for Vinny

[Jonathan]

http://www.theatlantic.com/science/arch ... ers/60829/

I demand a full explanation by the end of the quarter!

[VLSmooth]

The above refers to Nanex's analysis which can be found here:

Analysis of the "Flash Crash"
http://www.nanex.net/20100506/FlashCras ... Intro.html

I originally found it via:

Slashdot: 2010-06-24: News: Flash Crash Analysis of May 6 Stock Market Plunge
http://news.slashdot.org/story/10/06/24 ... ket-Plunge

[VLSmooth]

Also, this is a particularly interesting Slashdot comment:

ZeroHedge had a discussion on the Nanex report... (Score:5, Interesting)

...right here [zerohedge.com]. One commenter had some interesting things to say about "quote stuffing":

Just because the folks at Nanex can't figure out why a system was entering orders and cancelling them frequently does not mean that they were being "stuffed" to thwart competitor's systems.

The logic on the machines placing those orders (HFT or otherwise) may have been severely screwed up by the craziness of 5/6 and the latency on data feeds - but there is no way to profit by spewing lots of quotes.

First, everyone in the HFT space has plenty of headroom to process the full raw feeds (rather than the SIAC consolidated feeds Nanex is looking at). A few thousand extra quotes per second is not meaningful to systems that can process millions of quotes per second.

More to the point though, each exchange gives each participant a port on which to send their order flow. Those ports are rate limited. That means that if you send thousands of spurious quotes that are not going to hit, the only harm you cause is to your own trading strategies, since when you finally did want to execute a trade at a price where the execution was remotely likely, you are going to have that order queue behind all of your other orders on the same port.

So it might not be the big advantage that Nanex sees it as.

Edit: Updated formatting.

[VLSmooth]

Admittedly, I still haven't passed my own moral judgement on HFT yet. I'm hoping future experience will help me there.

[VLSmooth]

Another interesting Slashdot comment:

High Frequency Trading != High Volume Trading (Score:5, Informative)

*dislaimer* I work for a HFT firm.
HFT 99% of the time is actually a healthy process - it allows relative mispricing to be quickly corrected and gives investors a chance to trade at prices which are fair whenever they come in to buy or sell.

HFT firms don't care if the P&G share is fundamentally worth 60, 5 or 100$: they are only concerned about the relative value of the stock versus other financial instruments. If for example you know that product X has a robust 1:1 correlation with product Y (for example cash vs. future), and one goes up while the other goes down for no apparent reason, the HFT guys step in and immediately buy X and sell Y until they are realigned. This will usually be for small volumes because such discrepancies don't last for long and are due to people who just aggressively buy or sell one of the products.

Simply put, HF trading firms inject liquidity into the market, they allow thousands of investors to be able to buy and sell literally any financial instrument with a relatively predictable cost (the bid/ask spread).

The real danger IMHO are the "high volume" traders, whether they are hedge funds who take directional bets or some large bank with dubious moral values. These guys will look for markets where they can push the prices up or down using sheer volume. I see this quite often on stocks which are prone to takeover rumours, "large buyers" or "large sellers" suddenly step in and start buying or selling anything they can get their hands on - all market makers panic and think that there is either something they don't know or someone who has insider knowledge. Once things settle, they calmly sell away their new position to other investors (the trend following sheep) who step in to trade on the unknown rumour.

[VLSmooth]

This just percolated through my RSS backlog:

Slashdot: 2010-08-04: Market Data Firm Spots the Tracks of Bizarre Robot Trading
http://news.slashdot.org/story/10/08/04 ... ot-Trading

jamie spotted a fascinating story at The Atlantic about "mysterious and possibly nefarious trading algorithms [that] are operating every minute of every day in" the stock market:

"Unknown entities for unknown reasons are sending thousands of orders a second through the electronic stock exchanges with no intent to actually trade. Often, the buy or sell prices that they are offering are so far from the market price that there's no way they'd ever be part of a trade. The bots sketch out odd patterns with their orders, leaving patterns in the data that are largely invisible to market participants."

Spotting the behavior of these bots was possible by looking at much finer time slices than casual traders ever see — cool detective work, but as the story points out, discovering it is just the beginning: "[W]e're witnessing a market phenomenon that is not easily explained. And it's really bizarre."

I'm guessing that was the impetus behind the original post?

[Jonathan]

Yep. You know me, I like to link to the primariest source I can get my hands on. Summaries are for chumps.