Trade Like A HFT, Is To Follow The Pain – AUDUSD

A friend of a friend’s wanted to set up a branch of their HFT (high frequency trading) firm in Singapore a year back. Afterall, Singapore is the king of Asian foreign exchange and they are a foreign exchange high frequency trader firm based in Hong Kong.

The idea was mooted and then abandoned because Singapore rules needed a director of the company to be based here and they were not quite willing to move someone here other than to hire a low level staff locally to man the machine, which is overstated as the job was to just watch the machine to ensure no boo-boos. As such, they did not require any decent, competent and experienced trader.

It also does not take a lot of money – like billions, to set up a HFT but substantial capital (about 30-50 mio) is required to start a small one and Singapore wants them in ! As recently as October last year, in a new campaign by the SGX before they shut up recently because of the US probes into their business practices after Michael Lewis’s exposé of a new book, Flash Boys. http://www.bloomberg.com/news/2014-03-18/high-speed-trading-said-to-face-n-y-probe-into-fairness.html

“Singapore Exchange Ltd. (SGX), Southeast Asia’s biggest bourse operator, wants to lure more high-speed traders on to its stock market as it grapples with lower volume.” http://www.bloomberg.com/news/2013-10-27/singapore-exchange-seeks-high-frequency-traders-southeast-asia.html

I read in a highly respected website that today, 98% of the $750 trillion (and growing) liquidity is in speculative markets, in an article written by Michel Rocard, a former President of France. http://www.project-syndicate.org/commentary/michel-rocard-warns-that-the-eu-s-failure-to-reform-its-banking-sector-has-set-the-stage-for-another-crisis

It does make sense to be part of this “speculative market”, even for the common folk because it does not make sense to earn the money these days. Earn as opposed to Win the money. And the best part is that HFT’s like Virtu, lost money only 1 day out of 1,238 trading days, as they claim. http://www.zerohedge.com/news/2014-03-10/holy-grail-trading-has-been-found-hft-firm-reveals-1-losing-trading-day-1238-days-tr

Surprise ! For the retail investor, HFT’s are more beneficial than detrimental, as a study shows that “the less high-frequency trading, the worse the small investors did” http://marginalrevolution.com/marginalrevolution/2014/04/a-study-of-limiting-hft.html?utm_source=twitterfeed&utm_medium=twitter&utm_campaign=Feed%3A+marginalrevolution%2Ffeed+%28Marginal+Revolution%29

And they provide liquidity, defending us from the big bad hedge fund, banks, central banks and sovereign wealth fund bullies ! http://www.bloomberg.com/news/2013-11-05/high-frequency-traders-are-a-little-too-slow.html

How easy is it to set up your own mini HFT system ?

I wish I knew how they worked from the inside but I do not have first hand experience. Yet I can hazard a decent guess for us all to try.

HFT’s are about a bunch of super computers and a set of rules superior to our human eye and brain. More importantly, you need a free and liquid market which makes major G10 foreign exchange (fx) currencies the perfect platform. [currencies – AUD, NZD, CAD, NOK, EUR, DKK, GBP, CHF. SEK, JPY]

Forget the SGD, MYR and even the SAR. They are just too illiquid and as for the rest of the currencies like INR and IDR, it does not make sense to trade them unless you, by chance, would have a god brother working for the central bank ? (said in jest, of course)

The rules are pretty easy to establish, as far as fx is concerned, because we know that almost the entire major fx market trades by charts and technical analysis.

Let’s take the AUD/USD as an example because it has been an anomaly for the past month, the best performer of the G10 rising 3.8% in the past month against the USD despite their central bank rhetoric against its strength. For you see, the central bank is largely impotent because, 1. they cannot intervene in a free fx market and 2. their role is to manage inflation and employment but not the exchange rate.

Like any good HFT, you cannot trade all the time ! You programme the machine for the inflexion points ie. turning up or turning down which must also be coordinated with the market positioning and depth – information hedge funds and HFT’s have because banks grant them access to market depth information

For instance, 0.9130 looks like a good level for AUD/USD shorts to put a stop loss at on the 24th of March, given that the level has held twice in the month. It makes sense to play for their pain and again, at 0.9240.

But today, we note that the entire market has swung around in the latest CFTC’s Commitment of Traders report that the market has turned LONG the AUD in a massive 1.5 bio net buying seen last week out of leveraged accounts. That is mighty phenomenal indeed and could have only been achieved by battering the market senseless.

Now we can be sure they will try and get it higher which means we will only buy upon 0.93 breaking again or sell at 0.9240 when they buckle which illustrates the beauty of HFT mentality – there is no position taking !  Let the world of hedge funds, investors and traders be at our mercy with their positions because we will square out within the day or hour or minute.

Ok, we do know that such trading method does make us dumb. Research has shown that this will be the death of fundamental research as the incentive to read and analyse information is reduced.

Also, it would appear highly unfair that HFT’s have access to direct market feeds and manage, using their powerful networks and bandwidth, to lock in those trades before the rest of the world. That is their bad and their wrong.

And who is the biggest complain queen about this whole HFT affair ?

The big players like Norges bank and all the global financial institutions with positions to exit or enter but find that their levels are constantly being chased away from them.

“It has become much more a market trading for trading’s sake”, the top trader at Norway’s sovereign wealth fund says. His disadvantage “comes when other traders spot a big investor coming and then push the price down or up, knowing the investor will have many more shares to buy or sell”.” https://tradehaven.net/market/nothing-is-not-manipulated/

And who says that HFT firms all make money ?

They are constantly screwing up everyone’s minds with their ability to cancel 25% of all buy orders for large stocks within 25 milliseconds. http://www.nanex.net/aqck2/4456.html

As for us, the everyday chap ? HFT’s level out the playing field for us  because we cannot have a world controlled by hedge funds and sovereign wealth funds and major banks, trying to offload their trades to the nearest private bank sucker around. And now, the entire global media is trying to paint them in the usual scapegoat light because we need a new villain to bash this year.

So lets hear SGX stand up now and welcome all the HFT firms here to Singapore with open arms.