TheTradeNew.com reports on a mini-crash last month:
Shortly after 1pm on Tuesday 23 April, a tweet from the verified Twitter account of US newswire Associated Press stated explosions at the White House had injured President Obama. Within minutes, the markets had bottomed out, with the Dow Jones Industrial Average sliding 145 points, or 1%, before rebalancing pre-drop, four minutes later.
These days, even Tweets and blog posts may be polled for market sensitive content in order to inform trading strategies:
Automated news reading services scan web-based news sources and social media for breaking news relevant to markets and specific securities. This can be fed via an application program interface (API), to a trading algorithm, which may act as a circuit breaker to stop trading or accelerate participation in a certain stock depending on the news.
TheTradeNews.com reports on a mini-crash last week:
On Friday, the price of Anadarko Petroleum Corporation – which has a market capitalisation of US$45 billion – slid from US$90 to a single penny in the space of seconds, before returning to its pre-drop level.
HFT Review posted this interview with John Lowery, who it seems was there right at the start of electronic trading.
we were probably the first ever firm to offer co-location, high speed market data and a high speed transport system. I remember it was a great day when we first broke the one second barrier for an execution, we did 900 milliseconds and thought that was amazing! We were certainly way faster than anybody else on the street at that point; most firms were taking 10-15 seconds.
TheTradeNews.com reports that institutional traders are leaving traditional displayed market venues for dark pools:
Experts like Justin Schack, partner and managing director at Rosenblatt Securities, has seen the overall market share of dark liquidity pools rise from 6.55% in 2008, just after the adoption of Regulation NMS and the introduction of its Trade Reporting Facility – a source of off-exchange trading data – to 13.36% at the end of 2012.
However, fleeing to dark pools wasn’t enough – other strategies have been put in place to mitigate against the high-frequency traders:
Some dark liquidity pool operators responded to this change in order size by introducing ‘order bunching’, where they would aggregate a series of smaller orders to create the other half of an institutional trade. In theory, an institutional trade could interact with four or five high-frequency traders on a 2,000-share trade instead of a single high-frequency trader in a 200-share trade.
Other dark pools define a variety of trader profiles and are allowing participants to specify with which profiles they are prepared to trade.
Andrew Keller’s article Robocops: Regulating High Frequency Trading After the Flash Crash of 2010:
This emphasis on speed is the primary defining aspect to high frequency trading: it is the main difference between traditional investment management and HFT. It also distinguishes HFT from other algorithmic trading strategies. HFT is a subset of algorithmic trading, where both use programmed algorithms to execute automated order submissions and automated order management. However, it is common for a non-HFT algorithmic strategy to hold traded securities for days, weeks or months, whereas HFT traders usually end the trading day flat, with no significant holdings. Furthermore, ultra-fast trading speeds are not necessary in a non-HFT algorithmic strategy; HFT, on the other hand, uses strategies that require speed to gain advantages in the market.
“smoking” is an HFT scheme that exploits slow traders by offering attractive limit orders, then quickly revising these prices to take advantage of an unsuspecting slow trader’s market order.
Presumably, the exchanges know the players and have a better starting point than government regulators in attempting to understand HFT methods and strategies. HFT computers are also tied directly into the exchanges’ computer systems which provide the exchanges an advantage in compiling data. On the other hand, the exchanges have strong incentives to provide free reign to HFT traders: they earn high rents from co-location, and significant fees from large amounts of trading. The exchanges want HFT traders to continue playing a significant role in the markets, and may not be a reliable regulator.
Mike O’Hara of HFTReview interviewed Prof Alex Preda about his research into how modern day retail investors are trading (free registration required to view the full article).
London traders are working and building models together with traders situated on the US East Coast or in the Mid West. They use social media intensively in order to combine and match their skills, to develop trading algorithms. This kind of work has become almost impossible for a single trader to sustain, so they build these small groups of maybe five or six people, situated in different locations, in different countries, all coordinating with each other in building and testing their robots. They’ve become very, very savvy.
UltraHighFrequencyTrading.com posted a good article on the history behind high frequency trading and the potential consequences of some proposed changes to trading rules:
High-frequency trading might appear to pose threats on the horizon, notes Tabb, but hasty regulation is all but certain to trigger unintended consequences. “It could totally destroy the market,” he says. If rules lock a high-frequency investor into a bid of $102 for even half a second when the market value is $101, other investors could swoop in at $101 and make a dollar a share on the incorrect price. This will create incentives not to quote or provide liquidity, making it harder and much more expensive to invest.
Now the debate is getting political:
While the debate simmers, high-frequency traders are enlisting influential allies in Washington. Republican members of Congress Jeb Hensarling of Texas and Spencer Bachus of Alabama are advocating a slow approach to any regulatory initiatives. In letters to the SEC and the House Financial Services Committee, both congressmen warned not to “shoot the computers first and ask questions later.”