Worried About Senseless Futures Action? Blame HFT, Which Is Now Taking Over "Multi-Dimensional Arbitrage"

Tyler Durden's picture

The following clip from Tabb Group (and accompanying report which we hope to post shortly), provides some much needed color on what has been the source of some serious head-scratching lately: completely irreconcilable action between spot and futures trading, especially in some core market ETF and corresponding futures (see PragCap's recent post on this). As Tabb's Adam Sussman points out "Automation is not just a way to capture alpha anymore, but in some cases is a source of alpha itself." In other words, if you can't join in, and you really cant, the best you can hope for is to ride the occasional beta wave here and there. Just make sure you fall off the board first when the wave is about to crash.

Most notable: HFT shops' volume on the CME has increased by 30% in one quarter: from 31% in Q2 to 40% in Q3! And somehow the SEC is still contemplating the "benefits" of HFT, when it is more than obvious that HFT is now a way, by those who can, to game the market on a daily basis.

As we will demonstrate in a post later, pronounced momentum chasing strategies and predatory algorithms operating on the non-futures market is one thing, which in fact has increased trading costs, not decreased, but when HFT is essentially the dominant strategy in futures markets as well, then there is no question that fundamental alpha extraction is now practically impossible. Any fundamental equity hedge funds can just as well shut down now, as they are the whipping boys for those who really control the market in this increasingly low-volume market. Curiously, we have been hearing numerous rumbling about these same HFT operators demanding access to a CDS HFT strategy once CDS become exchange traded and cleared. Sky Net is truly becoming sentient.


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Divided States of America's picture

Once everyone is doing HFT, there is no advantage to exploit. That is when they will end this thing but as long as there's profit to be made, this is going to keep on going. Whats smaller than a nanosecond?

Anonymous's picture

And if we run out of those, we also have a femto second.

Interestingly enough, a femto second is a one quadrillionth of a second. So it becomes possible to trade one quadrillion dollar amounts in one second - something we may need a couple of years down the road if QE continues.

Anonymous's picture

Next is femto second

peterpeter's picture

> Most notable: HFT shops' volume on the CME has increased by 30% in one quarter: from 31% in Q2 to 40% in Q3! And somehow the SEC is still contemplating the "benefits" of HFT

The total volume of CME trades is dropping, which is the largest factor contributing to the rise in the percentage of trades attributed to HFT going up (i.e. the denominator is moving more than the numerator).

It's all well for Tabb group to try to tout their research papers and get folks to login to their site and buy a copy, but there is nothing remotely new (at least from what the video clip says) about automated futures trading.

Anonymous's picture

Great observation peter. Volumes are dropping through the floor on equities and the CME. This pretty much discredits this crap research.

Anonymous's picture

The point of the report is not to claim that automated futures trading is new but that that the downstream impacts of the practices are growing. First and foremost, the exchanges are enhancing their infrastructure. This is a positive benefit for anyone who is even attempting to keep up with technological advancements. This progress also allows assets managers that are less focused on the execution component of their business to reap some benefits in the form enhanced execution capabilities. Finally, if there is any serious competition at the the exchange level, it would bring overall transaction costs down.

But what it comes down to is knowing your audience. If you are a sophisticated algo futures trader, I suspect this report would be less interesting to you than say, our reports on hardware acceleration, messaging middleware and dark fiber.

Adam Sussman

Dixie Normous's picture

This will end well.  The ES trades less than a couple of million a day and the NQ trades less than half a million a day.  What can possibly go wrong with computers playing bid/offer leap frog?

AR's picture

We noticed this practice started becoming an influence in the commodity/futures space about 2 years ago. The problem as we see it, is that the commodity/futures complex (with its' inherent leverage) can cause abnormal and highly volatile price action when the trend changes.

Dividend States asks above:  Whats smaller than a nanosecond?  We answer:  IDIOCY. 

Despite what everyone thinks today, the numerous imbalances being built in today's markets, will not end well at all. Be patient, strenuously review your risk management profiles, and only trade with stops.

Divided States of America's picture

I agree. I think all these ploys (taxpayers bailout, HFT, PPT etc.) are part of a bigger sinister plan to crash the markets in the future. The only way that the USD will regain its luster is if they create chaos on a global proportion and a market crash is one way to do it. USD will again become the safe haven due to the military prowess of the US of A. To do this, the govt is pushing us in a corner to see how far the citizens can take this. Either way they win. If we dont stand up for our rights, they will keep pillaging us for all its worth. We have and will always be a pawn in the elite's game of living large. If we do stand up at some point, they will fabricate a war to scare us. It makes perfect sense. In the process, they can eliminate a lot of senior citizens which will ease the govt on future liabilities from healthcare and social security. Creating a war will strike fear into our minds and we will again be united as a country and our trust in our govt will be renewed....and this process starts anew.

Cursive's picture


Enjoy your posts and agree with everything except:

"Despite what everyone thinks today, the numerous imbalances being built in today's markets, will not end well at all."

Obviously, many here don't believe the hype and I have the trading losses to prove it.  ;-)

AR's picture

Cursive / We should have been clearer. When we said "everyone" we were referring to the masses (the permabull majority/mentality now permeating the current market). Analysts, Washington, fund managers, almost everyone, are talking their positions. Listen, we've been around for 30+ years. We've seen, heard, and watched more bullshit come out of Wall Street recently than could fill the universe. These are tough times. Historical times. Frustrating times. On top of it, much of what we observe and absorb is illogical, which makes our investment decisions that much harder, and more difficult. Be PATIENT. One of the hardest things to do in this business is exercising the discipline to sometimes "do nothing." Trade smaller during these times. Be nimble, use tight stops, and take profits when the market gives them to you. This will eventually pass. I always remind my people that you only need to make $600 per day, per million under management -- consistently -- to exceed 15%+ per year. That never sounds like a lot until you do it for 30 years. Stay positive, and hang in there. Focus on building back your portfolio one day at a time, and one good trade or investment at a time.

Racer's picture

The person/computer in charge of the dollar controls the worlds markets now...

watching the way all the indices/futures are jumping about at every tick up or down.

It is like some childish game of musical chairs but in fractions of a seconds time scale!

Divided States of America's picture

Are we seing 3 year stock market cycles being played out in 3 hours????

AR's picture

Eventually DS, we think you'll be correct, only it may take a little longer, like 3 days. We think very few are prepared for this type of potential rebalancing (think 1987 crash to the cube root). 

We just read this piece from Denninger on China (pretty funny):


Flyingtrader's picture

Certain agricultural commodities will always contain the seeds of chaos within. Until quants can accurately model long term weather trends and plant genetics, commodities like corn and soybeans will always have a substantial risk quotient for algorithmic traders.  Carrying charges (contango) will always be a hazard for the simple minded, long only, slide rule money as well.

Simurgh's picture

momo HFT is so fun, create your little pet and watch him run! sometimes I blow out the NQ-100 over night just for fun!

J.B. Books's picture

With enough money and herd behavior can you manipulate the market?

Prechter says ultimately no. 

Human behavior bein' what it is, I tend to agree with Prechter.   But you can't disagree with the success of HFT and GS - and PPT.

But the resounding fact of world history is: Governments have always attempted to manipulate the herd, and it ultimately fails.


Fibozachi's picture

HFT / GS EACH have their place within the substructure itself ... whether you want to talk about wave iv's of cycle degree and Banking Overhauls or how government's are nothing more than a reflection of the collective social mood inherent within their constituents. 

Government, by its very definition, is the last to identify, accept and address any trend.  That said, gov't is truly, truly, by us for us.  The same was true of/from the Pharoahs to the Pheonicians to the political plebes of today.  Nothing EVER changes but technology and aesthetics.  Human nature is. It just is.

Check into the original GS implosion debacle, the GS Trading Corp., which did last almost an entire year before wiping out the equivalent of $400 Billi today.

Anonymous's picture

Please define high frequency trading

Anonymous's picture

Exactly. Stat arb, momentum plays? At the root level MMs are HFT players. Without clarification these discussions are meaningless.