High Frequency Trading (Straight from the Horse’s Mouth)

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High Frequency Trading (Straight from the Horse’s Mouth) by Thelongshorttrader

A high frequency trader’s take on …HFT:

For almost 5 years, I was a trader at GETCO, which was the premiere, dominant HFT firm. They recruited me from MIT and I didn’t know what to expect when I joined the ~100 person company. Lucky for me, I found the work enormously satisfying and can’t imagine a more fun time.

From an intellectual perspective, the problems are as satisfying and difficult as you could find anywhere else. There is as much math, game theory, economics, technology, computer science, and engineering as you want there to be. The technology is cutting edge. high frequency trading is the driver of a lot of technological advances. It also generates and requires a lot of data.

From what I’ve read about different industries, high frequency trading is most like working on Google search: finding signals to predict what users are searching for is similar to finding signals to predict where the market is going. Addressing both problems requires a lot of technological resources, hard thinking, superior software and infrastructure, and intense computational power. Even compared to working at a fast paced tech startup, my impression is that much of the work at many tech startups doesn’t require a lot of deep thinking. Unlike many banking or consulting jobs, in HFT you don’t make power points or talk to clients.

HFT is extremely entrepreneurial because the problem of “make money trading” is ill defined: no one is telling you what to do because there’re many ways to approach the problem and a lot of things to consider. You don’t have to put in face time or wear a suit: it’s all about results. And you can’t fake your results or BS your way through your job- everyone can see how much money you’re making.

Before joining GETCO, I read Liar’s Poker, and I never saw any of that macho, elitist world. Rather than being a BSD, I think trading is about humbleness and curiosity, a willingness to test your ideas and accept the feedback markets give you. It’s human nature to surround yourself with yes-men who validate your ideas, but trading is about testing your best ideas the most and figuring out when they don’t work. The competition and low barrier to entry gives the best ideas a chance to succeed- it’s the most “fair” an environment I could imagine. If your ideas work, then they’ll make money. If they don’t work, then it doesn’t matter how senior or how good a reality distortionist you are- you’ll lose money. Only in high frequency trading does someone right out of undergrad who has no network have the same opportunity as everyone else to be the top trader.

Unlike my friends in academia, who labor over a huge problem for years with no end in sight, HFT gives immediate feedback. Your models are either making money or they’re not. If you fall behind, it’s obvious within weeks, whereas in many other industries it could take years for obsolescence to become clear. I like to see the direct results of my work, and for me being able to test out my ideas quickly is one of the most satisfying parts of high frequency trading. If you’re wrong, then you find out right away and you can test a new theory- you’re not left wondering if what you did matters or not, whether you’re right or wrong: the idea either translated into more money or it didn’t.

Trading is a constant challenge because the changing markets ensures there’s always interesting, hard problems to work on. I find this satisfying because I can get bored easily. I like doing experiments, I like getting results quickly, I like being quantitative and technical, and I like always learning something new. What’s more satisfying than that?

HFT is extremely competitive. As much as high frequency traders like to distinguish themselves from other people in finance, even from other kinds of traders (we’re not click traders or flow traders!  Like anyone outside finance knows the difference…) and view themselves as nerdier and a band apart, the fact is that the entire industry is relatively cutthroat because it’s dealing with huge sums of money and has an industrywide culture of secrecy and competition. Everyone is your direct competitor, sometimes even people within your own company. This can be stressful, but I find it exciting and motivating.

HFT has a bad reputation in the media, unsurprising considering the news is financially incentivized to misinform, generate controversy, and provoke valence emotions such as anger and outrage. Trading is complex and many people don’t know very much about finance but our financial system touches everyone’s lives so it’s often in the media.

As a result, high frequency trading suffers from a complexity valley: if people don’t know anything about it, when they hear about it in passing, they don’t understand it and they don’t think much of it; if people think about it a medium amount and read news articles about it, when they are armchair philosophizing they hate it; when people actively participate in algorithmic trading and electronic markets, they get obsessed with it and want to integrate it with every aspect of their existing trading. Why would you persist in forcing a human to do what humans aren’t the best at doing, namely fast, complex computations, aggregating and analyzing terabytes of data, submitting and processing numerous data feeds simultaneously?

Most important topics fall into the complexity valley category, but because getting to the other side of the valley takes longer than 140 characters, all of politics and many important economic and social problems have degenerated into soundbites designed so that everyone can have an opinion. Who wants to read an article only accessible if you’ve put in your 10,000 hours? Those articles don’t get hits or retweets; it’s easier and more profitable to write something blatantly false or misleading so everyone can dive in with their gut judgment.

When people as esteemed as Mark Cuban and magazines as excellent as the Economist (probably the best magazine out there period) write things that demonstrate how shockingly confused they are about automated trading, I wonder what hope there is for the rest of the world. But in some ways this negative media attention bonds your team because you’re the only ones that understand reality. I try to distance myself from news so I can afford to find bad articles funny instead of infuriating.

The opacity and intense secrecy contributes to making your work unrelatable to most people. This can make for awkward party conversation, either because someone asks you if they should buy gold vs Amazon.com, Inc. (NASDAQ:AMZN), or why you caused the flash crash, or why you shrank their grandmother’s pension fund. When most of the world including some of the most educated people with PhDs can’t tell you why the stock market exists or how it’s important to a first world economy, it’s not a surprise that many people can’t tell you what automated market making is or how it helps consumers. When people ask what your work is and you say you’re an algorithmic trader, they already hold an erroneous (I’ve never met someone not in finance who had anywhere near an accurate view of what high frequency trading involves), oftentimes negative, view of the field.

These concerns revolving around relating to other people outside your team, such as being able to explain your work to your mom or tell her how much you’re making, require you to be comfortable doing what you want to do, being self motivated and driven. When you go into finance, some of your friends will joke about selling out, and you have to not particularly care what others think. Otherwise you should be a children’s cancer doctor or something where it’s more glaringly obvious how you’re contributing to the world (assuming you care that people think you’re adding value to the universe).

Something I abstractly consider is the escalating speed race demanding increasingly large costs for infrastructure. Philosophically there could be some question of whether even the most technically advanced naturals care about the difference between 1 vs 2 microseconds. Furthermore, it’s the type of thing that a simple change in exchange microstructure could render irrelevant, so this aspect of the industry could change a lot as the industry evolves and grows. I don’t view this as satisfying or not- it’s just something characteristic of a business as new as high frequency trading for which regulations and best practices are still being created.

Sounds very thoughtful…

High Frequency Trading (Straight from the Horse’s Mouth) by Thelongshorttrader

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