HOT Users In Canadian Equity Markets

CalibratedConfidence's picture
The Analytics Group of IIROC performed a Trading Review and Analysis of High Frequency Trading on Canadian equity markets.  IIROC uses a methodology to identify user IDs exhibiting high order-to-trade ratios, or HOT User IDs, and covers the period from August 1, 2011 to October 31, 2011.  With User ID data provided by the Regulatory feed IIROC determined HOT User ID's by isolating the actions of placing an order, amending that order, then having the order trade.  Canceling an order and sending a new order is isolated against sending an order and amending that order.
Plotting the number of trades against the number of new and amended orders yields:
After using their methodology, HOT User IDs are identified in red with OTHER User IDs in blue:
So just who are these Hot Users?  They are:
  • 11% of the User IDs active in the study period;
  • 22% of share volume traded;
  • 32% of dollar value traded;
  • 42% of trades executed; and
  • 94% of new and amended orders.
The HOT Users encompass the group we would expect, those with fast processors, the fastest pipes, and the primary data feeds.  This group has been identified using the Regulatory feed account types as either:
  • DMA (Direct Market Access)
  • NDMA-IN (Non-DMA Inventory) - Inventory meaning activity related to proprietary trading activity
  • NDMA-CL (Non-DMA Client)
  • NDMA-Other (ie) specialist, non-client, options market-maker.
Ploting the order to trade ratio of Hot User IDs by account type yields:
As I highlighted in a post on Floating Path in June of 2012, ETFs are dominated by HFT over all other categories.  IIROCs study reached a similar conclusion regarding the level of HFT activity in ETFs.  This is another aspect of what is perverted within the current market structure: the derivatives now price the underlyings as it is easier to calculate in rapid fashion, a group of set prices, such as a SPYs constituency, instead of the fundamental analysis required to price the individual companies.  This rapid calculation leads to repeated revisions and makes the ETF market more appealing for those looking to execute trades on the predictive power of price movement over the predictive power of a public company's earnings.  The Canadian market is populated in much the same fashion, with the NDMA-Other - specialist, non-client, options market-maker account type having the largest ratio:
Whether measured by volume traded, valued (sic) traded or number of trades executed NDMA-CL and DMA were more active in common shares and NDMA-IN and NDMA-Other were more active in ETF/Ns.
With the individual activity identified, we can now measure the interaction broken down by order types and whom they traded with:
27% of the volume by Retail participants involved interaction with HOT Users, as you'd expected, being the DMAs.  As for the dark markets in Canada, HOT Users were responsible for a larger percentage of activity than on the lit markets, 39% vs. 21%:
The paper continues into an analysis of rebates earned, security types, liquidity categories, price bands popularity levels, inter-listed security activity, New and Amended Orders and Order-to-trade ratios, and trading venues.  The paper is must read for all those interested in identifying and valuing the activity levels of specific types of participants in equity markets.  It is one of the more transparent papers and it draws on input from many of the papers included in R.T. Leuchtkafer bibliography.

The HOT Study Phases I and II of IIROC’s Study of High Frequency Trading Activity on Canadian Equity Market... by calibrateconfidence

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Radical Marijuana's picture

So what happens after the equities get dwarfed by the derivatives?

That is potentially important, & may eventually shock Canadians?

The following can be found on pages 144 to 145 (within the document, 154-155 in the pdf) of Jobs Growth and Long Term Prosperity – Economic Action Plan 2013 as tabled in the House of Commons by the Hon. James Flaherty, Minister of Finance on March 21, 2013. (This is otherwise known as that government's "budget," which has been reduced to being nothing more than rubber stamped propaganda.)

Systemically important banks will continue to be subject to existing risk management requirements, including enhanced supervision and recovery and resolution plans. The Government proposes to implement a bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation time lines will allow for a smooth transition for affected institutions, investors and other market participants.

In the bizarro world of banksters, the "certain bank liabilities" include the deposits. Canada is now legally prepared to do to Canadians what is being done in Cyprus, IF something in the global economy causes big Canadian banks serious difficulties, THEN the banks will be able to take money from depositors, to bail them in to that! That big IF is probably only a question of how long until WHEN that happens.

Although everything in Canada tends to be more muted than in the USA, or elsewhere, the same international driving forces are working. The HFT numbers do not yet look as NUTS as they are in other places, however, Canada is accelerating on that path ...

To me, this looks like a soapbox racer picking up more and more speed, as it accelerates down the hill ... However, there was never any plan for what happens after that ... which reminds me of the old Bill Cosby soapbox derby comedy bit, on his album "Wonderfulness:"

hardcleareye's picture

Had not heard that in so very long...  thanks for the reminder!

mind_imminst's picture

Canada might be facing trouble, and a bail-in for Canadian banks would be another sign that this type of Cyprus wealth confiscation is going world-wide, however, I have much more faith in Canadians actually fixing their problem. Remember that their bond market almost collapsed back in 1994: They cut the size of government from something like 75% of GDP to 29% of GDP. Department budgets were cut 30-40%. Here in the U.S. The sequestration bill would (I say would, because the pols in D.C. will find a way to spend the money anyway) cut NOT EVEN 2% off of the Federal budget over the course of 10 years, and this led to the media SCREAMING that children were going to starve, old people were going to rot in the streets, what-not. I am embarrassed to be an American nowadays. Canadians are just tougher and willing to make real changes when needed.

Buck Johnson's picture

Canada is going to be another black swan to hit, they are hiding alot of bank and bond damage on their books. 

lolmao500's picture

Canadians are sooooo brainwashed it's insane. Black swans? Can't happen in Canada! Actually, no bad things can ever happen to Canada, that's why we must all ban guns and continue to invest in overpriced houses!

/actual Canadian who's not a sheep

ekm's picture

Brilliant article.