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A New Threat to Automated Trading Strategies: HFT?

(Last Updated On: August 28, 2011)

A New Threat to Automated Trading Strategies: HFT?

Word on the Street is there is a new threat to successful ATS systems. It seems the HFT boys are at it again. Not a new concept-yet a real threat. The use of “Quote Stuffing” can wreck havoc on your “Autobots”. Despite opinions of some people on this board-HFT is a force to think about. They can send ‘false signals” to your automated program. Try to think of it as “The ID” and “The Ego”.Haven’t had time to think through this “threat” as it was just brought to my attention through a blog release today that they claimed to “see it” in the Bloomberg systems and can be backtested to the “Flash Crash”. Something to think about. Need to explore. Any comments?

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I commented at length on the topic of HFT and the “Flash Crash” on my own blog recently:

http://trading-gurus.com/are-high-frequency-traders-about-to-destroy-the-city-of-london/

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They confuse your strategy if your algos “temporal memory” e.g. number of samples in your averages/autoregressive/anything with an F(t-n) model where the number of back samples is a significant percentage of the Spoof length.

.. but if your using raw signals an not putting them thru a sanity filter first then.. good luck.

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The sanity filter would work on the assumption that a fall or rise greater then x shouldn’t happen in a given time frame? …which is, basically, a bet against fat-tailednes

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Many HFT algos analyze the inside bid vs inside ask size to estimate their orders’ position in the queue. With quote stuffing, that data becomes distorted and it will confuse certain of those algos.

Having said that, you have to basically be an HFT player yourself to be doing that analysis in the first place. When a firm I know very well complained to the CME about this, they were basically told off the record to “grow up” and either accept the way things are or get out of the game.

Anyone relying on the bid/ask size for any kind of analysis at that level of detail should already know these risks. I have been aware of this issue for several years; you work around it.

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if you cant play at this level… then either get out or grow up.

your looking for *cycles* not absolute limits. Stuffing usually takes the form of pushing bid/ask open qty up/down in extremely predictable repeatable cycles, or toggling the bid/ask spread repeatedly… or poking it throughout the book. Note the word predictable. not trivial but not exactly rocket science to detect.

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if that is the cme view they are in trouble for they may love the cheap volume the hfts bring , but if yhey do not protect the end customer they will just quit trading and hft will be picking each others pockets

 

I have a hard time believing the CME would say or even suggest such a thing on or off the record. That would put them in very poor light.

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It somewhat surprised me as well but that is a pretty bare knuckle world – “all’s fair in love and war” sort of place.

 

 

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