When HFT Steals Liquidity – Exploratory Trading In The eMini [zerohedge]

On November 12, 2012,  Adam D. Clark-Joseph published Exploratory Trading, which analyzes CFTC audit level trading data in the eMini S&P 500 futures market. This is a special, “regulators-only” data-set that contains all orders and trades, and each order and trade has a trader identifier. What this paper exposes is astounding. The following is our summary of Clark-Joseph’s paper.

Exploratory trading

Exploratory trading is a form of manipulation designed to test the market’s reaction to a trade. Probing for stop orders would be one form of exploratory trading. This paper specifically investigates exploratory trading that attempts to determine whether the bid/ask spread is about to shift up or down a level. The impact on the market would be an increase in intraday volatility. Exploratory trading distorts the market’s view of supply and demand and induces trading activity from other participants. Furthermore, as participants learn of the strategy, they will employ counter-measures – which will further muddy an accurate picture of supply and demand for everyone else. This is why regulations ban manipulation.

The Top 8 HFTs Remove Liquidity 59% of the Time

Passive market making involves buying at the bid, and selling at the ask, which earns the market maker the bid/ask spread. Passive market making provides liquidity, narrows spreads, and lowers trading costs. Aggressive trading removes liquidity: buying at the ask (removes sell orders) and selling at the bid (removes buy orders).

Between September 17, 2010 and November 1, 2010 in the eMini futures contract (December 2010 contract, symbol ESZ0):

  • 41,778 accounts traded this contract
  • 30 of these accounts (less than 1/10th of 1%) met criteria to be classified as HFT.

These 30 HFT accounts:

  • participated in 46.7% of total trading volume.
  • grossed $1.51 million per trading day.

Of these 30 HFT, the top 8:

  • were aggressive 59.2% by volume (the other 22 were aggressive 35.9% by volume).
  • grossed $793,342 per trading day.


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From High Frequency Trading To A Broken Market: A Primer In Two Parts [Zerohedge]

One of the topics most often discussed on Zero Hedge before the wholesale takeover of capital markets by central planners was finally accepted by everyone, was the domination of market structure (first in equities, and now in commodities, FX and even credit) by new technologies such asHigh Frequency Trading as a result of a shift in the market to a technological platform domination, away from the specialist model, and one where the entire concept of discounting, the primary role of the market in the Old Normal, has been made redundant courtesy of a race to be the first to react to events (i.e., backward looking, and direct contravention with the primary function of markets) courtesy of milli- and nanosecond, collocated servers which collect pennies in front of steamroller and generate profits purely by “virtue” of being the first to trade.

This new “technology paradigm” developed in the aftermath of the regulator complicit adoption of Reg NMS (and to a smaller extend Reg ATS) which unleashed a veritable cornucopia of “SkyNet”-controlled algorithmic traders, even as regulators did not and still do not, to this day understand all the evils that rapid technologization of the stock market has brought, most vividly captured in the May 2010 flash crash, and daily subsequent mini flash crashes, which have achieved one thing only: the total collapse of faith in the stock market by ordinary investors, who now see it for what it is (and always has been but to a far lesser extent) – a gamed casino, in which not only the house always wins and the regulators are either corrupt or clueless, or both.

And while more and more “dumb money” Joe Sixpacks awake every day to the farce that is the stock market, one entity that continues to ignore it, whether due to its own incompetence, due to conflicts of interest, due to corruption, due to co-option, or for whatever other reason, are the regulators, in this case the Securities and Exchange Commission: arguably the most incapable entity to handle the topological nightmare that the current market landscape has become. Which is to be expected: after all only an idiot would expect that when the SEC invites a GETCO, or a DE Shaw to explain and observe the fragmentation of the market, and the evils brought upon by HFT, either in a closed session or before congress, that they would voluntarily expose their business for the parasitic fallout of what once was known as capital formation. After all, it is their bread and butter: to expect them to commit professional suicide by truly showcasing the ugliness beneath it all is beyond stupid. And the flip side are various fringe blogs, which must be relegated to the tinfoil crackpot ranks of conspiracy theorist (even as conspiracy theory after conspiracy theory becomes conspiracy fact after conspiracy fact).

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CFTC Economist Revitalizes HFT, Flash Crash Debate [terrapinn]

speed, hft, high frequency, cftc

High frequency trading (HFT) has suffered an onslaught of negativity in the media of late, serving as the sacrificial lamb of repudiation for such debacles as Facebook’s IPO glitch and Knight Capital’s $440m loss.

And a U.S. Commodity Futures Trading Commission (CFTC) economist is the latest to add insult to injury. Andrei Kirilenko – who has been with the CFTC since 2008 and a Chief Economist there since 2010, according to his official bio – has released a report indicating that small investors are greatly disadvantagedby their lack of access to supercomputers and elaborate algorithms, and stating that HFTs cost retail investors roughly $5 per contract. Kirilenko also insinuated that retail investors would leave the market, opting to “go some place that’s darker” to avoid the losses inflicted by HFTs.

While Kirilenko’s report did nothing more than articulate statistics on the competitive advantage HFTs have over smaller investors, it has nonetheless been met with a melee of criticism, dissenters (most notoriously;Dealbreaker’s Matt Levine), and recapitulations of the dangers of high frequency trading.

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Crackdown on dark pools, high-frequency trading [afr]

Australia’s major investment banks may be forced to hold stock-exchange licences under a tough new regime proposed by the government to crack down on secretive trading venues known as dark pools.

Financial Services Minister Bill Shorten raised the controversial licensing proposal as part of the next phase of reforms after finalising an initial round of measures yesterday to put the clamps on dark pools and risky high-frequency trading.

The government’s plan prompted an immediate backlash from investment bankers who warned a licensing regime would lead to a dramatic escalation in costs.

Mr Shorten defended the government’s reforms, saying it was acting to pRotect investors.

“I am aware that some investors have expressed concern about the use of high-frequency trading and dark pools,” Mr Shorten said.

“The government is acting to ensure that investors have continued confidence in Australia’s financial markets.”



“I believe that these new rules will help to reduce the risk of market volatility from high-frequency trading and provide increased investor protection for retail investors and others trading in dark pools.”

Dark pools are private exchanges where investors can trade shares among themselves, away from the scrutiny of the public market.




All the major investment banks in Australia, including Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs and UBS, offer clients access to in-house dark pools.

Under rules finalised by the government on Tuesday, dark pool operators will have to offer a better price than the stock exchange before investors are allowed to use the alternative trading venues.

In a bid to control risky “high-frequency” trading of shares, stockbrokers will be required to install “kill switches” to shut their systems if they posed a threat to the market. Trading in individual stocks will also be suspended for two minutes in the event of wild share-price swings.

While theses changes were well flagged, Mr Shorten announced the government would conduct a review of whether dark pool operators should be licensed as part of the next stage of reforms. It is believed the review will consider whether dark pools should come under the market licensing regime which applies to the Australian Securities Exchange and its rival, Chi-X.

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High-Frequency Trading Synchronizes Prices in Financial Markets

High-speed computerized trading, often called high-frequency trading” (HFT), has increased dramatically in financial markets over the last decade. In the US and Europe, it now accounts for nearly one-half of all trades. Although evidence suggests that HFT contributes to the eciency of markets, there are concerns it also adds to market instability, especially during times of stress. Currently, it is unclear how or why HFT produces these outcomes. In this paper, I use data from NASDAQ to show that HFT synchronizes prices in nancial markets, making the values of related securities change contemporaneously. With a model, I demonstrate how price synchronization leads to increased efficiency: prices are more accurate and transaction costs are reduced. During times of stress, however, localized errors quickly propagate through the nancial system if safeguards are
not in place. In addition, there is potential for HFT to enforce incorrect relationships between securities, making prices more (or less) correlated than economic fundamentals warrant. This research
highlights an important role that HFT plays in markets and helps answer several puzzling questions that previously seemed dicult to explain: why HFT is so prevalent, why HFT concentrates in
certain securities and largely ignores others, and nally, how HFT can lower transaction costs yet still make pro ts.


Link to paper

Germany Restricts High-Frequency Trading, Chicago Fed Recommends Same [commissionideas.blogspot]

Late last month, New York Times and WSJ reported on Germany’s intention to restrict High Frequency Trading.  High Frequency Trading is the use of proprietary algorithms to trade securities rapidly and at high speed. The idea is to capture fractions of a penny per trade.
Chicago Fed’s Concern About HFT
Earlier this month, the Chicago Fed published an essay on the risks of HFT for financial markets. Every exchange it investigated has had problems attributable to errant algorithms and software malfunctions. The worst was the 2010 Flash Crash which caused a 700 point drop in the Dow within seconds.
At fault is insufficient risk controls, a phenomenon due to the competitive time pressures involved. The Chicago Fed found that exchanges that impose pre-trade risk checks increase latency. Furthermore, investor confidence in the markets has also been adversely affected and the markets have seen a rise in volatility.
In order to control risks associated with HFT, the Chicago Fed has recommended:
•               Limits on the number of orders that can be sent to an exchange within a specified period of time;
•               A “kill switch” that could stop trading at one or more levels;
•               Intraday position limits that set the maximum position a firm can take during one day;
•               Profit-and-loss limits that restrict the dollar value that can be lost.
Germany Acts to Restrict HFT
Draft legislation on the matter was approved by the German parliament. Proposed measures include requiring that all high-frequency traders be licensed, clear labeling of all financial products traded by HF algorithms without human intervention, and a limit to the number of orders that may be placed without a corresponding trade.
According to a press conference by the German Finance Ministry, as much as 40 percent of all trading sales can be attributed to HFT. Germany’s goal in acting are essentially to limit the identified risks associated with HFT. If the bill becomes law, “excessive use” of trading systems would come with added fees. Traders also would have to maintain a balance between orders and executed transactions.

“Algos-Only” Tomorrow As NYSE Shuts Floor Trading Due To Sandy [Zerohedge]

The NYSE has just released a statement clarifying its hours tomorrow – due to the storm:


So, hold tight as all those low-lying humans will have left the building in the calm thoughtful hands of Johnny-5 and his friends.


Via Bloomberg:

Oct. 28 (Bloomberg) — The New York Stock Exchange said it will shut its trading floor starting tomorrow and invoke contingency plans to move all trading to NYSE Arca, its electronic exchange, as Hurricane Sandy heads toward the city.


“The re-opening of physical trading floor operations is subject to city and state determinations and local conditions; updates will be forthcoming,” NYSE Euronext said in a statement today.


NYSE Amex Options will open electronically and NYSE MKT, formerly known as NYSE Amex, will be suspended, the exchange operator said.


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