I am Eric Hunsader from Nanex and created this animation using our own custom software tools and our NxCore data feed.
Our position on HFT can be summed up in the first lines of text below the image: "It's not high frequency trading (HFT) that concerns us. It's high frequency quoting". Links are included for details. Our latest paper on HFT can be found here: http://www.nanex.net/aqck2/3532.html
Anyone who has taken the time to really look at the contents of the tsunami of data that some HFT creates will come to the conclusion that something very wrong and harmful going on. We've found this is nearly impossible to convey in text or graphics (with the possible exception of this animation), and sooner or later as more and more academics get up to speed, they will generally come to the same conclusions we have.
Our primary business is providing a real-time (and historic ) data service for U.S. Stocks, Options and Futures. In the course of monitoring our feed for our subscribers, we run across anomalies that we think need to be published for the public good or long term health of our markets. We have not received a dime from any of our analysis and not a week goes by that we don't regret opening that Pandora's box.
I will check back later today to answer any questions. If you don't receive a reply for a few hours, it's because we are working at our "day job".
You don't like high message rates because it makes your job harder. You guys are a great data provider (I used to be a customer) and you're doing a pretty good job (if not somewhat biased, perhaps unconsciously so) of informing folks about the happenings of the market. However, message rate limits are already managed by exchanges, what more would you ask?
Theories related to quote stuffing to cause ticker plants to stall and other gaming related items just don't jive, to be honest. It's always been the responsibility of the trader to ensure they can manage the data flow. If they can't they can get a vendor who can help them.
Data rates will naturally manage themselves and will always grow towards available bandwidth. It's the nature of our market, especially as we move towards tighter spreads. The markets are becoming more and more continuous and that necessitates the need to quote at high rates.
The charts you guys put together are interesting but let's be clear: no human looks at data at these levels, only machines. And machines don't care about visual patterns in data flow. So, as a means to help illustrate how markets are evolving I'm all for the visualization. However, as a means to denigrate the very real needs of important market participants to remain competitive, I think you're doing a disservice to the uninformed reader of your reports.
Your data shows the increase in HFQ relative to much lesser increase in HFT well, but neither of the links I followed to why HFQ is bad gave me much of an idea, other than "it's extra network traffic".
Exactly. Nanex does not like high message rates because it increases the cost of running their service. like yummyfajitas and yourself no one can explain to me why high-rate quoting is bad. Producing pretty graphs showing quotes at regular intervals doing interesting things is not indicative of bad behavior, especially when many of those charts include after market data when the depth is extremely thin. And remember, every venue enforces message rate limits already.
The link in the original post labeled "high frequency quoting" led to a page [1] that makes a more concrete claim. Basically they say that the NBBO (national best bid and offer) are being manipulated to be small when there is no trading and larger when there is trading.
I think that's at least a little disingenuous though...
If there is no trading then it makes sense that bids will be increased and offers decreased in order to 'entice' trades. No trading means the bid/offer are too low/high - basic econ 101.
As soon as there is trading two things happen:
1) bids and offers are hit, meaning they are removed, leaving lower/higher bids/offers as the next best.
2) The HFT algorithms know that when there is a lot of trading they should lower bids and raise offers, because excess demand indicates the bid/offer are lower/higher than they need to be. Essentially, they are realizing that they are leaving money on the table.
This all might look like price manipulation to an outsider, but to anyone that knows what is going on it's just the way markets work. The difference is that it happens a lot slower in markets humans are used to.
In my mind what would indicate a problem is if bids and offers widen AHEAD of trading. This would mean the HFTs are finding out that somebody wants to trade and adjusting their quotes BEFOREHAND. That's front-running and illegal. But I don't see evidence of that here.
I'd be curious to know what you believe the harm is. Specifically, since you claim HFT harms long term investors, what are the mechanics by which it does so?
One thing the site seems to do is keep an occasional catalog of patterns they believe to be evidence of attempts to harm price discovery in the markets through various quote-system-gaming tricks, presumably intended to set up some other strategy. Here's one, an algorithm that seems (in their opinion) designed to target a particular stock and jack up its volatility: http://www.nxcoreapi.com/aqck/3271.html
Hi Eric - Firstly, thanks for the work that you do. I can always rely on nanex research to produce thoughtful and interesting discussions.
Many of the "bots" in your research seem to be adding quotes that are far away from NBBO. One theory is that these exist to provide market participants with more precise measures of their own latency - almost like echo location. They send out a pattern to the exchange, and then wait until they see it coming back on their market data feed. I think that its good for market participants to have an accurate means of measuring market data latency and that having that means ultimately enhances the efficiency of the market. Do you disagree with this stance? Is there some other better means of measuring latency that would be better for market participants to use?
I like Nanex's work - the company has done a lot of excellent analysis of the progress of HFT over the past few years.
I'm wondering why there tends to be so much value judgment and moralizing in this area coming from various sources (such as Themis).
For example: HF traders are taking value from "real" traders ("real" defined by whom?), the systems are "too fast" (compared to what?) or quoting "too much" (compared to what?), and so forth.
Exchanges already seem to be penalizing participants with very high quote-to-trade ratios, suggesting that the existing regulatory and commercial system is responding to the needs of its stakeholders.
Maybe this kind of reaction is inevitable. I'm sure that there was moralizing in ancient Greece when some entrepreneur bought a load of olive oil at a low price in Athens and ran it on a fast chariot to Thessaloniki, unfairly undercutting the honest merchants of Thessaloniki and pocketing a tidy profit through their "high-speed trading" … same thing with those who used an undersea New York - London cable to gain advance knowledge of events.
The point of the stock market is to create a liquid market for businesses and investors. HFT who don't actually keep any skin in the game is just a market efficiency which is best dealt with by changing how the market operates not flooding it with 100 billion meaningless buy and sell orders a day.
EX: Put a 24 hour hold after a stock transaction is held before you can sell and you just killed 99% of HFTing.
Put a 24 hour hold after a stock transaction is held before you can sell and you just killed 99% of HFTing.
Not just HFT - you just killed some significant fraction of all forms of trading. Bought something and it's declining? Oops, too bad, you're locked in - better wait 24h. The arbitrary phase shift of transactions will add massive amounts of complexity and create a new system to be gamed.
Edit: Also, regarding "skin in the game" - the recent $440M Knight fiasco shows that firms participating in all forms of HFT are exposed to real financial risk. They definitely have some skin in the game.
This is an excellent graphic, but the author has a strong stance against HFT (such as the pages he links to about high frequency quoting) that readers should moderate with an understanding of what HFT does in an ideal economic context--the "purpose" of HFT.
At the level of HFT, the decisions being made are too fast and frequent to be based on the fundamentals of the stocks being traded. Instead, algorithms are used to make trades based on "technical" analysis rather than analysis of fundamentals--technical analysis predicts how stocks will move based only on past movement, not on underlying reasons.
In some cases, this movement is movement that happened only seconds, or milliseconds earlier. In a market with no HFT, say that there's a stock where a large sale is made by some investor, driving price quotes down a few cents; and then a second later, another investor buys a large share, pushing prices up again to where they were before. This behavior makes stock charts jagged and gives a certain volatility to prices.
Now, imagine that you could algorithmically predict when a price is likely to go down and then up again in cases like that, and so you could make a profit by buying low knowing that the stock price will be back up again one second into the future. You buy stock to capitalize on this, and if you buy as much stock as you profitably can, you'll essentially drive the price back up to where it will be after the original "correction". You end up correcting the price before the other investor does; and if your response time to the first investor's sale is fast enough, the time when the stock is underpriced will be reduced by you quickly buying.
This stabilizes prices, smoothing out the curves, and stable prices are valued in the market. People are willing to pay money for stability, even at those small levels; and that amount of money is what HFT is designed to capture. HFT also makes a benefit by being "first" on finding the right price through its algorithmic clairvoyance.
Sometimes, obviously, the use of these algos goes wrong. You get a flash crash with a death by ten billion cuts as the market moves to smooth in some incorrect way. But HFT is not all bad, and considering how much there is, it's impressive that it works as well as it usually does. The incidents you hear about are just like plane crashes; just because planes crash sometimes and it's big news doesn't mean that air travel isn't safer per mile than car travel. Similarly, HFT has a powerful smoothing ability that it capitalizes on (among other things that it does--but smoothing is one of its largest abilities), and most people who oppose it don't realize how essential price stability is to the market at those levels given how much non-HFT trading volume goes on these days.
> Sometimes, obviously, the use of these algos goes wrong. You get a flash crash with a death by ten billion cuts as the market moves to smooth in some incorrect way.
I learned recently that there have been many similar crashes throughout history, well before even the invention of computers eg
It seems to be more a matter of market dynamics rather than crazy algos. If some market shock drops prices too quickly you pass from a stable equilibrium into panic selling. Market makers will only accept so much risk before they start trying to offload stocks too, leading to a feedback loop. Lots of exchanges now have measures in place to break this feedback loop by halting trading on a stock if the price moves too fast and running an auction instead.
The 2010 flash crash was really only notable in that the move to electronic trading made both the crash and the subsequent recovery much faster. Panic selling itself is a problem with the market structure, not with the machines on the other end.
Indeed, crashes happen are nothing new, and HFT algos going wrong are only one of the billions of ways that it can happen. That's what you get when the market has ways of deciding prices--through people, machines, or contracts. It's possible that things can go wrong, but investors acknowledge that risk, and take responsibility if things go wrong. It's no great moral failing of the world that the market can go south.
I think you missed the main point of the article: that the activity of HFT algorithms overwhelmingly takes the form of quotes that never lead to trades and only serve to manipulate prices or create an information asymmetry.
There is nothing efficient about HFT's. It's all leveraged money used to extract a profit from the market in ways that in their very nature is anti competetive. If there ever were a positive side to HFT is was passed a long time ago.
I am Eric Hunsader from Nanex and created this animation using our own custom software tools and our NxCore data feed.
Our position on HFT can be summed up in the first lines of text below the image: "It's not high frequency trading (HFT) that concerns us. It's high frequency quoting". Links are included for details. Our latest paper on HFT can be found here: http://www.nanex.net/aqck2/3532.html
Anyone who has taken the time to really look at the contents of the tsunami of data that some HFT creates will come to the conclusion that something very wrong and harmful going on. We've found this is nearly impossible to convey in text or graphics (with the possible exception of this animation), and sooner or later as more and more academics get up to speed, they will generally come to the same conclusions we have.
Our primary business is providing a real-time (and historic ) data service for U.S. Stocks, Options and Futures. In the course of monitoring our feed for our subscribers, we run across anomalies that we think need to be published for the public good or long term health of our markets. We have not received a dime from any of our analysis and not a week goes by that we don't regret opening that Pandora's box.
I will check back later today to answer any questions. If you don't receive a reply for a few hours, it's because we are working at our "day job".