Extensively over the months we have highlighted the serious shortfalls associated with High Frequency Trading. We've pointed to ridiculous claims made by those who are "in-the-know". Most of us already know that the only reason we even have tight spreads is because of the rebates offered from the exchanges. Nanex has just released 2 new reports which depict the lack of supporting evidence that the NBBO spread has tightened since 2007. What's more, the findings reveal that the NBBO has decreased in stability. For what its worth, government officials just don't know what they are talking about.
From Nanex (The Tighter Spread Lie - Part 1):
We have found significant evidence that overall NBBO spreads have not decreased since the implementation of Reg NMS in March 2007. Combing through over 1/2 trillion quote records, we sorted stocks into bins by NBBO spread every second of the trading day. We then plotted the results and were surprised to find no evidence of tighter spreads. What is worse, we found that the NBBO spread has become less stable since 2007 (See also Part 2 The NBBO Flutter ).See also The Rise of the HFT Machines
The following animated GIF chronicles the NBBO spread for all U.S. Stocks from January 2007 through January 2012. (Lower values means overall tighter spreads
Shows the percentage of stocks during each second with an NBBO spread greater than 1 to 25 cents. The percentage of stocks with NBBO spreads greater than 1 cent is plotted in dark violet. The percentage of stocks with spreads greater than 2 cents is plotted in a light violet, and so on up to the percentage of stocks with spreads greater than 25 cents which is plotted in red. Lower values equate to tighter spreads. Note the jump (meaning wider spreads) after Reg NMS was implemented (March 2007), which overall remains persistent through today. Also note the significant increase in spreads around news and other events such as the flash crash (5/6/2010) and August 2011.X-Axis shows time of day (Eastern Time)
From Nanex (The Tighter Spread Lie - Part 2)
We have found significant evidence that the stability of NBBO spreads has decreased since the implementation of Reg NMS in March 2007. Combing through over 1/2 trillion quote records, we sorted stocks into bins by the changes in NBBO spread every second of the trading day. We then plotted the results. You can clearly see the decline in NBBO stability since 2007 in general, and during very active trading. An unstable NBBO is a indication of a drop in liquidity, or that visible liquidity might be an illusion.
The following animated GIF chronicles the NBBO flutter for all U.S. Stocks from January 2007 through January 2012. (Lower values means better NBBO stability. Higher values: Instability).
Shows the percentage of stocks during each second that had changes in the NBBO spread greater (flutter) than 0 to 25 cents. The percentage of stocks with NBBO flutter greater than 0 cents is plotted in dark violet. The percentage of stocks with NBBO flutter greater than 1 cent is plotted in a light violet, and so on up to the percentage of stocks with NBBO flutter greater than 25 cents which is plotted in red. Lower values equate to more stable NBBO spreads. Note the jump (meaning less stable spreads) after Reg NMS was implemented (March 2007), which overall remains persistent through today. Also note the significant increase in flutter around news and other events such as the flash crash (5/6/2010) and August 2011.X-Axis shows time of day (Eastern Time)
