Phantom Orders, High Frequency Bots & Latency Arbitrage

[UrmaBlume 10]

This article in "The Atlantic" describes phantom orders placed with no hope of fills in the millisecond time frame, sometimes by the tens of thousands.

 

The snapshot below shows the prices of different levels of low to almost zero latency data feeds. The $500k per month feed is about latency arbitrage.

 

I think these phantom orders are placed by the latency arb guys to lure the HFT guys (one step slower than the latency arb guys) into moves that are already being faded by the latency arb guys. What do you think?

 

 

 

UrmaBlume

[TheDude 10]

An interesting article. Perhaps you should define 'latency arb' a bit more, otherwise it sounds a bit too star treckie for me.

 

I think money is spent on latency to be the first in the FIFO world, not to do over those who dont have the spend for co-lo & gold connectors between servers etc. If he who is fasted is always the winner, then there would only be one player in the market, and we would no longer have a market. Thus the slower guy has to be able to make money too. Speed is not everything. A solid algorithm would be a better and important asset.

 

I didn't see anywhere in the article about the fees exchanges will charge HFT's for message:fill ratio's that are frequently incurred even with high volume auto-spreading let alone HFT's. This is very common in the derivatives exchanges, but I'm not sure about stock exchanges.

 

Michael S Manley makes an interesting comment near the top of the comments list.

[SIUYA 11]

Good find - very interesting - potentially very scary.

One explanation that did not get mention was maybe it the exchanges themselves - they are trying to get people to trade, the more trades, the more exchange fees?

 

Nah...probably not.... the exchanges are not that sophisticated.

 

If its market spoofing in order to drag out orders or likely interest - then that is nothing new, people have been doing this every since markets have been going, and market regulators need to draw the line been market manipulation and innovation.....they will probably get that wrong too.

 

Personally this sort of stuff does scare me as I hear it too often that even the programmers are not even 30% sure about what is happening with their own programs, even if there is nothing sinister about it..... sort of like the nutters running the asylum, and all the nutters are the psychiatrists.....

 

The nice thing may be the increase in external exchanges (the dark pools), OTC markets etc..... after a while people then try and game the gamers. The never ending cycle of life.

Edited August 15, 2010 by SIUYA

[TheDude 10]

Good point SIUYA. I'm sure many of us remember Paul Rotter aka The Flipper on Eurex. Many were screaming foul play as his orders were there with the intention of fooling others to place orders which he would then fill. Many complained to Eurex.

 

Eurex didn't give a tinkers cuss however because:

1/ His trades alone were something like 20-30% of total Bund volume, so they were making good money from him.

2/ His orders were tradable. Sometimes he did get hit on his 'fake' orders.

 

You don't hear of him any more. I bet he's still trading though......somewhere.....some how.....

[UrmaBlume 10]

Good find - very interesting - potentially very scary.

One explanation that did not get mention was maybe it the exchanges themselves - they are trying to get people to trade, the more trades, the more exchange fees?Nah...probably not.... the exchanges are not that sophisticated.If its market spoofing in order to drag out orders or likely interest - then that is nothing new, people have been doing this every since markets have been going, and market regulators need to draw the line been market manipulation and innovation.Personally this sort of stuff does scare me as I hear it too often that even the programmers are not even 30% sure about what is happening with their own programs, even if there is nothing sinister about it..... sort of like the nutters running the asylum, and all the nutters are the psychiatrists.....

 

While at present there are no retail packages that make the order book, depth of market, information available for anything other than visual reference, it is rumored that TS V9.0 will. This means that these orders are being place by entities with far greater resources than any retail and many commercial traders.

 

Again we think that these "phantoms" are placed by latency arb guys to lure the uber HFT guys. While we don't track these phantom orders we do track the HFT guys, noting every transaction in the millisecond time frame.

 

We treat these phantom orders the same way we treat time - we ignore it. We don't believe that the passage of time motivates the movement of price but rather it is the occurence of trade (order flow) and more specifically it is an imbalance in that order flow that motivates price - hence we track real transactions and not phantom orders.

 

UB

[TheDude 10]

 

We treat these phantom orders the same way we treat time - we ignore it. We don't believe that the passage of time motivates the movement of price but rather it is the occurence of trade (order flow) and more specifically it is an imbalance in that order flow that motivates price - hence we track real transactions and not phantom orders.

 

UB

 

This doesnt make sense if you think about it - ignoring time. The imbalance in order flow that is motivating price as you put it will exist only for a brief amount of time. Balanced order flow (the norm) is available in a large majority of time. Thus, the 'passage of time' has a massive impact on price and it's availability.

 

Id agree that in this day in age it makes more sense to track LTP's and their size than quotes.

 

Out of interest, if you operate on the microsecond time frame (see, you're talking of time again!!), surely you will get your butt kicked by those in the nanosecond time frame? How about those on the giggliwiggli time frame? (sorry, I made that last one up )

[UrmaBlume 10]

This doesnt make sense if you think about it - ignoring time. The imbalance in order flow that is motivating price as you put it will exist only for a brief amount of time. Balanced order flow (the norm) is available in a large majority of time. Thus, the 'passage of time' has a massive impact on price and it's availability.Id agree that in this day in age it makes more sense to track LTP's and their size than quotes.Out of interest, if you operate on the microsecond time frame (see, you're talking of time again!!), surely you will get your butt kicked by those in the nanosecond time frame? How about those on the giggliwiggli time frame? (sorry, I made that last one up )

 

If a unit of time passes without the occurnece of trade, how does that motivate price movment as compared to when a unit of trade that is imbalanced 2 to 1 on the buy side occurs?

 

The passage of time by itself does nothing to motivate price movement where as the occurence of imbalanced trade is the PRIME motivator of pirce movement.

 

It is not about tick-tock it is about buy/sell and more specifically - more of one than the other - imbalanced trade.

 

UrmaBlume

[SIUYA 11]

Have to agree with you UB - the only really relevant thing is an actual trade, not just a bunch of phantom trades. This shows up when markets have pre-market and post market orders which often show a lot of phantom orders that never actually trade. Some of these are based off other spreads, arbitrages etc. eg; there are always option market makers making markets....these are live and not phantom orders, but are generally waiting for one end to get filled.

 

However it does raise an interesting question about the technicalities of these phantom trades. If they are miles away from the market then its less relevant, however, if they are feeding off each other, and some other 'flash crash' or fat finger, or plane into a building occurs, then these out of the money orders can very easily start to transact.

If they are not just quote requests, and actual orders then they can be filled, will this potentially start a domino effect? Especially given the thousands + of orders that can be sent.

[MidKnight 12]

While at present there are no retail packages that make the order book, depth of market, information available for anything other than visual reference, it is rumored that TS V9.0 will. This means that these orders are being place by entities with far greater resources than any retail and many commercial traders.

 

Hi there,

 

There are and have been retail packages (at least 1 that I know of) for some years with the ability to use the order book in a programmatic fashion. Check out Neoticker - this has been available for quite some time.

 

With kind regards,

MK

[TheDude 10]

If a unit of time passes without the occurnece of trade, how does that motivate price movment as compared to when a unit of trade that is imbalanced 2 to 1 on the buy side occurs?

 

The passage of time by itself does nothing to motivate price movement where as the occurence of imbalanced trade is the PRIME motivator of pirce movement.

 

It is not about tick-tock it is about buy/sell and more specifically - more of one than the other - imbalanced trade.

 

UrmaBlume

 

Thanks for the explanation. I see where you are coming from.

[UrmaBlume 10]

Hi there,

 

There are and have been retail packages (at least 1 that I know of) for some years with the ability to use the order book in a programmatic fashion. Check out Neoticker - this has been available for quite some time.

 

With kind regards,

MK

 

You are right MK, I had forgotten about Neoticker and next will be TS V9

[BlowFish 10]

While at present there are no retail packages that make the order book, depth of market, information available for anything other than visual reference, it is rumored that TS V9.0 will. This means that these orders are being place by entities with far greater resources than any retail and many commercial traders.

 

 

As MK pointed out Neoticker always has had the order book available programmatically, Ninjatrader has for ages too, perhaps not that robust a platform for 'serious' work but its available. I'd take the chart in the original post with a pinch of salt btw. You can get 'tier 2' (yellow) performance for as little as 500 odd bucks a month (by 'sub letting' virtual machine space from a broker that is already collocated at the same facility as the exchange).

 

Whilst getting 'tier 1' (green) performance does require technical expertise having suitable commercial arrangements is all that is important, (programs like Advanced Look, Enhanced Liquidity Provider, Supplemental Liquidity Provider etc.) Exchanges are not going to allow you to graft your hardware into theirs at a low enough level to get that sort of performance if you are not part of one these programs. You need a 'license' to print money and these are not handed to all and sundry