Bootstrapping an Ultra Low Latency Trading Firm, Part 2
Published in 2011, this chronicle by @veyron details the mechanics of building a profitable, self-funded business without venture backing.
Core Principles for Independent Builders:
Charging customers from day one acts as the ultimate filter for building software that solves genuine, high-urgency problems.
Keeping fixed overhead low and leveraging lean infrastructure allows founders to stay alive until market tailwinds kick in.
Small, repetitive improvements in customer retention and conversion rates yield massive returns over multi-year horizons.
Community Debate Themes:
The community focused on B2B customer acquisition channels, cold email vs SEO distribution, and balancing full-time employment with side-project development.
CATEGORY Bootstrapping & MRR →
HISTORICAL ERA Web 2.0 Genesis (2007–2013)
COMMUNITY SCORE 119 points
TOTAL DISCUSSIONS 47 comments
Don't ask who is losing on the other side of your trades but think instead who is your customer. What is the service that you provide and how it helps them.
If you're making a profit it means you bought inventory when the price was below fair value (your customers didn't need it and wanted to sell as fast as possible) and you sold it when the price was above (your customers really needed the shares right now). The net benefit to everybody is that the volatility is lower, as you moved the price down when it was too high and moved it up when it was too low.
The market efficiency is higher too: a lot less capital is required to establish fair prices as market reacts immediately to any imbalance.
It also makes the spread lower and makes buying and selling stock cheaper for your customers. Only a few years ago market makers and specialists would chicken out at the first sign of trouble and would widen the spread between bid and ask prices. Crossing the spread is a huge part of your overall expense of trading. Unfortunately very few investors understand full impact of it on their returns and don't appreciate your contribution.
Execution time is better now. Even during flash crash it was possible to buy and sell with retail brokers, where's I still remember times in 2001 when retail broker market orders sometimes took minutes to fill.
Nice post veyron. Please keep it up.
For those interested, here's some other good reading on this topic while you wait for veyron's next post :)
- http://www.technologyreview.com/blog/mimssbits/25308/ ↗ Using textual analysis
- http://www.institutionalinvestor.com/Article/2593339/Markets-Exchanges/Inside-the-Machine-A-Journey-into-the-World-of-High-Frequency-Trading.html ↗ Article on HFT
- http://news.ycombinator.com/item?id=1517339 ↗ Ask HN: Is it feasible to do high-frequency trading as an individual?
- http://www.reddit.com/r/IAmA/comments/9s9d7/iama_100_automated_independent_retail_trader_i/ ↗ I bootstrapped an automated trading firm ama
- http://quant.stackexchange.com/ ↗
- http://bitstat.wordpress.com/ ↗
What bothers me is how simple this is. This is simple arbitrage that anyone with access to wikipedia could figure out in a few days.
What makes these strategies profitable is exclusive access to information - not actual investing prowess. It's about who can afford to buy the fastest hardware on the fastest pipes in the closest proximity to the exchanges and top tier e-brokers. It's frequently even about who you know.
If your only competitive advantage is systemically restricting the public's access to information, you're doing it wrong.
(but my inner nerd thinks this is super cool, and my inner Gordon Gekko wants to get started today)
This is fun reading. It reminded me of another blog, "WK's High Frequency Trading Blog" (howtohft.wordpress.com) which got about 9 posts in with some great details, and then went silent.
I found it in my Google Reader feedlist, and the last post was from March, but Wordpress now says the blog has been deleted. Anyone know what happened it?
Veyron, I'm glad you're writing these posts. It's cool to have HFT demystified.
related: http://code.google.com/p/disruptor/ ↗ , http://martinfowler.com/articles/lmax.html ↗ , http://www.quantcup.org/ ↗ , http://quant.ly/ ↗