Tag Archives: HFT

The Rise of Dark Pools

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.

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Regulating High Frequency Trading

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.

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Human traders v robots

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.

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Time to apply the brakes to high-speed trading?

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.”

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BATS looks to compensate after long-term system error

BATS Global Markets has identified a software bug that has caused almost 450,000 trades to be executed at the wrong price over a period of 5 years, according to thetradenews.com:

The exchange group found that some short-sale orders were executed at a price that is equal to or less than the national best bid or offer, while non-displayed pegged orders may not have been executed at the most optimal price.

Under the SEC’s Reg NMS rules, trades must be routed to the market displaying the best price. As per short-selling rules, if a stock declines by 10% from the previous day’s close, traders can only sell short at a price one tick above the national best bid or offer until the end of the next trading day.

This sounds like an oversight in their understanding of the complex market rules rather than a bug – it wasn’t that the software was implemented correctly, this rule wasn’t implemented at all!

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Treat market data with caution

Stale market data occurred yesterday on the Nasdaq, according to TheTradeNews.com:

As a result of the error, market data for many Nasdaq-listed stocks did not refresh for around 15 minutes, rendering some consolidated tape data unreliable. The issue was resolved at around 13.53 EST, according to a Nasdaq OMX statement.

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News on US Circuit Breakers

TheTradeNews.com reports that the rollout of new circuit breakers could be delayed to allow firms longer to implement them.

The new limit up-limit down (LULD) and market-wide circuit breakers are scheduled for introduction on 4 February but could be delayed until 6 April, pending approval by the Securities and Exchange Commission (SEC). Testing for the enhanced circuit breakers is expected to commence on 26 January.

Here’s how it’s supposed to work:

Under the current proposals, if the national best offer of a stock equals the lower price band, or if the national best bid of a stock equals the upper price band, trading in that stock will enter a ‘limit state’.

In a limit state, trades at the upper or lower limit must be adjusted or cancelled within 15 seconds to prevent a pause to trading of that stock. The length of a pause will depend on the liquidity characteristics of the stock in question, currently five minutes for S&P 500 and Russell 1000 constituents and at 10 minutes for most other securities.

Trades that are entered outside of the price band set for a stock will be rejected or adjusted to an appropriate price, at the discretion of the broker entering the trade.

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Dark Pools in the news

Two dark pools are in the news:

The two cases differ decidedly, according to industry pros. In the Pipeline case, the settlement was based on fraud and resulted in direct charges against individuals. Pipeline failed to disclose that more than 97 percent of orders in its dark pool at times were filled by a trading operation affiliated with the firm.

LeveL ATS is rebounding as 2012 comes to a close. It says clients are returning since its parent firm, eBX LLC, paid an $800,000 fine and settled charges that LeveL failed to properly safeguard information on customers’ unexecuted orders, which were stored and allegedly reused in a smart order router.

In the same article, news on brokers who are analysing the profile of those trading in their dark pools, e.g. The Light Pool by Credit Suisse:

The alternative system classifies users by how they trade. The venue categorizes participants, helping mutual funds, hedge funds, pensions and endowments trade only with parties they are comfortable with.

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Money and Speed: Inside the Black Box

HFT Review publicized this excellent video by Marije Meerman on the flash crash:

In her latest film ‘Money and Speed: Inside the Black Box’ she continues this format, talking of High Frequency Trading and the ‘Flash Crash’ of 6th May 2010 through the eyes of the regulators and market participants.

Paul Wilmott is one of the contributors.

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Knight Capital takeover rumours

Knight Capital’s fall from grace was well publicised after a software glitch cost them $440 million. Now there’s talk of a takeover.

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