HFT is Killing the EMini

Discussion in 'Automated Trading' started by Dogfish, Aug 15, 2011.

  1. Dogfish



    <B>Enough Already!</B>

    On Friday, Aug 5, 2011, we processed 1 trillion bytes of data for all U.S. equities, options, futures, and indexes. This is insane. A year ago, when we processed half of that, we thought it was madness. A year before that, when it was 250 billion bytes, we thought the same. There is no new beneficial information in this monstrous pile of data compared to 3 years ago. It is noise, subterfuge, manipulation. The root of all that is wrong with today's markets.

    HFT is sucking the life blood out of the markets: liquidity. It is almost comical, because this is what they claim to supply. No one with any sense wants to post a bid or ask, because they know it will only get hit when it's at their disadvantage. Some give in, and join the arms race. Others leave.

    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, before the CME halt, when hot potatoes were flying everywhere, the depth would still accommodate an instant sale of 2,000 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.

    In summary, HFT algos reduce the value of resting orders and increase the value of how fast orders can be placed and cancelled. This results in the illusion of liquidity. We can't understand why this is allowed to continue, because at the core, it is pure manipulation.

    The charts below shows the sum of all 10 depth of book bid sizes over each minute of the trading day. This is an excellent measure of liquidity in the emini. The red line at the bottom is Friday, Aug 5, 2011. Note how liquidity has been falling off sharply over the last few weeks.
  2. Pekelo


  3. Dogfish


    Well done for looking that up.

    Interesting nanex article regardless of which side of the argument you support.

    Other ones here http://www.nanex.net/FlashCrash/FlashCrashAnalysis.html you could blame a local for puking for starting the flash crash reading their final summary
  4. rosy2


    Why do you say that? The people who place resting orders want to buy/sell at their price, correct?

    Is nanex a lobbying firm or is it backed by some old world system? I can never figure out what you guys are getting at.
  5. Dogfish


    It's a quoted article from the link, I didn't write a word of it. Someone sent me the link, from what I can see Nanex make their money supplying data to HFT operations:

    <I>"Nanex's NxCore excels in delivering and databasing all the quotes and trades transmitted by the exchanges, even in the hyper-active U.S. Option market (OPRA) which now transmits over 4,500,000 quotes per second, and 8 billion quotes per trading day."</I>

    The resting orders of the HFT do not want that price necessarily, they want the execution relative to the other legs of their arbs, if the spread moves they move the bid/ask in that leg.

    Hence the whole argument that the order book is effectively hollow and why some people point the finger at the machines for all sprinting for the exit at the same time and the other slower arbers saying if you get filled you didn't want it in the article.
  6. CrackPipe

    CrackPipe Guest

    I remember years ago, traders would bemoan locals in the futures pits for their ills. If it wasnt them, it was the specialist MM on the nyse floor.

    the fact is, losers will always find someone to blame for their situation.

    5 things in life are certain:
    volatility cycles
    people blaming the smallest denominator (in terms of time frame) for manipulation
    mankinds inability to understand wimmin
  7. Can't believe people are complaining about the "illiquidity" -- I didn't realize there were so many big swinging d*cks on this site that need to buy/sell 10k lots in one shot.

    Stop digging for gold and just keep selling them shovels.
  8. rosy2


    so then its HFT vs HFT and the slower HFTs get hurt. Why should anyone care
  9. If you have a beef it should be with the Exchange and not anyone class of market participants.

    The game is getting progressively faster because Globex can order match and post trades faster. A few years back it was 25ms than 14ms and now under 1ms.

    What difference does it really make as long as the game is fair and everyone participating has equal access?

    Level II DOM has expanded from 5 to 10 levels per side and the exchange provides protection on all orders from ridiculous fills. If you get filled outside of the bust range the order will be cancelled.
  10. Oh, one of those whines again!"Let's go back to horses; cars pollute air and leave less room for pedestrians!" Nobody can stop the progress! Stop whining and adapt! Or die if you cannot adapt.

    I do HFT and I don't give a flying f....k about whether it is convenient for you or not!

    #10     Aug 15, 2011