Now You Can Try High-Frequency Trading

Summary

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WSJ Your Money Briefing - Episode Summary

Podcast: WSJ Your Money Briefing
Title: Now You Can Try High-Frequency Trading
Date: March 26, 2018
Host: J.R. Whalen
Guest: Alexander Osipovich, Wall Street Journal reporter

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Episode Overview

The episode explores how high-frequency trading (HFT) — once an exclusive, secretive activity dominated by elite Wall Street firms — is now becoming accessible to the general public. Through the lens of a new startup, Alpha Trading Labs, the conversation demystifies high-frequency trading, discusses its risks and requirements, and touches on its controversial standing within financial markets.

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Key Discussion Points

What Is High-Frequency Trading?

• Definition and Mechanics
  • [01:59] Alexander Osipovich:
    “High frequency trading involves the use of computers to buy and sell stocks. But specifically compared to other types of computerized trading strategies, it tends to do this very, very quickly and often in high volumes. Looking at trade executions in millionths and even billionths of a second… looking at very fine grained signals and what's happening on an exchange on a micro level…”
• HFT is about speed, high volume, and micro-level trading signals, distinct from traditional trading strategies or even standard automated trading.

High-Frequency Trading Now Open to the Public

• Alpha Trading Labs’ New Model
  • [02:41] Alexander Osipovich:
    “I wrote about this company called Alpha Trading Labs... They've created an online interface where you can go, enroll in it, and develop your own high frequency trading algorithm…If [they] think it would make money, they'll run it in the real live markets and share the profits with you.”
• Alpha provides the technical infrastructure and lets anyone capable of coding an algorithm try their hand at HFT, with potential profit-sharing opportunities.

How It Works: The Process for the Individual

• [03:16] Alexander Osipovich:
  • Users write a computer program (an HFT strategy) and submit it to Alpha Trading Labs.
  • The company screens, tests, and evaluates algorithms, choosing top candidates to run in live markets.
• [03:09] J.R. Whalen:
  “The trader decides what they want to do and then they submit information to the company.”

Market Conditions and Timing

• [03:56] Alexander Osipovich:
  “Volatility is the lifeblood of high frequency traders. Back in 2008, 2009… they were making tons of money. Volatility collapsed and stayed very low for a few years... That caused a massive retrenchment where companies went out of business.”
• HFT thrives on volatility, which has been sparse for years, but recent market activity may revive opportunities, though "it's not what it used to be in the glory days."

Who HFT Is (and Isn't) For

• Technical Demands and Typical Participants
  • [04:48] Alexander Osipovich:
    “High frequency trading is a weird subset trading. It tends to attract a lot of people who have PhDs in physics or math or computer science...”
  • HFT is not “your everyday day trader.”
    • [05:06] Alexander Osipovich:
      “It is not your everyday day trader... [Alpha] may be able to get some people who are basically experienced coders or data scientists… or people who used to work in high frequency trading firms but left for one reason or another to participate through this online platform.”
• Risks
  • Not for the faint of heart; even individual participants must be prepared to lose money and should have very strong technical and analytical skills.

HFT: Public Controversy and Recent News

• Controversy in the Markets
  • [05:43] Alexander Osipovich:
    “High frequency trading is controversial. It is not popular. High frequency traders have tried to explain themselves and say that they're not wreaking havoc in the markets, but they haven't really convinced the public, in my view.”
• Regulatory Actions
  • [05:43] News about Bank of America Merrill Lynch paying a $42 million settlement for secretly routing large institutional orders to HFTs, misleading clients about where orders were executed.
    • [06:24] Alexander Osipovich:
      “If you're a big pension fund... you ideally want to do it without telling high frequency traders that you're doing it because then they can respond very quickly... and the end result is that you get a worse price.”

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Notable Quotes & Memorable Moments

• On HFT Now Being Open to the Public:
  • [02:41] Alexander Osipovich:
    “They’ve created an online interface where you can go, enroll in it, and develop your own high frequency trading algorithm… If they think it would make money, they’ll run it in the real live markets and share the profits with you.”
• On Who Succeeds at HFT:
  • [06:58] Alexander Osipovich:
    “You also just have to be a devilishly smart person with a knack for writing computer code and decoding very complex market data to do it.”
• On HFT Risk:
  • [03:39] J.R. Whalen:
    “…it's an odd time for Alpha Trading Labs… because… frequency trading as a business often thrives on market volatility. It’s been almost non-existent for the past eight or nine years.”
  • [04:48] Alexander Osipovich:
    “You’ve got to be prepared to lose some money.”

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Timestamps for Key Segments

• 00:18 – Program Introduction: Market Turmoil, Trade Wars, and Boeing’s Position
• 01:59 – Overview: What is High-Frequency Trading?
• 02:41 – Alpha Trading Labs and “Democratized” HFT
• 03:09–03:39 – How Individuals Submit Algorithms
• 03:56 – Discussion of Market Volatility & HFT Profitability
• 04:33–05:22 – Who HFT is For and Who it’s Not For
• 05:43 – HFT Controversy & News about Bank of America Merrill Lynch
• 06:58 – The High-Thrill, High-Risk Nature of HFT
• 07:07 – Episode Wrap-up

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Summary & Takeaways

• High-frequency trading, once exclusive and secretive, is now accessible to individuals through platforms like Alpha Trading Labs.
• Participants must possess strong coding skills and market understanding — this is not suitable for the average day trader.
• HFT heavily depends on market volatility, which impacts its profitability.
• Despite new public access, HFT remains controversial due to its impact on pricing and transparency in the financial markets.
• Recent news highlights ongoing regulatory scrutiny and reputational issues for the industry.

The episode provides valuable insight into both the allure and the dangers of HFT, highlighting that while the barriers to entry may be lower, the intellectual and risk requirements are as high as ever.

Transcript

[Deel Representative]

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[J.R. Whalen]

in Market Stories from the Wall street journal. I'm J.R. whalen in New York. You don't have to be one of the high rollers on Wall street to try your hand at high frequency trading. We'll have details on that in a moment. But first, these money items you should know about. The Wall Street Journal's Hurt on the street team asks if the market can handle all the current turmoil currently going on, fears of a trade war, problems in the tech sector and central banks. Removing stimulus might be manageable individually, but taken together could be a formidable test for global markets. The Hurt on the street team also puts the focus on Boeing and whether the aerospace giant could be in some form collateral damage or from a possible US China trade war. While the herd team says that China does need Boeing, just the specter of retaliatory tariffs by China placed on aircraft has spooked investors. Aircraft are among the biggest US Exports to China and investors are worried that escalating trade tensions could hit Chinese demand for other U.S. exports like soybeans and corn. And while China's initial response to tariffs has not included soybeans, investors are concerned that if tensions do escalate further, they could extend to include oilseed, a key component in animal feed. China is by far the world's largest importer of soybeans and by far the largest buyer of US Beans. This is your money briefing from the Wall Street Journal. Welcome back, everybody. High frequency trading is one of those Wall street activities often shrouded in secrecy and carried out by a relatively few number of traders. But that's changing now as ultra fast stock trading is available to the public at large. And Wall Street Journal reporter Alexander Osipovich is with us to discuss. Alex, can you just explain for a moment to our audience what high frequency trading is?

[Alexander Osipovich]

High frequency trading involves the use of computers to buy and sell stocks. But specifically compared to other types of computerized trading strategies, it tends to do this very, very quickly and often in high volumes. Looking at trade executions in millionths and even billionths of a second and looking at very fine grained signals and what's happening on an exchange on a micro level rather than big trends in stocks that we tend to follow.

[J.R. Whalen]

There are companies that use software to trade tens of billions of dollars in shares per day. But a crowdsourcing startup company you profile in your Story is offering it on a smaller scale and it's not secret at all.

[Alexander Osipovich]

Yeah. I wrote about this company called Alpha Trading Labs, which is a startup just getting underway. What they've done is essentially they've built technology for high frequency trading, all the infrastructure that goes into it. But they've created an online interface where you can go enroll in it and develop your own high frequency trading algorithm. And then they can test it and check it out. And if they think it would make money, they'll run it in the real live markets and share the profits with you.

[J.R. Whalen]

The trader decides what they want to do and then they submit information to the company.

[Alexander Osipovich]

Yeah. Basically every high frequency trading strategy is a computer program. So you write a computer program, you say, hey, I want to trade this way in response to this type of stuff happening in the markets. And you submit it to the people who run Alpha Trading Labs and they'll test it and they'll kind of screen it various ways. And the better candidates they'll unleash into the live markets.

[J.R. Whalen]

All right. It seems like it's an odd time for Alpha Trading Labs and other companies to roll this service out or offer it because as you point out in your, frequency trading as a business often thrives on market volatility. It's been almost non existent for the most part for the past eight or nine years.

[Alexander Osipovich]

Volatility is the lifeblood of high frequency traders. Back in 2008, 2009, when markets were extremely volatile, they were making tons of money. Volatility collapsed and stayed very low for a few years. That caused a massive retrenchment where companies went out of business. Larger high frequency traders bought weaker high frequency traders. This was a big scene in the industry. Since volume has picked up a little bit in the past few weeks. They're doing better now. But broadly speaking, it's not what it used to be in the glory days.

[J.R. Whalen]

But some high frequency trading veterans that you spoke with say this kind of trading is really not for the faint of heart. Even if you are an everyday trader who wants to try your hand at this crowdsourcing company, you've got to be prepared to lose some money.

[Alexander Osipovich]

Perhaps high frequency trading is a weird subset trading. It tends to attract a lot of people who have PhDs in physics or math or computer science. Not only do they have some sense of trading in markets, but they also have the ability to write code.

[J.R. Whalen]

It's not your everyday day trader.

[Alexander Osipovich]

It is not your everyday day trader. I think what Alpha Trading Labs is calculating is that they may be able to get some people who are basically experienced coders or data scientists who are, or people who used to work in high frequency trading firms but left for one reason or another to participate through this online platform.

[J.R. Whalen]

Now, even though high frequency trading now is being introduced and is being brought to the public as a chance for them to take part, the whole concept still carries with it a lot of controversy. In fact, some News on Friday, March 23rd was in the Wall Street Journal that you wrote about, which sort of carries that theme forward.

[Alexander Osipovich]

High frequency trading is controversial. It is not popular. High frequency traders have tried to expl explain themselves and say that they're not wreaking havoc in the markets, but they haven't really convinced the public, in my view. The news most recently was that bank of America Merrill lynch paid a $42 million settlement to the state Attorney General here in New York over allegations that it had secretly sent client orders, big stock orders placed by pension funds and asset managers to be executed by high frequency traders. While telling those customers that we'll handle

[J.R. Whalen]

this ourselves internally, they did not tell them that the money was going to get caught up in high frequency trading.

[Alexander Osipovich]

Yes, that is a no no for big investors because essentially if you're a big pension fund and you want to execute a big trade, you ideally want to do it without telling high frequency traders that you're doing it because then they can respond very quickly and adjust their pricing and trading activity in the markets and, and the end result is that you get a worse price. If you wanted to buy, the price goes up away from you. If you wanted to sell, the price goes down away from you.

[J.R. Whalen]

Well, I'm sure there's a thrill to high frequency trading, especially on the individual level if you take part in these startups and you can trade like the big boys on Wall street, but it's like being on a tightrope.

[Alexander Osipovich]

Absolutely. And you also just have to be a devilishly smart person with a knack for writing computer code and decoding very complex market data to do it.

[J.R. Whalen]

All right, that's Wall Street Journal reporter Alexander Osipovich joining us here in our studio. Alex, thanks for being with us.

[Alexander Osipovich]

Thanks so much.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

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