a purpose. It makes web sites more accessible to users, by correctly using HTML (title, h1, alt="", etc.) and it makes the web more machine readable and thus easier to find useful things. But I guess you mainly refer to the spammer SEOs that try to trick Google.
HTF otoh does not serve any purpose whatsoever. On the contrary, it brings instability into the market and makes the market less useful. But my guess it that it will need a major market crash before HFT gets banned.
No. The dominate strategies of HFT firms are market making and related arbitrage such as latency arbitrage between venues. There is nothing nefarious about having a computer do this in general as it is much more efficient than a human doing this. These strategies are not very complicated and instead require a lot of infrastructure to run. It used to be you needed to buy or rent a floor seat at the exchange to be able to run these types of strategies. Today that money goes to servers, hosting and engineers.
Automated trading, such as statistical arbitrage would be lower frequency, although often still high frequency by most peoples standards. This algorithms often are liquidity takers from HFT.
The problem with HFT algorithms in the eyes of most hackers is they are almost entirely a zero sum game. Assuming minimal volatility and free trades the absolutely dumbest algorithm* will make money.
*Buy at X sell at X + 1cent with a simple ratchet of buy orders from 1 cent up to market price + a small number of shares to be sold if the market price increases.
PS: Random walk that averages +/- one cent 10 times a second = 5 cent's profit a second assuming ~2,000 trading hours a year = 360k profit. Cost to make that for a stock worth ~20$ = ~30,000$ of capital + whatever it takes to get on the HFT floor.
Everything matters if you're doing HFT (or back in the day, high speed algorithmic trading). In Australia, the support for algorithmic trading means you're required to house your server in ASX itself (ASX has recently introduced their HFT platform in 2011). And that meant ball-shrinking dollar values from place rental alone, not to mention the hardware and software times.
And that meant ball-shrinking dollar values from place rental alone, not to mention the hardware and software times.
I got the first part of that, but what do you mean by "hardware and software times"? Yes, HFT relies on fast hardware/networks/software. Was that your point, or is there something I'm missing?
FWIW, despite a strong entrepreneurial bent, I would (possibly even will) look to join an existing HFT operation, rather than start my own.
(Unless you want to do it in the Bitcoin world - there is a Bitcoin stock exchange now and it's exciting times, my friend!)
Exactly my thought - I guessed that MC was praising us. Sigh, you'd think we HFT practitioners were, I dunno, Goldman Sachs or something like that. ;) (jk, GS, you know we love you ...)
Good list, also. I work with some really smart programmers and tech people and HFT is a great laboratory to work on tough technical problems in the real-world, with real results.
For a corporation, the psycopathic behaviour is that if it makes a profit and is not illegal (yet), then do it.
The real problem is that large financial institutions have somehow ingrained themselves in society in such a way that they bring us all down when they fail, and so society would _have_ to bail them out. It is an ingenious stragegy - by aligning failure with the downfall of many others, these large financial institutions gets the protection they don't deserve. I wish it was me who was reaping the benefits, but unfortunately, being a "commoner", that aint so.
It's interesting how many other areas of the economy have pulled off the same hat trick, but largely go unnoticed. Regulatory capture is a good marker because it's as conspicuous as it is essencial.
I know that the startup community at large doesn't largely respect short term trading, particularly HFT. I understand it, though I honestly think its misguided and the outrage is disproportionately large, but thats another story.
The reason why this article TITLE excited me was because I think its totally true, or least close to true. I think awesome HTFs and algo traders have a very similar skillset to top notch startup hackers.
Small prop shops ARE startups. You:
At some point, I'd love to get a bunch of hackers together and start a small prop shop. The jobs are different, but in so many ways it takes the same kind of person to succeed at either.