From my understanding, HFT is simply the opposite investment strategy we are supposed to focus on in this competition. Our objectives are to go for long-term investments for the duration of the competition, hoping to make an overall profit after a few months of letting stocks accumulate value.
HFT traders do it differently. They buy stocks when they're low, and sell them immediately when they go high, and collect the profit. So while we're making a couple trades a day at the most, these guys are making tons of transactions regularly, trying to out-pace the market by turning stocks over for an easy buck. I'd be interested in seeing data for average profits for a high-frequency trader versus a long-term investor, just to see how the strategies match up.
Warren's reply is generally correct; however, the term "high frequency trading" is currently applied to the activities of computerized trading programs that enjoy very slight (and I mean VERY slight, measured in nanoseconds!) advantages over other investors with their ability to receive and process market information ahead of others. This strategy requires a heavy investment in computer equipment and software that makes the strategy uneconomic to all but the highest volume traders. The programs have come under fire for their "advantage" and for the role that they may have played in the "flash crash" earlier this year, when many of these high-frequency traders suddenly stopped trading; as a result, market liquidity took a nose-dive.
This strategy is simply not available to the small retail investor, but such investors should be aware of the risk that this strategy poses for them.
I find HFT very interesting. Warren, I would also like to see how they match up against long term investing. I couldn't really find any comparisons (if someone could that would be awesome!), but my guess would be that it very much depends on the economy and the skill of the traders. I would guess that some High Frequency Traders make far more than long term investors, but I would assume an equal amount make far less. With anything else I would guess there would be a bell curve, how that would match up with long term investing I can only assume. (I think the definition was given above very nicely so I have nothing to add on that note)
I read a book about this last year (the Quants), and it talked about quantitative trading based on certain mathematical models of random motion. They use Kelly's betting system to determine how much and when to trade, and they use their computers to trade exactly when market conditions reach those specified in their model. They require no delay in trading, giving them a very slight edge. This strategy worked really well through the 1990's and early 2000's, but has crashed recently.
From what I understand it seems to me like HFT is like a "foolproof" strategy. The simple idea that people could make millions with almost no risk involved seems almost too good to pass up. So really my question here is this strategy even legal if it could have such a negative effect on the economy. If not it seems almost impossible to me to see someone pass up such a high valued opportunity like this.
From my understanding, HFT is simply the opposite investment strategy we are supposed to focus on in this competition. Our objectives are to go for long-term investments for the duration of the competition, hoping to make an overall profit after a few months of letting stocks accumulate value.
ReplyDeleteHFT traders do it differently. They buy stocks when they're low, and sell them immediately when they go high, and collect the profit. So while we're making a couple trades a day at the most, these guys are making tons of transactions regularly, trying to out-pace the market by turning stocks over for an easy buck. I'd be interested in seeing data for average profits for a high-frequency trader versus a long-term investor, just to see how the strategies match up.
Warren's reply is generally correct; however, the term "high frequency trading" is currently applied to the activities of computerized trading programs that enjoy very slight (and I mean VERY slight, measured in nanoseconds!) advantages over other investors with their ability to receive and process market information ahead of others. This strategy requires a heavy investment in computer equipment and software that makes the strategy uneconomic to all but the highest volume traders. The programs have come under fire for their "advantage" and for the role that they may have played in the "flash crash" earlier this year, when many of these high-frequency traders suddenly stopped trading; as a result, market liquidity took a nose-dive.
ReplyDeleteThis strategy is simply not available to the small retail investor, but such investors should be aware of the risk that this strategy poses for them.
I find HFT very interesting. Warren, I would also like to see how they match up against long term investing. I couldn't really find any comparisons (if someone could that would be awesome!), but my guess would be that it very much depends on the economy and the skill of the traders. I would guess that some High Frequency Traders make far more than long term investors, but I would assume an equal amount make far less. With anything else I would guess there would be a bell curve, how that would match up with long term investing I can only assume.
ReplyDelete(I think the definition was given above very nicely so I have nothing to add on that note)
I read a book about this last year (the Quants), and it talked about quantitative trading based on certain mathematical models of random motion. They use Kelly's betting system to determine how much and when to trade, and they use their computers to trade exactly when market conditions reach those specified in their model. They require no delay in trading, giving them a very slight edge. This strategy worked really well through the 1990's and early 2000's, but has crashed recently.
ReplyDeleteFrom what I understand it seems to me like HFT is like a "foolproof" strategy. The simple idea that people could make millions with almost no risk involved seems almost too good to pass up. So really my question here is this strategy even legal if it could have such a negative effect on the economy. If not it seems almost impossible to me to see someone pass up such a high valued opportunity like this.
ReplyDelete