High Frequency Trading
I know a lot of engineers work in HFT and it is quite lucrative. But doesn't it cause too much volatility? What kind of regulations are there? Curious to hear from engineers or analysts in the industry.
What makes you say that it causes high volatility? The US equities market is one of the most regulated, liquid and efficient markets out there
In fact, the effect is most often the opposite
Yeah I think hft decreases volatility. Definitely increases volume. Have you read "Flash Boys"?
Algos are there to take arbitrage and reduce inefficiencies. The opposite of volatility. It would happen otherwise in a slower manner if they didn't exist
Algorithmic trading tends to reward particular strategies in such a way that they become self-reinforcing at scale. At some point seemingly everyone is following the same strategy. The insanity can continue for a surprisingly long time but it almost always breaks at some point and everyone following the popular strategy is punished. Rinse and repeat...
Kinda sorta like XIV in Feb18.
So what’s the problem with volatility? SEC got the market they asked for when they implemented Reg NMS. Everyone hated the Specialists @NYSE for collecting their 1/16th of a point, and the Market Making forms on the NASD for their “manipulation” of markets. SEC made it so all markets had to respect other markets quotes. Nobody could make a profit market making after decimalization. So exchanges by offering rebates to firms who posted order flow. Firms figured if you could post a buy and a sell on two different exchanges you could make rebates on both...... if you got their first. Hello low latency arms race! HFT’s do God’s work of providing liquidity for investors who want to actual move inventory. Not their fault that the SEC mandated such a shitty market structure.
There’s a bit more to quant finance than just HFT. Don’t think volatility too much of a concern.
Yup the majority of transactions in the market are now driven by algorithms. It’s going to be a mess when things don’t work out anymore.
The SEC has breakers in place to protect the markets should large swings occur in any given stock - limit up limit down halts, trade through protection, best execution regulation. That’s Not to say that a lot of firms out there don’t benefit from volatility in the markets...
Yes I agree with your comment below. Algorithms might not cause volatility (acrually maybe the opposite), but you can’t tell me they’re not influencing the market and the price.