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Donski

High Frequency Trading (HFT) Systems

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What are your thoughts about the effect that High Frequency Trading (HFT) systems have had (are going to have) on VSA/Wycoff? Estimates now say a majority (maybe as high as 70%) of the volume on any given day is created by these HFTs. Do you think these HFTs will change our current views on volume, VSA, Wycoff?

 

Don

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In the long run, No I don't. The principles programmed into HFT Trading Machines are the principles used by Market Makers and other Professionals. What "Bots" do is carry out a series of market "tests" to determine supply and demand. If the Bot ticks down on low volumes, it is testing to find where demand enters the market. When they discover demand, the Bot then bites and takes a large chunk.

 

When the Bot is ticking up, again it is testing the market to find a level at which supply enters the market. The Bot then sells into that supply level.

 

Now - if you're a short term trader, you may not be fast enough to go along with whatever the "Bots" are discovering. So - it's probably not worth entering that pool of trading.

 

But - in the long term, the Bots have little discernible effect on the direction of the market.

 

Unfortunately, people confuse cause and effect. People see the Bots ticking down, and jump to the conclusion that the Bots are "causing" the market to fall. The market can only fall if there is no demand.

 

Bots are designed to discover market conditions and then to take advantage of market conditions. That's exactly the process that Market Makers and Professionals have used for eons. The Bots do it much more quickly.

 

Cheers

Red

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Redbacka what your saying makes complete sense but it confuses some of the VSA concepts I thought I had clearly in my mind.

 

You said a):

 

If the Bot ticks down on low volumes, it is testing to find where demand enters the market. When they discover demand, the Bot buys.

 

Is this equivalent to a test or a shakeout or neither?

So I assume the bot is accumulating because it is buying? Isn't it bad business to buy when others are buying? Wouldn't you go broke?

I thought If you had strength in the background and you were in a possible accumulation phase testing was done to test for supply? E.g. If there was a bar in the background where there was previously a lot of selling the professionals could "test" those levels to see if the supply was still present? Then if you had multiple tests of those levels with progressively decreasing volume you could assume there is less supply present (the floating supply has been removed). You might also get a no supply bar which is like a test but there is only a speck of volume (no interest in the downside). They could also do a shakeout which is more of a push down to scare longs into covering their positions or hit stops etc.

 

But what your saying is that this bot is pushing the price down until it finds demand then it starts buying? It makes sense that if you push the price down below value you will find demand though.

 

You also said b):

When the Bot is ticking up, again it is testing the market to find a level at which supply enters the market. The Bot then sells into that supply level.

 

Is this equivalent to a no demand or upthrust bar or neither?

This does seem to me like a no demand test? But back to front. Usually in a distribution phase (which I assuming is happening if this bot is looking to sell stock) I thought you get no demand bars which are up bars with narrow spread on low volume. I suppose the bar you would be describing would be initially marked up but would be more of an upthrust. Once people start buying it dumps. I don't understand why it would start selling when supply hits because I thought that would be bad business, very bad business in fact.

 

If I had a bot and I wanted to accumulate some stock I would want to know if there was going to be any supply above me rather than demand. Because working through a lot of supply is going to be expensive, but I can create the initial demand, and I know when good news is coming out so I can distribute once it is released. I don't know much about bots though.

 

Anyway the above statements have confused me. Can someone please explain this more clearly?

Edited by quinn123

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Hi,

 

From Bill Williams book (I've paraphrased):

 

 

Path of Least resistance

 

1. if selling has decreased on any down-move, the market will then want to go up (No selling pressure)

 

2. If buying has decreased on any up-move, the market will want to fall (no demand)

 

Bots are working out the path of least resistance. They are working out whether or not there is selling or buying pressure. When they find selling or buying pressure, they go with the flow.

 

A bot is not a market maker with that person's knowledge of supply and demand on their books and where the stops are.

 

But the Bot uses the much the same principles as an off-the-floor professional uses to determine where the Supply and Demand levels are. The Bot doesn't "see" anything the way a Professional sees it. But discovers where things are by actively probing. The bot is programmed to test to find where supply and demand levels are. When they've found them, they then go with the flow.

 

When a bot ticks up or down - it does so on extremely low volumes, often of only one share per sale or purchase.

 

Again from Bill Williams' book: lack of demand is pretty easy to pick out. Basically, you will be watching out for a low volume up-bar, on a narrow spread ...

 

So a bot, looking for "supply" will tick up perhaps a small series of narrow-spread low-volume up-bars ... and keeps doing so until supply kicks in. It then sells into that supply.

 

etc., etc.

 

Cheers

Red

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What do you want to delete The Dude?

 

I assume there is going to be heaps of different bots out there. There are probably market making bots, accumulating bots, distributing bots & scalping bots and many more etc. They are probably always going to be changing and I have already figured out that you are not going to know exactly what the bot is doing. If you did the bot would become useless.

 

From what I have read most bots are just distributing stock at VWAP rather than undertaking some manipulative move.

 

So is it worth even researching into this? I don't think I'm going to bother, it will still be on the chart in the end of the day. They can play all the games they want by placing and pulling orders, but if they buy or sell, it will show up on the chart and they can not hide that. So I don't think I'm going to look into this further, unless someone can convince me otherwise. I don't really see how it matters if its a bot or a person buying/selling.

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FYI.....

Hedge Funds | HedgeWorld | The Definitive Hedge Fund Community

 

WASHINGTON (Reuters)—The fact that no one has comprehensively defined high-frequency trading has not stopped it from dominating debates over the fairness and stability of today's electronic marketplace.

Such computer-generated, rapid-fire trading has taken hold on exchanges globally, dominating volumes and making it faster, cheaper and easier to trade than ever before. Yet the strategies driving "HFT" and the unintended effects it has on securities prices are contentious and little understood, leading regulators to consider new rules to rein it in.

 

So this week, a U.S. Commodity Futures Trading Commission regulator pitched a seven-point definition meant to serve as a starting point for any new rules.

 

"Without a principled definition of what constitutes an HFT, any oversight scheme may inadvertently extend either too narrowly or too broadly unless the definition and behaviors are well understood," Scott O'Malia, a CFTC commissioner, said in a letter to an advisory committee on market technology.

 

Mr. O'Malia, who chairs the CFTC's Technology Advisory Committee, called his definition a "seven-part test for what constitutes an HFT," and asked the committee to consider it before a Dec. 13 meeting:

 

The use of extraordinarily high-speed order submission/cancellation/modification systems with speeds in excess of five milliseconds or generally very close to minimal latency of a trade.

The use of computer programs or algorithms for automated decision making where order initiation, generating, routing, and execution are determined by the system without human direction for each individual trade or order.

The use of co-location services, direct market access or individual data feeds offered by exchanges and others to minimize network and other types of latencies.

Very short time-frames for establishing and liquidating positions.

High daily portfolio turnover and/or a high order-to-trade ratio intraday.

The submission of numerous orders that are canceled immediately or within milliseconds after submission.

Ending the trading day in as close to a flat position as possible (not carrying significant, un-hedged positions overnight).

U.S. and European regulators have warned for at least two years that they could slap new restrictions on HFT hedge funds, banks and proprietary firms that send high order volumes and execute short-term trades, often to make markets.

 

The May 2010 "flash crash" amplified calls from some investors and politicians for a crackdown on HFT—though a regulator report later said such trading did not spark the crash, only that it exacerbated the speed and severity with which U.S. stocks plunged over the span of minutes.

 

In March, a CFTC subcommittee proposed new trading controls, such as kill switches, to reduce the risk of a runaway computer program roiling markets. Commissioner Bart Chilton has said he wants HFTs to register with the CFTC, something akin to the U.S. Securities and Exchange Commission's new reporting requirements for "large traders."

 

The European Union in October proposed new rules that would force high-frequency traders to buy and sell shares or other securities at around the price the market is trading.

 

By Jonathan Spicer

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High-Frequency Trading by Peter Gomber, Björn Arndt, Marco Lutat, Tim Uhle :: SSRN

 

The research at hand aims to provide up-to-date background information on HFT. This includes definitions, drivers, strategies, academic research and current regulatory discussions. It analyzes HFT and thus contributes to the ongoing discussions by evaluating certain proposed regulatory measures, trying to offer new perspectives and deliver solution proposals.

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another article re trying to define HFT and the issues involved.

Scary if they start lumping HFT and algorithmic trading - even us fools know they are different.

a subset maybe - but different.

 

Europe

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