10 years in the industry, Chicago trader Wang Chen decodes high-frequency trading
This article was first published on the WeChat public account: the transaction gate. The content of the article belongs to the author's personal opinion and does not represent the position of Hexun.com. Investors should act accordingly, at their own risk.
Wang Chen has been doing high-frequency trading in Chicago for 10 years. He admits that he is a typical "trader character" - he refused to accept the loss from an early age and only wanted to be the first.
In the middle and high school, Wang Chen was a well-known sports athlete in the school. He was a swimmer, track and field, and triathlon. As a "body-thinking student", Wang Chen successfully "hidden" two major exams - the senior high school entrance examination and the college entrance examination. He admits that his life is a bit "incomplete."
When Gao San was sent to the school, Wang Chen chose the civil engineering major of Tongji University. "At the time, my mom had a colleague who was a contractor. The family was very good. My mom felt that this profession was quite good," he said.
After studying in the United States, Wang Chen quickly found his strong interest in the transaction. He moved from civil engineering to financial engineering. There is no scholarship for the financial engineering major, and tuition fees must be paid by himself. This is a big gamble for him at the time.
In 2007, Wang Chen joined the Chicago High Frequency Trading Team IMC. He is the team's No. 30 employee.
When the company is relatively small, Wang Chen does everything: risk management, compliance audit, medium-sized business, accounting, and position confirmation. As the company grew, Wang Chen joined the Delta One team (products outside the Delta One group trading options) to focus on trading and strategy.
He is passionate about the transaction and believes that he "does a trade all his life."
In the early summer of 2017, I was chatting with Wang Chen at a bar in downtown Chicago. Wang Chen wears glasses, is plainly dressed, has the foundation of an athlete, and has a strong body. After sitting down, he ordered a drink. He said that drinking and drinking too much at the university, and later found gout, no longer dare to drink.
There are more than 30 degrees outdoors on this day. Not far from the Millennium Park, the Lantern Festival is staged, crowds are crowded, and the streets are full of hot girls wearing short skirts. The summer in Chicago has arrived.
My conversation with Wang Chen revolves around high-frequency trading.
High frequency trading has always been a controversial topic. After the US financial crisis in 2007, it became the target of the US media's key attack. Professor Douglas Diamond of the University of Chicago Booth School of Business clearly stated in the classroom that the high-frequency transaction itself is a “Rent Seeking†behavior. I heard this highly abstract statement on the spot, and I felt that I was convinced that the secrets of this industry seemed to be realized. After chatting with Wang Chen, I feel that things are not that simple.
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Wang Chen, who loves outdoor sports
dialogue
Q: You have been doing high frequency trading in the last ten years. In your opinion, what are the more prominent new trends in the US industry in recent years?
A: After 2012, it is more and more difficult to make high-frequency trading money. Many people are willing to spend millions of dollars (unless otherwise specified, this article refers to the US dollar) to build a microwave tower, from Chicago to New York, to pass the signal. This makes a technical deal. Doing high frequency is to pile up money to do it. Because you have more people, your profit margin is getting smaller and smaller. [Chun Xiao press: In 2013, researchers at the University of California analyzed market data and found that from March 2011, the delay from Chicago to New York suddenly decreased from 7.5 milliseconds to 5 milliseconds. This is a very significant improvement. By analyzing FCC data, the researchers found that during the study in 2013, 15 licensed networks operated microwave tower connections between Chicago and New York. This reduction in delay is most likely due to the new microwave tower going online. Reference reading: http://arstechnica.com/information-technology/2016/11/private-microwave-networks-financial-hft/
During the period from 2008 to 2011, we made this kind of Spread trading. When the stock market fluctuates, one can earn 1 horn, and even make a profit when the maximum price difference. When the market is very liquid, like the 2010 Flash crash, the spread is even bigger. We earned millions of dollars a day at that time, and now we can earn it in a week. (Note: Flash Crash refers to 2:40 pm on May 6, 2010. The Dow Jones Industrial Index has fallen nearly linearly since 10,460 points, and it has plummeted to around 9,870 points in just five minutes. The index has a high and low spread of nearly 1,000 points. The US Department of Justice seized a scapegoat and accused the high-frequency futures trader that Sarah was suspected of using the automated trading program to make a lot of selling in the market, causing the illusion of a large supply and profiting from it. )
Q: What role does an organization like IMC and Citadel play in the market?
A: Organizations like IMC and Citadel spend most of the time doing market makers. Market makers stand in the market and are ready to trade with other people's trading intentions. Now everyone thinks that the easiest way to make money is to do a Flow type transaction.
Flow simply means that when an account is to initiate a transaction, the intent is sent to the broker to help you put it on the market. Previously, the brokers directly threw the order to the market. Now the broker will hand over the information of the transaction intention to the traders who participated in the market like IMC and Citadel. The trader needs to pay the broker a few dollars for getting an average of this Flow stream. Then you can selectively and internalize the transaction. The price of the customer's order may be out of line with the current market price. After the trader sees the opportunity and deals with it, he will immediately reverse the transaction in the open market. Locking this profit, Flow's order, as long as it does not match my theoretical price (the price that is willing to be traded within the strategy), will not match, and will continue to send the order to the open market. The theoretical price of the strategy depends on the current market price, the current position of the trader, and the pre-judgment of the direction of future price changes. The entire process of Internalization allows traders to choose a single deal that is beneficial to them. In this way, Flow is provided with liquidity to assist in the transaction of these trading intentions, and on the one hand, their own profit margin can be guaranteed. [Spring Xiao press: This is a new reason with the freshman. The beautiful girls were first taken away by the seniors who were willing to resist the roll. The rest is in the public domain. 】
Q: How do high-frequency traders use the market microstructure to find arbitrage opportunities?
A: We need to rely on the market microstructure to make judgments in high-frequency trading. For example, the exchange charges us different fees. Some exchanges provide you with liquidity. He gives you kickbacks and can make money by ordering. Some exchanges provide you with liquidity, and you still have to pay. We can use the transactions in the exchanges that need to be paid as a strategy trigger. If someone is in a place where they need to pay to provide liquidity, it often indicates that the market is moving in this direction. If we can thoroughly study this small thing, we can grab all the other people's favorable direction in front of others. Because we do stocks, there are 10 exchanges, there are nearly 20 customers in the dark pool, there is such a little advantage, long-term can accumulate a large advantage.
Trading all matching engines, cross buy orders, and trading. The matching engine will connect to a number of interfaces, each of which can be placed with a new order, but the exchange uses the round robin algorithm (see reading: http://en.wikipedia.org/wiki/Round-robin_scheduling) Order one by one from the interface, if a report comes in this interface, but the time does not happen to enter the fastest engine, it is necessary to queue in the interface, wait for the next round to come back. This mechanism may artificially cause the next single entry to enter. If the high-frequency trader needs to trade the current price as soon as possible, he needs to issue a bill to all the interfaces and use the exchange's immediate transaction or the cancellation command (Im) to achieve this goal. [Spring Xiao Press: Opportunities are always reserved for those who understand the details and thoroughly study the rules of the game. 】
Q: The author of the book Flash Boys used a term to describe a high-frequency trader called Front Run (before the trading intention originator rushed to open a position), he pointed out that this is because high-frequency traders are better than others. Seeing this order earlier, it has gained an unfair advantage that other traders do not have. What do you think?
A: For high-frequency traders, this is a game in the market microstructure. Each of us stands at a different angle and understands it differently. If the market is 100 shares want to buy, 100 shares want to sell. Suddenly it became 100,000 shares to buy, only 100 shares wanted to sell, then the high-frequency traders thought that the market would soon go up. So it will immediately sweep the 100-selling sell order on the market. But Flash Boys said that you are the one that robbed the 100,000 shares, because the one who wants to buy 100,000 shares can't buy it, and he has to raise the price and buy it again.
The real problem here is not who ran, but the appearance of the large-scale order itself is releasing information about future price changes to the market. Our automated program applies this observation to actual trading and makes money by increasing the efficiency of market price responses. [Chunxiao Press: The book has its own gold house. This part of the theory was studied 30 years ago. See Kyle 1985: http://faculty.fuqua.duke.edu/~qc2/BA532/1985%20EMA%20Kyle. Pdf]
Or from another point of view, if 100,000 shares are a market order, if his executives arbitrarily put the transaction on the exchange, according to SEC regulations, he will go through the exchange at the best price in all markets. transaction. There are 10 exchanges. If you only trade 10,000 in the first one, go to the second and third. If we see the first exchange bought, we will go to the fifth exchange to buy. Because I have detected the impact of this transaction on the market based on different fee structures and signal transmission between exchanges. In response to this situation, someone has specially made a clever trading system to split the big order and adjust the signal transmission delay to reach all the exchanges at the same time.
Q: Whose money is earned by high frequency trading?
A: Now the main high-frequency players have similar strategy models, do not cross-line (cross Bid-Ask Spread) to trade, and hope to be a "stupid money" transaction with active cross-line. Because there will always be people who predict where the market will move, but I don't know or predict. They take our step and eat our order. If my strategy is not wrong, I can lock this profit. For his position time horizon, his strategy based on his own strategy is definitely expected to make money. I might make money in one millisecond, and he might be a one-minute timeline to make money. In the field of UHF, you can only hope, different time dimensions, according to different sources of information, people with different opinions to trade with you. And the more "stupid" individual trader's order has already passed the internalization, the flow to the trading company, and will not directly trade in the high frequency dimension. [Chunxiao press: The profit of the high-frequency strategy constitutes part of the cost structure of the lower-frequency strategy, and the reason for making money is to make different money. Quite like the global wholesale and retail network of Yiwu small commodities, the high-frequency strategy is those centralized retailers. 】
Q: Who is a successful trading team?
A: Traders need to have the spirit of not giving up. For example, I have been very good since I was a child, and I am not willing to be second. And I am very confident in teamwork. For a trading team, a few people are important, traders, strategies, programmers, and most importantly Quant. Quant takes the traders' ideas into large-scale historical backtests, optimizes parameters, and translates them in a language that programmers can understand, thus forming a cooperative loop. This is a systematic project that everyone can't replace, and every part is quite important.
Q: What is the biggest setback in the transaction? How was it overcome?
A: From 2012 to 2015, during my work at IMC, my cash group was hit hard. Our speed is slow, we are trading in a system written in an older programming language, and I feel that all transactions are afraid to go up. After the study, we found that our system is worse than others. So we built it in a new language for three years and got it back. It was very depressed every day for a few years. Because it is very big to get tens of thousands of dollars a day from a year or two ago to a few thousand blocks per day. And as a trader, you don't have a trading direction. At this time, you need to have a strong psychological suggestion, tell yourself: I can do it, I believe in my team.
Q: What is the future strategy development?
A: UHF's trading margin is getting smaller and smaller. I am studying low-frequency trading and seeing if I can combine some of the experiences discovered in high-frequency trading.
High-frequency costs are high. You need to have your own server on the exchange. You need to have direct connect. You need to know the update of the exchange at any time. The software needs to be updated at any time. This is a big expense. From the exchange to the high-speed connection between the exchanges, you also need to spend a sum of money to connect wirelessly. Wireless is a few milliseconds faster than cable, and it's a lot of money.
So I think I can use the idea of ​​high-frequency trading to do some medium- and long-term transactions. I don't need to pay a few cents. So I don't care too much about the slippage of these cents. I want to catch a few dollars or more.
It's like the VIX (panic index) that has been speculating a lot lately, and it has its own effect of decay (the value of itself is constantly decreasing). Many people go to short this thing. Like I am a VIX ETF, I go to Market Making. I know all the relationships in it. How do I change positions and change positions? I know that it is indeed a decay. If I can put it in a day that is not a day, and a profit of a few cents, if I put it a little longer, put it in weeks, months, or even years, I will have a feasibility. A more complete strategy. As long as my strategy is designed to be reliable, I can completely control the maximum retracement rate in the Black Swan event and generate a considerable return.
Q: What are the deficiencies in my trading?
A: I am risk averse. If I have not encountered a similar situation before, I will consider whether to try it first, make sure that I can make money, and then expand. In the same situation, my American colleagues may maximize profits as soon as they go up.
So when we look forward to making money expectations with the management, more radical people are more popular in the trading world than the more aggressive small company management. I think I am more conservative.
Q: How do you keep learning?
A: I have always been curious about technology. There have been new things. In terms of transaction speed, it used Java, and later C++, now using hardware. If the strategy can only be traded by a certain signal, we will write directly to the FPGA, which is at the nanosecond level. The other is the microsecond level. There must be even faster after that. See how much you are willing to invest in it.
The cost of each FPGA is 10,000 to 50,000. Now the price is getting lower and lower. If the price can be reduced, we can even burn something that was previously written in C++ and burn it inside every day. Then everyone came to a faster speed to compete.
After everyone evolved, the source of information is slowly evolving. For example, the data published before the transaction was measured in milliseconds, and now it is microseconds. Now Nasdaq is at the nanosecond level. Trading data is constantly evolving, and the level of automation and learning of high-frequency trading will be higher and higher. But I feel that there will always be a limit. It is very difficult to break through each limit and it will take a long time. My feeling of high frequency is that I have money to make, but if you spend more money on technology, you will be guaranteed a share in the future.
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