"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 18, 2011

The Out-of-Control Explosion of Equity Quote Rates Peak One-Second Equity Quote Rates for each minute from 2007 through Aug 16, 2011

From Nanex.net

Lately, readers have sent us links to a few research papers extolling the virtues of HFT, namely, that they provide liquidity, reduce spreads, and probably cure cancer. At first, it appeared that some of these papers were written based on data from another planet, but, upon closer inspection, we realized that they were simply based on very old data. You see, as HFT races towards zero, the data it generates decays just as fast. In other words, any research paper written just 6 months ago, or one that does not take into account recent data, might as well have been written for people on another planet, because it won't accurately describe what is going on in the market today.

Take a look at the images below, which show just how much, and how quickly trading has change since 2007. We plot U.S. equity quote and trade data for each minute of the trading day, from the beginning of 2007 through August 16, 2011 (about 1165 trading days). Charts are colored according to dates which are shown in the legend in the format M/YY: so 8/11 indicates August 2011. The most recent data on all the charts is colored red, with older data using colors towards the blue end of the spectrum.

Note the significant changes from late 2009 (light green/aqua-marine). That was a year that many Pro-HFT research papers are based on. If the research paper predates 2011, or worse, ignores recent data, it's probably not worth the paper it's printed on. 

Peak One-Second Equity Quote Rates for each minute from 2007 through Aug 16, 2011  (click any chart for hi-resolution)

Note how the spikes at 10am, which were driven by significant news events in years past, pale in comparison to normal trading today.

Quotes Per Trade Ratio
The peak occurred on August 16, 2011 (see red spikes in the middle of the chart), when the market threw a tantrum on the shocking news of a possible financial transaction tax. We are serious.

Count of Stocks with very high quote rates
More stocks are falling victim to unrestrained algorithms. 

The Sum of (TradeSize * TradePrice) / NumberOfQuotes.
The value of a quote is rapidly vanishing.