"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, March 8, 2012

HFT Is A Religion That Operates On Faith And Not Provable Evidence

The Economist is running a poll in a shameless effort to drive more traffic to its site.  The poll ponders whether High Frequency Trading is a boon or not (real data and evidence here, here, here, here, here).  This isn't a blog that thinks twice about stirring the pot.  The way we see it is like this: advocates praise HFT, we say more needs to be understood, and we'll get in the face of every promoter because if they are right, they should have no problem being able to point to non-conflicted evidence of such behavior, and this new form of trading better improve efficiency in all areas.  Let's be clear, there exist many forms of HFT such as Predatory Algo's, Market Making Algo's, Exchange Rebate Algo's, Bad Algo's, etc, etc.  Luckily there are enough voters that recognize the faults of HFT and therefore do not trust all the other aspects that are promoted.  

It's nice to see groups have beliefs but just like in religious politics, it is not enough to just "believe" your viewpoint, you ought to be able to prove it.  We have the ability to split atoms and understand molecular structures and other very basic things that are very difficult to find, record, and replay as evidence.  With HFT, there is legitimate evidence to the contrary of the benefits of HFT.  Just off the top, consider the E-Mini S&P 500 Futures:

Continuing on, here are more examples of the serious deviations from normal behavior that are caused by machines operating so fast, humans cannot intervene fast enough.  Another talking point is the very essence of HFT.  They deal with numbers only, only worried about deviations from normal movements, abilities to alter human perceptions (paint the tape), and the "race to zero".  Financial markets were started and have lasted all this time because they  have a specific purpose which is to enable those seeking capital for their business to be able to reach some, and for others to be able to purchase an ownership interest in an already establish company through a means of determining that the value of such a percentage is depressed in the market place and thereby worthy of purchase.  HFT has absolutely nothing to do with this. 

Consider our old post on Dud Munition Testing in which blank orders were repeatedly sent in an effort to make the market for IMPV appear active.  Here is some documented history on HFT from Nanex: "The two images below tell the story. The chart on the left shows the growth of high frequency quoting. The chart on the right shows the (lack of) growth of high frequency trading. Quote data is from CQS, trade data is from CTA, both which cover listed stocks on NYSE, AMEX, and NYSE-Arca between 2008 and 2012. Quote spam has exploded with no signs of stopping, while trade frequency has stalled and is actually lower than it was years ago."

 So when you vote on the Economist's poll, bear in mind that everything your told about HFT is not the truth.  The material is very complex.  In the real world, we pass laws and restrict behavior once people begin getting hurt.  In NY texting while driving is banned even though most of the deaths are caused by kids < 21 years old, so we punish the entire NY population for this.  Why is the same not applied to markets?  We know HFT manipulate prices and use the speed of light to their advantage yet many trusted regulator bodies defend the practice has tightening spreads and providing liquidity.  This must be the tight spread they speak of (images from Nanex):

EnStar Group: $102.00 to $0.01

Brown Foreman: $74.00 to $16.00

RJL Lodging Trust: $17.25 to $0.0001

Last week I personally recorded a cycle in SPY that happened on Friday at the end of the day as the Algo's ran the price $0.25 up and $0.25 down in a matter of 15 minutes, for no good reason.  These types of patterns are in the markets all day and are easily identified thanks to platforms such as HFT Alert and NxCore.  Please do not be fooled by those with lofty claims and no evidence.