"We risk becoming the best informed society that has ever died of ignorance"
- Rubén Blades

"You can't make up anything anymore. The world itself is a satire. All you're doing is recording it"
- Art Buchwald

"It's getting exciting now, two and one-half. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium"
- Tyler Durden

"It is your corrupt we claim. It is your evil that will be sought by us. With every breath, we shall hunt them down."
- Boondock Saints

Thursday, August 25, 2011

Dear HFT, Please Explain This

The algorithms have kicked it into high gear over the last few months.  We have been lucky that NANEX is able and willing to seek out abnormalities and more often than not, they offer a free look inside what is really going on at 11 Wall St. 

Consider this from March 2010 in TradersMagazine:
...the critics of high frequency trading fail to appreciate the major contribution that traders employing high frequency strategies have made towards ensuring that our nation's equity markets the world's most fair, transparent, resilient and lowest cost. 
Specifically, a chorus of critics have recently begun asserting that so-called "high frequency" traders, which now make up approximately 60 percent of trading volumes in the United States equities markets and provide critical liquidity to all investors, are harming the market with unfair, speculative trading that causes stock prices to needlessly fluctuate to the detriment of investors. 
Variations of this concern have been raised by some very educated and well-intentioned market observers, causing the Securities Exchange Commission and some Congressional staff to begin a more thorough examination that could lead to actions designed to reduce, eliminate or inhibit the use of high frequency trading strategies.
Ironically, acting on the critics' concerns and inhibiting high frequency trading would actually create the type of market reactions that the critics profess to be concerned about, causing considerable economic harm to individual investors, large institutions and, ultimately, to our nation's economy. 
Catch that?  Trying to stop HFT would end up "causing considerable economic harm to individual investors, large institutions and, ultimately, to our nation's economy".  Oh really, then who sucked money from the system since July 21st?  Apparently we don't even understand how much we need HFT.  Below is something from NANEX that will show how HFT really provide all that fantastic liquidity and very tight bid/ask spread (look how tight they are).

On August 25, 2011 at 15:45:48, in a one second period of time, there were more than 10,000 quotes and exactly zero trades in DELL. Close inspection of these quotes reveals something very disturbing. This cannot be dismissed as a computer problem or glitch. This can't be explained as stupidity or some oversight. It is not pinging for hidden liquidity. And it's certainly not price discovery. As far as we can tell, it's not adding liquidity or narrowing the bid/ask spread.

What caused this blast of 10,000 quotes in DELL appears deliberate. Of the 10,000 quotes, the bid and ask prices remain the same. The bid size also remains constant except for one change after the first 7,000 or so quotes. The only real variation is the ask size. Not a simple 2 step variation, but one that repeats in a mathematical pattern with a long cycle. This makes it difficult to detect, but it also confirms that it must be emanating from a single source.

There are approximately 4,000 stocks that quote during active trading. Which means 40 million quotes/second if just one of the 9 exchanges allow this nonsense to spread to all 4,000 symbols. You would need 40 gigabits per second of bandwidth to receive data at that rate. Unfortunately, we think it's just a matter of time, because events like this one in Dell are no longer isolated or rare. And it doesn't look like there are any grown-ups in charge.