High-frequency trading

The other side, the other co-founder, Ed is a quant by background.

We've been working together for the better part of a decade in hedge funds, in market making, in HFT, and in crypto.

I sit more on the engineering side by background, but these days I'm more on the business side of the protocol as well.

Skipping forward to just a very brief introduction about Variational, our main goal is to bring derivatives trading on-chain, and that takes two main forms.

They are for order matching.

They are for price discovery.

They are for institutions hedging against each other in HFT.

I do think eventually retail flow will move to a broker like

And it was the natural kind of evolution of our skill set and expertise at the time, but also where we felt we could be most nimble.

Because market making is one side of our business, but I use the word prop trading, right? So we raised capital, very flexible equity capital that we could deploy across a variety of different ideas, strategies, sometimes building and incubating, sometimes partnering, a lot of times market making and running other types of HFT strategies.

But it was our background, our expertise, and it was also the opportunity we saw in the market.

And I think it gave us a lot of the resource and positioning that led us to where we are now.

And I've gotten a lot of feedback from some of our amazing investors, particularly Hasiba Dragonfly, who's been really helping us to think about how do we market? And we talked about this in my background, right? We didn't come from a consumer app facing background.

We didn't come from kind of a marketing background at all.

If anything, in prop trading and HFT, the firms are relatively stealthy quite intentionally right so we had to learn kind of this idea of marketing and growth and distribution and you know i like to think we haven't made big mistakes there in the sense of you know kol you know campaigns and some things that could damage the brand Yeah.

But I think for us, learning to speak more publicly about what we're doing, and this is a great example, frankly, this conversation, to your point, it builds trust, it builds credibility, and it gets our message out there.

And a lot of that side is the prop trading side of things.

So I, I've spoken to, you know, I won't name specific companies, but, like, major, major quant, like, HFT style and major liquidity providers that have looked at entering the market and have chosen not to because they can't work the system.

Now, I guess the question I would have is how big a problem is that, even if it is a problem, for the TSO? Do the TSO-- how much do they value, like, larger pools of liquidity from these types of firms? Is it that important to them or is it just a pain point that the, the trading side feel?

Indeed, that's a, that's a tough question [laughs].

A pension fund manager might tell you one thing.

An HFT firm's chief technology officer would tell you something very different.

The truth, as we'll see, contains elements of both perspectives.

Today, we're going to pull back the curtain on millisecond markets.

We'll explore the strategies these firms use to find profit in fleeting price discrepancies.

And we'll look at the real-world consequences from ordinary market days to the infamous flash crash that briefly erased a trillion dollars in market value in a matter of minutes.

Let's start with the infrastructure, because understanding HFT means understanding the physical reality of how these firms operate.

The first thing you need to know is co-location.

So proprietary trading firms who don't have a lot of capital need to achieve a very high return on capital, tend to do high frequency trading because they never end up in big positions.

By contrast, hedge funds tend to end up more in mid-frequency trading because they're not interested in small gains or losses that you can realize on each trade from high-frequency trading.

In HFT, if I'm trying to predict a few seconds ahead or I'm only holding risk for a few seconds, ultimately the market won't move that much and allow me to capitalize much spread off the fees when I do those trades.

Therefore, if I have the ability to basically put a lot of capital behind my trades, and I have the ability to take large positions, then I have the privilege of being able to predict much longer in the horizon, potentially being able to make much more return, allowing whatever stock or future or option I'm trading to move a lot more.

and achieve an outside return because I can do that because I have more capital to put behind the trade and I can take a bigger position and a bigger size.

You can find it at flux.live, and the link is in the description.

So the different types of model and the way that you would create these strategies and the rules you would create around these strategies and the way you would control risk around these strategies really vary in this grid.

Proprietary, HFT, hedge fund, mid-frequency.

It grew across NeoClouds.

It grew across our HFT customers as well as our enterprise customers.

So that's exciting to see.

And then the mix inside our Traditional AI business is exciting.

Good to see you guys.

You were engaged in HFT, high-frequency texting,

apparently.

There you go.

I think, like, there was a lot of things on FTX, uh, like that.

I think they, they employed a lot of things that, like-- First of all, it was the exchange where, like, people who did, like, HFT or, like, mid-frequency stuff, um, realized that they were making, uh, a lot more money trading on FTX rather than trading anywhere else, uh, most likely because of Alameda.

Um-

Mm-hmm

So he said it would be preposterous for them to even consider executing on shorter time horizons with size.

HFTs are different as well with size, which simply tells me that they cannot play our game because the rules, they, they can't just, uh, through a fine needle, they can't thread enough capital through it.

So then it's not worthwhile to pick up these crumbs, hence they go on longer time horizons and different type of trades.

But market impact leaves clues for us to say, "Okay, let's, let's ride that wave." That's how I've kind of taken something away really tangible from this tour, is, is all of these guests have, in different ways, highlighted market impact, which has then reaffirmed to be the way that we retail traders should be trading is with this lens.

So if I'm seeing this is the reason price is moving, the reason they are entering could be com- completely different.

They could be entering because of geopolitical, geopolitical factors, a war, uh, fundamentals.

It could be whatever, technicals, quants, HFTs.

Institutional intent is not necessarily my concern.