any market, any market, where there is extreme doubt or risk will see a disappearance of liquidity. hft's are not required to bring this on. it happened in the real estate market, it happened in the swaps market, it happened in 87' and 29' when stock markets were traded manually. on may 6th, more than one fund closed out enormous trades. much more than the market could bear in the time frame they chose to do it in. hft firms ie market makers could only take on so much risk before they had to step away to prevent blowout. at that point, it really became an exchange issue. how an exchange can allow a member firm to trade out so much size to drive stocks to pennies without any market safeguards is a flaw in the market model. you cannot require any market particpant to take on more risk than they're comfortable taking on to appease other market participants. at some point the exchange has to protect it's own integrity, and on may 6th those safeguards were not in place. vola auction models, like have been implemented in europe, would allow liquidity some respite to take on appropriate hedges and would prevent some of the idiocy you saw that day. on a positive note, it looks like they're going to be implementing some form of that with the proposed circuit breakers. it would be MUCH better if they were not imposed by the SEC, rather established by exchanges and member firms, as the smell of flawed implementation is almost palatable, but we'll have to wait and see.
True. Though, you are making a case for market makers, rather than HFT's. Did any of you take debate class in hi school? Remember how it was important to agree upon term definitions at the beginning? Market making and HFT strategies have become like concentric circles in the stock world--making this discussion difficult. In the stock world, the successful market making companies have started to use many HFT strategies out of necessity. In the options world there is still a very clear distiction between the two. There is a difference between pure market making and HFT methodology, as per my definition of these terms. Though the same firm may do a bit of both. The order information disseminated to some dark pool operators (which is what I would refer to as flash quotes) and some dark pool participants as well as order internalization (basically just a one market maker dark pool) gives a select group of well connected players huge, unfair advantages. RegNMS only covers the public exchanges. Therefore if a dark pool operator has internalization deals with retail brokers (like Citidel does with E-Trade), all they have to do is sub penny the public exchange prices to legally internalize these non-public orders. If Citidel/Getco/GS/Knight/IB chooses not to internalize the trade, they can still use the order info to make proprietary trading decisions before that order ever hits a public exchange. This company may be making markets on a public exchange, but they are basing their public markets off of non-public order flow information. Read the fine print when you sign up as a Sigma X customer, which states that GS may make trading decision off of your order if you don't believe me. If that isn't the defintion of front running, I don't know what is. This kills liquidity for all other participants who don't know the orders coming through the pipeline. All the while, the HFT company may adjust theoretical values due to non-public information. This sucks liquidity from everyone else, and hands it to the HFT company. Similarly, in the options world, payment for order flow is a liquidity killer. If a company is a registered market maker, they must pay .65 per contract every time they trade with a customer counter-party. Since dark pools do not fall into the same regulation, HFT companies register as customers in the public exchanges. These companies send .5 cent wide markets into dark pools. If they get hit on a trade, they cover by routing the exact opposite trade via naked sponsored access brokers into a public exchage. Since they come in as customers and get paid .65 cents per contract, they literally can buy and sell the same price, and make money. This is killing the market making companies. Think about a penny wide market in an options product. A HFT company can sub penny both sides, and still make money. Whereas, after adding together all the fees, a market making company would need at least 2 pennies of edge to break even. The HFT companies do not hold positions. They change their markets based on non-public info. They are killing the real liquidity providers. Adding all this together results in the marketplace losing the price impact cushion to order flow, which pure market makers used to provide. HFT decreases liquidity and vastly increases the price impact that orders have in the marketplace. The penny wide displayed market is an illusion. This is not a good thing for the market in general. More flash crashes with .01 @ 10000 type of markets are in our future, if we continue to allow HFT trading methodolgy to be legal.
That doesn't address my quote. Nor does it speak to the admitted front-running done by high frequency shops. If what you suggest was true, that HF's only trade support and resistance, I'd have no problem with it either. But that's not the case for many HF strategies. They front-run trade decisions already made.
Order queue jumping is front-running, Dumbass. That's the conclusion of Tradeworx. In their own words: "Jumping ahead of an order that was placed earlier at the same price by another trader is an UNFAIR practice, because it undermines the principle of PRICE-TIME priority on which our equity markets are premised. Unfortunately, this UNFAIR practice is widespread, due to a deficiency in Rule 611 of Regulation NMS(in regards to ISO-orders)" (pg 17). http://sec.gov/comments/s7-02-10/s70210-129.pdf Like most HFT'ers, you defend front-running as ethical and moral because the SEC hasn't banned it (yet). What you're doing is a computerized version of insider trading. Nothing more. To be sure, it's neither ethical or moral. HFT'ers that front-run are thieves.
Read page 17. Tradeworx admits ISO's are used to queue jump (front-run) and the practice is widespread amongst HFT'ers.
Say a large remote trader sends in a market buy order for 500K shares. Is that market order routed to a data feed viewed by HFT'ers before it's routed to the exchange and placed in the order queue? If yes, are HFT'ers given a few sub-seconds to trade with or against the market order before it's shuttled off to the exchange? Can you answer that for us, please?
Isn't it more what the OBLIGATIONS are for a market-maker? In the old NYSE specialist way, working under they umbrella of the exchange, they were obliged to maintain an orderly market. The floor guy couldn't just flip the "off" switch to his terminal and walk away on his own. Compound that with many algos that are 50-60%+ of volume and there is no liquidity in a heartbeat (actually, faster). Seems it is really at least 2 questions - 1) Who is obligated to provide liquidity in times of market stress, and 2) HOW that liquidity is maintained (meaning the manner in which the process is executed to maintain that "orderly market").
The large remote idiot who places a market order for 500K shares deserves punishment because he drains liquidity from the market. Why do you think such an idiot should be protected? Why do you think other players should not know he will be moving the market? What good do you think there is in being an idiot? Why do you think idiots should be rewarded with protection from the rest of the society at its expense? Are you a socialist? Where I worked, if someone placed an order for 500K shares at market, he would be instantly thrown out of the building by security.