Having zero real knowledge of trading in any fashion at all, recently I've been wondering if there was a niche for "medium-speed trading." I know I can't get close to the exchanges, and I don't have the capital to hire experienced trader/engineers to develop the latest algorithms.
Basically, is there a slice of the pie in trading much faster than humans, but much slower than HST?
It's an academic exercise, but one I've been toying with.
Yes, there’s a "frequency spectrum" of sorts and HFT is at the short end of it. Here, your models monitor and react to trading tick-by-tick, and execution speed is paramount. It’s also where you have the fiercest arms race for the fastest systems, colocation, FPGAs, etc. Next up comes what’s often called “statistical arbitrage,” where you have models that no longer look at tick-by-tick trading but may look at what happens at 30-second, 1-minute, or 5-minute windows. Here you have more interesting relations emerge between stocks and the market, e.g., what does IBM do relative to the tech index, or relative to MSFT, etc. (Such cross sectional relationships don’t seem to matter as much in HFT.) Actually stat-arb was the domain where the earliest statistical approaches such as "pairs trading" emerged. Next up come models that trade daily (or less frequently), and here you begin to see the long-short market-neutral relative-value type of approaches, where some quantitative [mutual] funds may operate. Next up will be the traditional mutual funds, and beyond that you have your Warren Buffett’s, etc.
One thing to keep in mind is that the higher your trading frequency, the smaller the price moves you can hope to capture, which limits how much capital you can deploy in your models. This is why HFT models are usually small in size but have high Sharpe ratios. As you reduce your trading frequency, you can expect to capture larger price movements and deploy more capital but you’ll also be exposed to more of the vicissitudes of the general market, so your Sharpe ratio will decline. Market participants usually carve themselves a happy spot on this frequency spectrum and stay there. I don’t know of any firm who is successful at every spot.
I think you are misconstruing holding period or predictive horizon with latency sensitivity. Many HFTs are looking at statistical relationships like the ones you mention to compute a fair price for making markets. The only trades where HFTs hold positions sub-second on average are pure arbitrages. Like you mention, there simply isn't enough price movement within that timeframe to generate a profit.
All the inputs to their pricing change rapidly, so their order prices must change quickly as well, but they can end up carrying risk for long periods of time. The Australian regulator looked at HFT activity in their markets, mind you probably less sophisticated than US stocks, and found the average holding period was 42 minutes: http://tabbforum.com/opinions/hft-concerns-are-overstated
I'm not sure the average holding period is a useful thing to measure. For eXample, if you are trading a spread it's how quickly you put on the second leg that matters, and who cares how long you hold the pair for. So, 42 minutes has nothing to do with it.
Not HFT by any definition (unless your definition of HFT is on the order of minutes), but purely algorithmic and data-driven. You can backtest your algorithms with up to 13 years of historical data, live trade your algorithm with paper money, and even link your algorithm to a broker and trade your algorithms with real money.
It's the single most disruptive financial service I know of, and I've had tremendous success with it, even without linking a brokerage account (just checking it daily for trade signals in my super-low-frequency algorithm on paper money).
Where's your value add, your USP? If you're not going to be the fastest then you can't make money as a market-neutral market maker. You have to be able to offer a better price, by predicting the future value better than other market participants.
For the "faster than a human, slower than HST" niche all I can think of is the traders who automatically react to press releases, twitter and the like. If you're getting data that no-one else has and it affects the price, it doesn't matter whether you're as fast as HST. (Of course if you get competitors who are doing the same thing you still have to be faster than them).
Beyond that most stuff happens at human speed - which doesn't mean you can't do market analysis with algorithms, competing with humans. But speed is always going to be a factor - even if we're talking about e.g. a multi-month analyst investigation that figures out that company X is really a massive fraud (there are trading firms who make their business figuring this stuff out), that still becomes worthless if your competitor finishes their investigation a day earlier than yours.
Basically, is there a slice of the pie in trading much faster than humans, but much slower than HST?
It's an academic exercise, but one I've been toying with.