‘HFT is killing the emini’ S&P, says Nanex

Nanex’s Eric Scott Hunsader — the guy who likes to dig through trading data to unearth weirdly fascinating algorithmic patterns — is out with quite a chart on Monday:



And no it’s not a new design for a Missoni scarf. It’s actually a chart tracking the deteriorating market depth in the emini future contract. The red line at the bottom reflecting the most recent data.

That’s quite a large drop over the last few months.

Furthermore, Hunsader is adamant it’s nothing to do with the holiday calm period. He believes it’s actually the result of one particularly harsh algo, which he calls ‘the disruptor‘:

Take the electronic S&P 500 futures contract, known as the emini, for example. This is, or used to be, a very liquid market. The cumulative size in the 10 levels in the depth of book was often 20,000 contracts on each side. That means a trader could buy or sell 20,000 contracts “instantly” and only move the market 10 ticks or price levels.

Even during the flash crash, when hot potatoes where flying everywhere, the depth would still accommodate an instant sale of 5,000 to 10,000 or more contracts. Not anymore. On Friday, 2,000 contracts would have sliced right through the entire book. Not during a quiet period, or before a news event.

Pretty much any minute of trading that day after the 9:54 slide. And it wasn’t just Friday, the trend in the depth of book size has been declining rapidly over the last few week. What used to be the most liquid and active contract in the world, which served as a proxy for the true price of the US stock market for decades, is getting strangled by the speed of light, a weapon wielded by HFT.

Without going into detail at this time, we think we know one cause of the drop in liquidity. A certain HFT algorithm that we affectionately refer to as The Disruptor, will sell (or buy) enough contracts to cause a market disruption. At the same exact time, this algo softens up the market in ETFs such as SPY, IWM, QQQ, DIA and other market index symbols and options on these symbols.

When the disruptor strikes, many professional arbitrageurs who had placed their bids and offers in the emini suddenly find themselves long or short, and when they go to hedge with ETFs or options, find that market soft and sloppy and get poor fills. Naturally, many of these arbitrageurs realize the strategy no longer works, so they no longer post their bids and offers in the emini. Other HFT algos teach the same lesson — bids or offers resting in the book will only become liabilities to those who can’t compete on speed. Hence the reduction in liquidity.

So, because people have caught on to the antics of ‘the disruptor‘, they’re reluctant to offer any depth in their emini bids and offers.

Which presumably means ‘the disruptor‘ will be looking to move on to some other market soon enough.

In the meantime, we suggest it’s at least a good name for the world’s first high-frequency-trading inspired rollercoaster ride.

http://ftalphaville.ft.com/blog/2011/08/08/646276/hft-is-killing-the-emini-says-nanex/

Good to know that there is a "DISRUPTOR" out there waiting for your money...

 

Thanks , interesting article.

I have no idea why so many firms love to jump into HFT where the competition can kill you. On top of hardware, software and exchange costs.

Much easier to profit from huge vola on currencies, gold, crude oil.
No, most traders will always choose the worst niche to trade

either the least liquid (orange juice, options etc) or crowded with ultra smart robots (eurex, nyse) or the ones with weak volatility (bonds)

 

Market depth has always been a function of volatility. Why would you want to be on the hook for more contracts when the risk the move can go against you hard is so much higher? It's typical to lighten the load in these scenarios.

The disruptor thing is cool, but I'd want to see the mechanics more closely.

 

i'm saying same shit for like at least 2-3 years. all you have to do to see the difference is go out and actually trade. not demo,not paper, but real account,decent size..and trade a lot...liquidity my a**..they are nothing,but the leeches..efficient and orderly market..yeah..

i know exactly what their game is..the problem is for me that i don't have same technical capabilities\advantages to join..

 

duh, this whole thing sounds lame.

volatility up, liquidity down. simple.

 

More than 90% of small traders lose. They just lose!!

 

Just a few weeks back, volume at each price tier would be >1000 for the ES, and the ATR on a 5 minute chart around 2.00 - 2.50 points.

Now it is 300 - 600 (200 even) at each price tier and ATR hits 6.00 - 7.50 on the 5 minute chart.

With lower volume at each tier, it is much easier to move price.

I always figured the reason NQ jumps like crazy is the lower volume at each tier compared to ES.

 

Fascinating. Thanks for the post.

I find it a little hard to believe 2k size will slice right through the book, even in periods of high volatility, but just reading about the algo's strategy is interesting.

Glad I don't swim in that time frame for futures...

 

Or reduction in market depth size can be due to summer. People are on holidays.

Note the chart reflects data only since May. I wonder how it would compare to the same period last year.

 

that's what they do on the stocks all day long. i guess i'm only one here,who trade them..it's just more obvious over there than on futures. specially if you have large portfolio on front of you. today it's like MEGA VISIBLE. market move one tick up-whoooshh... spreads on all offers jumps couple %,looking for suckers with market orders or market chasers..just like that..nice and orderly market. yep..