HFT Up Close

by Larry Levin


For those of you who still do not know what HFT means, it stands for High Frequency Trading. Wikipedia describes it as follows: In electronic financial markets, algorithmic trading or automated trading, also known as algo trading, black-box trading or robo trading, is the use of computer programs for entering trading orders with the computer algorithm deciding on aspects of the order such as the timing, price, or quantity of the order, or in many cases initiating the order without human intervention...A special class of algorithmic trading is "high-frequency trading" (HFT), in which computers make elaborate decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information they observe.

Have you ever wonder why, or how, the market could go up day after day despite unbelievably bad economic news? Have you ever marveled how the SPY and the ES could lift the offer tick after tick after tick...on NO volume? Have you wondered why the NBBO (National Best Bid & Offer) changes the instant you place a large order to buy or sell your favorite stock? Have you wondered why the SEC isn't doing anything about it?

One thing is for certain, don't bother the SEC with a FOIA request to find out what the SEC is really doing - it will ignore you - and it can; it's part of the new FinReg law. The SEC no longer needs to grant us peasants access to anything it does.

To be sure, there are more reasons why the market does what it does; however, HFT is certainly a main reason. With estimates at 70 to 80% of the daily volume being executed by HFT robots, the charge cannot be ignored...unless you're running the SEC.

Since placing orders, with the dual purpose of them moving the market and NOT being filled is illegal, you may want to send this to your Congressman and ask them to have a look-see. This amazing data was compiled by Nanex and can be found here http://www.nanex.net/FlashCrash/CCircleDay.html The charts are amazing and seem to be the smoking gun. Nanex titles the piece "Crop Circle of the Day - Quote Stuffing and Strange Sequences." Each of the following bullets corresponds to one of the charts. Please visit the link to see them.

* BATS "Flag Repeater". 15,000 quotes in 11 seconds, dropping the ASK price 1 penny each quote from $9.36 to $8.58 and back up again.
* "The Crown". While not a large number of quotes, this NASDAQ/BATS Bidsize sequence was just too unusual to bypass.
* BATS "Batsicles". BATS price cycling through a large price range, each intermittent with a stub quote, drop it down and start over.
* NASDAQ "Blotter". One of the more unusual repeating Asksize cycles.
* BATS "Stubby Triangles". Drop the quote from a valid price to 0.001 and then back up to a lower price level. When the new price level hits 0.001 as well, do it all over again at approx. 380 times a second. (PER SECOND!!!)
* NASDAQ "Flutter". 4000 quotes in 2 seconds, alternating the bid price/size in 3 increments and effecting the Best Bid along the way.
* BATS "Periscopes". 8000 quotes in 3 seconds, alternating the bid price each quote. Pop the size up 1 every second or so.
* NASDAQ "Double Dip". Symbol SH. 10,000 Quotes in 4 seconds, each affecting the Best Bid.
* NASDAQ "Racing Stripe". Symbol WYNN. 2000 Quotes in one second, each affecting the Best Ask.
* NASDAQ "Blue Bandsaw". Symbol SHG. (760 quotes in 1 second, taken from a total sampling of 10,000 quotes in 12 seconds)
* BATS "60-Step". Symbol SAH. Take sixty steps up (a penny at a time) and one step down (0.60), reset and do it all over again (at approx. 700 times per second).
* NASDAQ "Ask Mountain". Symbol IAU. Over 56,000 quotes in 10 seconds, all with same Ask Price and the Ask Size increasing or decreasing by 1 (to almost 40,000!).

Let me be clear: I have no problem with electronic trading whatsoever. However, when the electronic trader uses his robot to intentionally fool the market to intentionally move the NBBO, with the intention of NOT being filled is just wrong as it tricks people (and now other robots) to make trades that they otherwise wouldn't do. Moreover, this intentional action leads to HFT profits for them, and losses or forgone gains, by you.



Previous Day's Trading Room Results:

Trade Date: 8/2/10

E-Mini S&P Trades*
(before fees and commissions):


1) No "Secrets" trades today.

2) Algorithm positions (4)

3) “Reading the Tape” positions (3) combined Secret’s, Algo, & “Reading the Tape” total… +5.00



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