Monday 28 December 2015

Beating the HFTs

Its been estimated that the algos are responsible for almost 70% of the trading volume on futures markets. So as the pit locals disappeared as the pits were made redundant, the algos came in to take their place.

I've been writing about this transition for years and I think we have now come to the new normal although there will probably be more evolution due to regulation and technology changes. Most traders are still trading as if the old normal was still in existence.

Seeing the writing on the wall I started using hybrid trading also some years ago as chronicled in this blog. I defined hybrid trading as using an algo and turning it off and on and choosing different logic for a specific context. This is, I believe, what is required to beat the algos. The speed and reactions of an algo are needed to match the speed and reactions of algos if I want to win trading short time frames. Also, my algo can read and react to the order flow much quicker than a human can.

I have hybrid algos in MultiCharts, Ninjatrader and MarketDelta. The Ninjatrader version makes more efficient use of the PC's resources and now, with Ninjatrader 8, there are microsecond time stamps on each tick so that the order flow can be correctly followed. Each platform is better at something than another platform so it is a matter of using the one that best meets your needs in both functionality and ease of programming.

My algos use a button system that allows me to combine a number of conditions and rules with specific orders that will only execute when everything is true. The pic shows the completed Ninjatrader 7 version which requires tick recording. The Ninjatrader 8 version, is still being developed but has better volume capabilities in addition to correctly tracking order flow.

The functionality needed is a series of buttons that allows me to create a triggerable set of rules that shoot an order immediately those rule conditions are true. I watch the context and when I see the right context I arm a number of the buttons so that the algo can trigger the order from my Virtual Private Server that is co located at the exchange so that I get a less than 2ms latency from the moment that the conditions ar met and the time that the order hits the exchange matching engine.

The series of buttons decribe some context as well as order flow conditions. There are also trade management buttons so that I can have the trade management orders shoot out immediately I have a fill.


This type of functionality is available in a number of platforms out there now.

8 comments:

  1. Instinctively (and empirically..) I know you are right about hybrid trading- I've read your many posts on the subject over the months and years and I've noticed how speed, or lack thereof, will really help or hinder your edge/profitability respectively.

    I have a set of criteria for entering the market but am struggling to see how that can be transformed into an algo. There are so many layers of complexity/discretion that, I found it impossible to arrive at a finished list of criteria for the NT programmer that I was about to have create the algo for me a couple years back. In the end, I had to let the idea go...

    Now, a couple years later, I'm faster and the pattern is more ingrained in my brain but I could definitely use the help of an algo for entries. The exits are easy enough. Do you have any advice on how to start?

    PS. I have paid the same programmer for a tool that will cut down on the time needed to check the entry criteria so that should help. You've piqued my interest in getting deeper into this :).

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    1. I'll do a post in reply to your comment as it deserves a more detailed reply. I just returned from the U.S. and London so give me a few days.

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    2. Thanks for the reply- looking forward to the post!

      PS I'm overdue for a nice visit back to my hometown (London) myself :).

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    3. Like Market Monkey, I am also finding it hard to transform my trading criteria into Algo logic. Can you give us examples of what type of logic is contained in your Algo's? Thank you.

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    4. Like Market Monkey, I am also finding it hard to transform my trading criteria into Algo logic. Can you give us examples of what type of logic is contained in your Algo's? Thank you.

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    5. Its a matter of converting as much of what you do into algo logic that is possible. I'm going to post a lot more on this.

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  2. hello, i noticed you have used logik ulitmate renko in the past and i was wondering if you had seccess with them or would you not reccomend them.

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    1. PureLogik have some wonderful tools and I recommend them. Pick the one(s) that help you see what you need to see: orderflow and price action. The ultimate renko is great at getting rid of the noise and shows historical turning points. Renkos have the disadvantage of printing untradeable bars at these turning points but will then keep you in the trend. The ultimate renko is probably the most configurable renko out there. As you can see on the posts in the last months, I have tools that allow me to see the orderflow more clearly and the bar type is less relevant although turning points are VERY important. Technology is moving forward. PureLogik has a VolumeWand that is really excellent but I apply Volume Profiles in a particular way. I'll be starting a series of posts in a week or two that will show how I have evolved further down the road using orderflow.

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