Yes I used the word crap, and I do mean it. What gets me about this high frequency trading article and issue is that I feel it is sour grapes. Here is what I heard from the woodwork. It seems that high frequency trading has been something new. But in fact it has been around for a while and last year there was the following job.
08 Aug 2008 18:25
Master Strategist | High Frequency | Quantitative Trading | London –
Are you a super smart statistician with a strategic mind and an interest in algorithmic ultra high frequency trading? My client is the leading electronic trading business with a significant market presence. They focus on enhancing liquidity and improving market efficiency through algorithmic trading programs based on automation and probability. The fund is expanding within Europe and is on the lookout for a statistician to join the trading / quant team. The ideal …
So if this has been around for a while and there have been oodles of jobs coming my way why the hub-bub? Answer and it is very simple, some very big boys in the high frequency game are getting their heads handed to them on a platter.
Stock Traders Find Speed Pays, in Milliseconds
The article says milli-seconds, but my contacts are telling me the new norm is micro-seconds. Thus there are players in this game that are about 10 to 50 times slower. And these players are getting their heads handed to them on a platter. I am guessing that these players are confounded and hence are complaining about how their business model just went poof!
The new complaint seems to be that somebody has extra information that the other folks don’t.
It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.
Yeah a handful of traders can peek at the stock market ahead of the rest of market. Want to know why? They are called market makers! Market makers have a duty to provide liquidity meaning that they have provide a certain number of trades. Or they can buy the access. So buy the access! Being a market maker is no fun! You have trade all the time and you have to make money. High Frequency Trading is a direct result of this.
And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.
This point is complete CRAP! If I am an investor then I am holding onto my stock for a relatively long period of time. This means my gain is probably in the order of 50% or more. If I have to give up a percentage point to high frequency finance, so be it! I really could not care.
So why the association of investor? Simple, because those who are being walloped by this are traders! And nobody has sympathy with traders. But if this argument were switched to say investors then, well this is an issue! What gets me about this is that it is not an investor issue. It is a trader and a liquidator issue. By liquidator issue what I mean are companies that specialize in selling or buying large chunks of stock. I am guessing they are getting hit hard and have not kept up with technology. As somebody said to me, “maybe they need to change business models.”
“It’s become a technological arms race, and what separates winners and losers is how fast they can move,” said Joseph M. Mecane of NYSE Euronext, which operates the New York Stock Exchange. “Markets need liquidity, and high-frequency traders provide opportunities for other investors to buy and sell.”
This is the more accurate part of the article and it tells it as it is. High Frequency Trading is an arms race. And if you are going to jump in then you better start buying hardware.
What is really telling about the article and shows who is getting hit is the following part of the article.
It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.
The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.
In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.
Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.
The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.
The real issue is that a liquidator who has to buy or sell large chunks is not able to keep up with the market. And thus is getting hit hard because they have not kept up in hardware. There are ways around this, namely dark pools, but oh wait dark pools again cost money and technology.
I am an algotrader, but I do not do high frequency trading because it is an arms race that I don’t want to participate. But if there is one lesson that I can tell you, don’t chase the market! You wait! Use the technology and WAIT! Case in point had the algo waited till today they would have gotten filled in the prices that they wanted to. In fact you would have gotten as many shares as you needed.
As a reference I have literally dozens of orders just waiting to get filled at my price.
But again I am sceptical that this is an “investor”, and more likely a trader who is crying sour grapes!