Thursday, January 21, 2010

High frequency trading and having your own hedge fund.

Right now I've been pretty intrigued by the concept of high-frequency trading. If these experts are to be believed, market efficiencies drop precipitously as we reduce the time we hold our positions. This means that if we buy and hold, we will usually just earn the normal market return but we if hold a series of securities position for seconds or milliseconds at a time, we can potentially earn ridiculous Sharpe ratios of 2000+ which trump even the top fund managers in the world.

What this means is that finance firms already have a stable of IT-Finance types ( like myself but maybe 100x smarter ) writing algorithms in C++ in FIX protocol who are running various programs to take advantage of market inefficiencies to make money in hedge funds.

Unfortunately, my own progress to learn these techniques is hampered by the lack of literature on high-frequency trading.

Some books will introduce the concept to a potential investor but most whiz kids are mum about how these algorithms can actually be written.

If you are interested, take a look at this book from Amazon : http://www.amazon.com/High-Frequency-Trading-Practical-Algorithmic-Strategies/dp/0470563761/ref=sr_1_1?ie=UTF8&s=books&qid=1264078445&sr=8-1

It's full of equations and does'nt actually show anyone how to get a program written.

If you have any insight to building a personal hedge fund, why not share your ideas with the rest of the folks who read this blog ?

3 comments:

Investidor Ninja said...

I'm having the same questions unanswered in Brazil. HFT is "new" here, but it will not be long until we reach 50% of transactions made by Algos

Arthur said...
This comment has been removed by the author.
Arthur said...

"Right now I've been pretty intrigued by the concept of high-frequency trading. If these experts are to be believed, market efficiencies drop precipitously as we reduce the time we hold our positions. This means that if we buy and hold, we will usually just earn the normal market return but we if hold a series of securities position for seconds or milliseconds at a time, we can potentially earn ridiculous Sharpe ratios of 2000+ which trump even the top fund managers in the world."

But that's assuming one has the fastest computers and the shortest lag time to the securities exchanges as well as a whole army of IT guys to prop up the server, data, etc etc, which I believe youknw better than me.

Only large institutions are capable of such sustained operations or small firms with large capital to start off with.

Beside that, the normal market return assume capital growth and doesn't count into your infamous dividend play eh?

Cheers
Art