As more people become aware of the bad algo's that cause problems in financial markets, the true information remains suppressed from our perspective. All too often someone with a CFA or MBA will come out who works at a bank or as a systems engineer and they will tell people that HFT make very little money, keep spread tights, provide liquidity, etc. Some HFT algo's do do that but they are incredibly out numbered by the bad algo's. Over the past two months or so there has been a marked increase in activity (plus a trader gaining unauthorized access to individual broker accounts and the FRBNY having their $9.5 million code stolen). We've seen test programs run that just shoot 10,000+ quotes and quickly withdraw from the market (this has coincided with the increase in foreign exchanges offering co-location, enriched data feeds, and low-latency platforms). We've highlighted where RIMM was blasted before CNBC decided to falsely hype a errant story about RIMM being sold to Samsung. Also, there have been instances where there has been constant blasting into stocks like Carbonite and Google. Just the day before we wrote that post we found empty blasts coming repeatedly on multiple exchanges as a form of dud munition testing. Exchanges have seen empty quotes being send to illiquid preferred shares in an effort from DDM's to maintain their quote quota levels. These guys are getting more risky as more and more people are mislead about the actions of the bad algo's and more and more headlines focus on shallow and hallow American Presidential circus.
Oddly, Trichet and Turner question the real value of larger and faster trading, with the former ECB head stating "that high-frequency trading should be scrutinized as a source of systemic risk". The UK's Financial Services Chairman Adair Turner said "We know from the efficient-market hypothesis that the more markets you have, the more allocative efficiency there will be, the more risk will be shared, the better price discovery we will have. But once you’ve got a reasonably active, liquid market, is there any real value? I think it’s quite reasonable of us to ask searching questions in a way we didn’t before the crisis on whether this is limitlessly good". Read more here (h/t @JoeSaluzzi)
Oddly, Trichet and Turner question the real value of larger and faster trading, with the former ECB head stating "that high-frequency trading should be scrutinized as a source of systemic risk". The UK's Financial Services Chairman Adair Turner said "We know from the efficient-market hypothesis that the more markets you have, the more allocative efficiency there will be, the more risk will be shared, the better price discovery we will have. But once you’ve got a reasonably active, liquid market, is there any real value? I think it’s quite reasonable of us to ask searching questions in a way we didn’t before the crisis on whether this is limitlessly good". Read more here (h/t @JoeSaluzzi)
Too often people of high stature mislead their trusted readers (see here and here) and let's be honest, they're assholes for aiding in the spreading of inaccurate information just be relevant. The SEC isn't here to stop this, government won't even talk about it, so you're stuck with a two blogs (ZH and CC), and three specialty firms (Nanex, Themis, HFT Alert) that are constructed to aid and assist others in not only finding these programs in the market, but trading large blocks around these programs. A recent report from Nanex showcases just how these programs can manipulated ETF's and trick other traders with in milliseconds. This is just another blockbuster report from Nanex and were thankful for not only the software to monitor algo activity but the public reports they put out for free. The problem is getting Joe Six-pack to read and understand the micro-structure of exchanges.
From NANEX (they update their reports so use the link to monitor any changes):
There is a new phenomenon that began on January 10, 2012 (first reported here). It started with about 80 stocks and has grown.This algo turns on at 9:45, then off at 9:58, and back on again at 10:02. When this algo is running, the quote rate increases 10-fold and the occurrence of a locked or crossed NBBO (National Best Bid or Offer) increases significantly. The stability of the NBBO spread increases when the algo is running. In each of the charts, the occurrence of a locked or crossed market is much higher when the algorithm runs.On January 27th, coinciding with the release of the Michigan's consumer sentiment index at 9:55, the algo turned off earlier at 9:53 and resumed at 9:57. This indicates the algo is news sensitive and withdraws. In other words, when the market needs market making HFTs the most, they have already withdrawn.
FAS on January 27, 2012 (2 second intervals). The NBBO is shaded black for a normal market, yellow for a locked market (bid equals ask) or red for a crossed market (bid > ask). On this day, the algo turns off at 9:53, turns partially back on at 9:55, and resumes in full at 9:57. See more examples on previous days.
1-second NBBO Stability. The difference between the maximum and minimum of NBBO for every second is a good indication of the stability of the NBBO. Below is a chart showing the total counts for all equities (expressed as a percentage of the number of equities with quotes). Note how changes in the blue line matches the times when the algo is running. The blue line represents stocks with an NBBO that flutters 0.01 cents each second (from 0.01 to 0.02 or 0.05 to 0.06 for example). A stable NBBO will not flutter at all (green line).
