Smaller spreads was supposed to make things better, but it took regulators some 10 years to understand that by decreasing the spread, the market would get less efficient, at least if you trade more than 100 shares. We have always argued that by decreasing the spread, many functions of the “natural” market maker would dissapear, as there is no spread to motivate the trader being in the market, providing the nescessary liquidity. We are not arguing for the old times to return. Technological advances are great, but only if the market benefits. The development over the past years, with Broken Markets, is now slowly being acknowledged by the regulators. Irrespective of what the academics tell you, liquidity is not better, trading impact is higher etc. One of our suggestions is starting off by applying a spread in relations to the company market cap. There are many more suggestions, but first let’s see if the SEC finally starts realising the market is broken. From WSJ.
For some stock prices, the new math might look a lot like the old math: Regulators are thinking about bringing back the fraction.
The move would at least partly undo an 11-year-old rule that replaced fractions of a dollar in stock prices, like 1/8 and 1/16, with pennies. The idea of that change was to trim investors’ trading costs: One-cent increments can lead to narrower gaps between the prices at which brokers buy and sell shares—potentially reducing their opportunity to shave off profits.
In case you missed the interview with Eric Hunsander of Nanex a few days ago, we suggest reviewing it again.
Mr Hunsander shares his views on crashes, system overloads and killer Algos.
Ralph Ferrara, partner at Proskauer Rose LLP, talks with Bloomberg Law’s Lee Pacchia about the problems presented by high frequency trading and potential solutions. Ferrara says that certain policy changes made by Congress in the mid-1970′s had the effect of decentralizing financial markets and diminishing the presence of human controls over trading activity. In his opinion, the resultant market fragmentation combined with high frequency trading has led to a broken, two-tiered system that could force retail investors out of the market and fundamentally change the notion of capitalism in the United States. Ferrara served as General Counsel to the Securities & Exchange Commission from 1978 to 1981.
The Trader has been covering the HFT space for some time. We are not sure how these charts are constructed, but as the race to zero continues, HFT are making less money, and who wants to be investing billions in technology, in order to make peanuts? Is HFT becoming the next broken dream? Full chart and explanation, click here. Courtesy NYT.
HFT Volume Profits ( max 5 billion)
Maximum estimated annual profit at all H.F.T. firms
New Algos running the show. Welcome the 4% Algo. Courtesy Nanex.
The new quote spamming algo first spotted yesterday continues to grow. It accounts for about 4% of all equity quotes and run almost every second of the trading day – except for several 5 minutes gaps. It’s signature is so large that it was easy to spot when looking at the consolidated quote feed at millisecond resolution. When it runs, it blasts 200, 400 or 1000 quotes per symbol over about 25 milliseconds of time, and often accounts for 80 percent or more of all quotes during that time. It appears oblivious to market conditions – running whether trading is quiet, or full throttle. Which is disturbing, because bandwidth is extremely scarce at peak activity.
The animation below shows 5 minutes worth of CQS quote messages on 2 millisecond intervals. Each line is colored by reporting exchange according to the legend below. Each frame in the animation below shows the first 1/2 second of each second. The bottom panel shows each exchange’s percentage of the total.
As our frequent readers know, The Trader has covered the HFT in depth over the past year. Yes, the market structure is broken, despite what “pundits” tell us. Our friends at Nanex have made it possible examining a second in milliseconds, and provided us with charts over the past years, of which majority of investors never get to see. Machines is the new normal, so either you adapt, or you won’t survive. Below is an excerpt from the latest interview of Nanex’s Eric Hunsander by Chris Martenson.
High Frequency Trading (HFT) deeply concerns Eric Hunsader, founder of Nanex. He worries that today’s investors, our regulators, — heck, even the HFT algorithms themselves — don’t fully understand the risks market prices face in the brave new era of bot-dominated trading.
For instance, Hunsader estimates that HFT algorithms are responsible for 70%(!) of all completed transactions on our exchanges, and for 99.9%(!!!) of all exchange quotes.
The pictures of trading floors you see on TV, where the people in bright jackets appear frantically busy in making their trades, have no bearing — claims Hunsader — on the actual trading action. The real action happens across fiber-optic cables, on racks of servers in cooled rooms; where an arms race defined by cable length and switching speeds is being waged
We have said it many times before, the gap between regulators and the technological developments in the markets have never been bigger.
Last week the Indian markets collapsed in a flash crash move, although few talk about it. Here is a reminder that the issue needs to be adressed asap, via Bloomberg.
Don’t forget to check out the (K)nightmare video as well.
In this new world of technological developments, thing can only get better, or? We have written extensively on the HFT topic. The Algos are unregulated, and will eventually cause the collapse of the system. Despite regulators “assuring” us the technology is providing liquidity, we can not but disagree, as we once again see what happens when a few algos go crazy. Somehow these events are getting more frequent as time passes, or have people already forgotten about the (K)nightmare in August? India collapsed 16% while you were sleeping, but all is back to normal….From Bloomberg.
Trading in the S&P CNX Nifty (NIFTY) Index and some individual companies stopped at 9:49 a.m. in Mumbai for 15 minutes after the 50-stock measure tumbled as much as 16 percent to 4,888.20. Volumes traded on the gauge surged 163 percent compared to the 100-day average at 1:27 p.m., data compiled by Bloomberg show.
Reliance Industries Ltd., owner of the world’s largest refining complex, and Housing Development Finance Corp., the country’s biggest mortgage lender, both tumbled as much as 20 percent.
Senator Jack Reed, Democrat from Rhode Island, talks to Bloomberg Law’s Lee Pacchia about an upcoming hearing in front of a subcommittee for the U.S. Senate Banking Committee on how high speed computerized trading impacts the broader economy. Senator Reed will chair the hearing which seeks to examine the role high frequency trading systems have played in recent market disruptions such as the so-called ‘flash crash’ from May 2010, the failed BATS Gloabal Markets IPO, problems with the Facebook IPO and recent glitches plaguing trading firm Knight Capital.
Must watch video below.
A must listen to interview on HFT Trading by one of the “fathers” of HFT. From Planet Money.
Thomas Peterffy’s life story includes a typing robot, a proto-iPad, and a vast fortune he amassed as one of the first guys to use computers in financial markets.
On today’s show, Peterffy tells us his story — and he explains why he’s worried about the financial world he helped create.