I can't comment on anything I've specifically been involved in and even that is a small subset of the motivation of all the market participants. The price discovery that I described in mk's answer above is a combination of everyone coming together with their own strategies. These strategies come from a wide variety of ideas and time horizons. Trading on P/E on a month to month basis might be one. While trading on twitter traffic in a minute to minute horizon may be another. Trading on order flow on a microsecond by microsecond basis is another. Predicting how the weather is going to affect Oil and Utility companies is probably something else going on. Ha it's interesting that you mentioned stock price proximity to multiples of ten because that is something I wouldn't expect someone outside the industry to even know about. Are you a shark trying to extract info? It's true stock prices do weird things when they get close to whole numbers. I've pictured it a matter of psychology, I think it's the same reason that queues at restaurants get busy at 12:00 and 1:00pm but not at 12:23. It's because everyone told their friends to meet at the restaurant at 12:00 not 12:23. I think people do the same thing for stocks. They say "OK, I will finally sell TSLA if it hits 180." Not "I will sell TSLA if it hits 179.97." except me that's exactly what I say because I know that's going to get my order executed before everyone at 180. Some stocks can even trade along 1 penny from a whole number all day long. It's weird and I don't get it completely. IMO as I described above, in the smaller time horizon space the simpler and more fundamental of a signal you can act on the lower risk you are going to have and the quicker you are going to be able to act on that signal. Here are the costs of all the regular lit exchanges NYSE, NASDAQ, BATS, and Direct Edge. It's less than a penny to to take liquidity of a liquid stock and you also get paid to provide liquidity of that same stock. How much you get paid for taking less how much you get paid for providing is clearly positive resulting in profit for the exchange. Additionally you might be interested to know that every big lit market has an inverted exchange where you get paid for taking and have to pay for providing. There tends to be less trading on these exchanges. Executing a trade, whether that trade came from a signal or a client is all about finding the cheapest liquidity in the market. If you can provide liquidity and get paid by NASDAQ then do that first. If that doesn't exist then go to the dark pool where you might be able to match between the Best bid and ask. If that doesn't work then go to a lit exchange and take liquidity. You can see from the cost lists above that it's not going to be more than a fraction of a penny to execute in any of these areas. As far as their significance even though its small how much you are going to get paid for a trade from your client is also pretty small. So you want to be as frugal as possible. Trading is a numbers game. You want to make each fraction of a penny of profit you can make in a transaction as big as possible while doing as many of those transactions as possible while also taking on as little risk as possible.Thanks for the offer. I would like to know what kind of factors your algorithms consider. Are they mostly indicators that traditional investors look for, like product announcements and earnings statements, but HFT aims to react faster than others, or do you put in variables day traders might ignore? Not just Twitter trends, but obscure things like weather events, stock price proximity to multiples of ten, ease of pronunciation of company names.
The article also mentions that transaction fees approach zero. This seems a critical factor too for a high-frequency trader. How close to zero, and how significant are transaction costs overall?
Thank you for the detailed information. Every time I came here to reply I got sidetracked reading about something you mentioned. Your description of price discovery was illuminating and reminded me of the Law of One Price. It sounds very official when they call it a law. I had not heard of "lit" markets, but found a source that says "a market is lit if its orders and quotes are viewable by the general public and dark if they are not." Simple enough. I learned my lesson on the stock market riding the early downward slope of the dot com bust. Watching my brighter friends try their hand at investing has mostly reinforced my feeling that it is something best left to the professionals. I bought my first "For Dummies" book on the advice of a friend and have since then parked my 401(k) in an index fund. The multiples-of-ten idea comes into play as soon as you apply a little game theory (what do I know that they know that I know...) to bidding on eBay. I have also noticed peculiar discontinuities around the round numbers of the Bitcoin market depth charts. There are big jumps at round numbers like $1000 and $980, and also little parasitic clusters a few cents away from those numbers. Thanks for the links on transaction prices. I am still a bit in the dark about the market maker's role compared to that of the individual investor, but still found your overview a fascinating look at how HFT works, especially the parts about algorithms anticipating and competing with one another.it's interesting that you mentioned stock price proximity to multiples of ten because that is something I wouldn't expect someone outside the industry to even know about. Are you a shark trying to extract info?
Of course you will understand that the Shark Code prevents me from answering in the affirmative.
Also, the bit about pronunciation of company names came from Thinking, Fast and Slow:Companies with pronounceable names do better than others for the first week after the stock is issued, though the effect disappears over time. Stocks with pronounceable trading symbols (like KAR or LUNMOO) outperform those with tongue-twisting tickers like PXG or RDO — and they appear to retain a small advantage over some time. A study conducted in Switzerland found that investors believe that stocks with fluent names like Emmi, Swissfirst, and Comet will earn higher returns than those with clunky labels like Geberit and Ypsomed.
This is sweet. What do you do for a living? Are you involved with statistics or computers?
I work in software development, but regret that I use very little math on the job. There is a current fad in the "agile" style of project management for using Fibonnaci numbers to estimate level of effort. It is all I can do to ignore the incorrect series "0, 1, 2, 3, 5, 8 ..." scrawled on the whiteboard.