Guest Post: A Five Minute Example of HFT Shenanigans

Tyler Durden's picture




 

Via Dennis Dick of PreMarketInfo.com,

I was trying to buy 500 shares of a preferred stock this morning, Principal Financial Group Inc. series B (NYSE:PFG-B).  It is such a challenge to trade any type of illiquid issue as the execution of orders is nearly impossible in this HFT world.  Here is the sequence of events.

At 09:39:08, the stock is offered on EDGX at $26.29.

I place an order to lift the offer.  The shares trade but I get filled on zero shares.  Knowing that my bid will cause a bunch of HFT programs to penny-jump me (step ahead of my order by a penny -  which they immediately do), I cancel the order. The HFT penny jumper cancels their order as well.

At 09:39:29, the stock is offered on EDGX again at $26.32.  I place an order to lift the offer.  The stock trades at the exact same second.  Again, I get filled on zero shares.  I cancel the order.

At 09:39:41, the stock is offered on PCSE at $26.29.  I place an order to lift the offer.  The stock trades at the exact same second again, but I get filled on zero shares.  I cancel the order.

At 09:39:50, I place a hidden order to buy the stock at $26.32.  Five second later the stock prints in front of me at $26.33 (Obviously these hidden orders aren’t as hidden as they should be).  I leave the hidden order to buy at $26.32.

At 09:40:05, the stock prints right through my hidden order on another exchange at $26.30.  So despite my bid being higher at $26.32, thanks to the fragmentation in the market, I get filled on zero shares again (and the seller gets a worse price!)

At 09:40:20, the stock prints through my hidden order again at $26.30.  Again, no execution for me.  Frustrated, I cancel my order.

A few seconds later, at 09:40:36 a couple of HFT programs battle out for the top of the order queue, and the bid changes rapidly, as you can see below:

At 09:40:40, the HFT programs go to battle again fighting for the best bid.

This battle continues for the next few minutes.  In fact, during one period of time from 09:44:53 – 09:46:35 (a total of just over a minute and a half), the best bid changes over 800 times, as these two HFT algorithms battle to be at the top of the queue.

At 10:07:14, I finally lift an offer and pay up to $26.35.  The HFT firms scalps their few cents from me, and all the games are over.

Some serious issues are highlighted in these few minutes of activity:

1) Inability for market participants to access a quote.

2) Excessive quote pollution as HFT algorithms battle each other.

3) Market fragmentation can lead to inferior execution.

4) HFT penny jumping can discourage market liquidity.

The bottom line is that all of these issues discourage participants from trading illiquid securities – making these securities even more illiquid.

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Tue, 12/11/2012 - 20:31 | 3053826 shitting_alpha
shitting_alpha's picture

melt up?

 

you mean the 140pt meltup contained in the 200pt yearly range?

 

LOL.

 

if calling it a "meltup" makes you feel better about yourself...

Tue, 12/11/2012 - 21:17 | 3054033 chump666
chump666's picture

But-nut says: "it is 6 months later."

 

Tue, 12/11/2012 - 20:35 | 3053835 Papasmurf
Papasmurf's picture

shitting_alpha


Vote up!

1
Vote down!

-1

I REMEMBER YOU CHUMP666.  THIS IS WHAT YOU POSTED ON 6/8/2012 ( http://www.zerohedge.com/news/asia-opens-and-risk-closes ):

***********

Quit the crack, turning your mind to mush...

 

Look Asia starts the corrections, forget Europe it's a write off, no one cares and they have lost brains.  The USD bids started on the Asian open...boom, blew their equities markets south. A slight correction is forming as supports break on most indexes.  We may have a tight range till June passes.  If you are going long have a ten year plan with equities.  No new highs for a long time, you just witnessed the last highs for maybe the next few yrs 3mths back.  Not even Bernanke can do anything, QE3 has to be massive to offset Aisa's meltdown.  Impossible.  A creditor going to the wall will take out America, Europe has already been taken out sans the ECB's mad Mario buying.  Europe is a zombie.  A recession till the great reset when markets can't price anything (goes to zero)...3-6mth time-frame

In the meantime US markets will be short once the supports have been retraced. Maybe a week or so

*******

WRONG AGAIN, GENIUS.

 

Don't drink and post.  Soon you'll need larger font to see your text.

Tue, 12/11/2012 - 19:43 | 3053667 shitting_alpha
shitting_alpha's picture

 you permabears crack me up.  you're worse than the regular lemmings.

Tue, 12/11/2012 - 19:47 | 3053683 shitting_alpha
shitting_alpha's picture

oh, and one more thing, CHUMP666, like all good lemmings, you called the top

 

AT THE BOTTOM.

 

hahahahahahahHAHAHAHAHAHAHAHAHAHAAHHAAAAAAAAAAAAAAAAAA

 

awesome.  it never gets old.

Tue, 12/11/2012 - 19:53 | 3053708 bobert727
bobert727's picture

Somewhere...someone is working on an algo that will exploit the weakness of these algo, take advantage of them, and send the market into a tail spin. 

Like the movie Close Encounters of the Third Kind when they play cords on an electic organ to communicate with the giant ship.  Soon the command is given to let the computer take over and it begins to communicatea at a much faster rate.

Somone is going to figure out what makes most of these algo's tick and how they react....and then use their algo (X100) to drive those algos into a death spriral. Someone will figure out the predictabliity of these algo and use it to their advantage and to the operators of these algo disadvantage and demise....especially is many of these have no on/off or kill switch.  They will make the machine panic!

It will be coming soon......

 

Tue, 12/11/2012 - 19:56 | 3053716 shitting_alpha
shitting_alpha's picture

are you drunk NOW, chump?

 

on 6/8, the close was 1322.

 

it is 6 months later.

 

we're at 1431.

 

and if you're suggesting that you didn't get smoked in june when you said, "no new highs", you're a liar by omission, or you don't have any confidence in your own trades.  either way, you're a lemming.

 

and i normally don't do this, but i feel sorry for you.  short the march contract after the roll.  it's time.

 

no more freebies for you.

Tue, 12/11/2012 - 20:38 | 3053854 chump666
chump666's picture

Drunk?  Slightly.  But lets go, ok June blows out at 1300, volatility till the July meltup, somewhere on here I actually said we would break highs after Mario's meltup, our immediate top was 1400, we got another 75 points.  Then what? We crunch back to June 2012 lows, fancy that it falls back to 1350 in Nov (yes 6mths)...which was the "slight correction" - hence the short and the top. 

Longs would have been burnt holding from June to Nov, the current melt-up is 100% HFTs. I didn't get smoked, but I missed the meltup from the 1350 bounce.  But HFTs are gaming players to pile in from the 1400.  Go for it.

You have my blessing.

 

Tue, 12/11/2012 - 19:59 | 3053720 Stuck on Zero
Stuck on Zero's picture

The rule is simple: "Never submit a market order."  Always use limit orders or you'll be screwed. 

 

Tue, 12/11/2012 - 20:19 | 3053771 Papasmurf
Papasmurf's picture

Look at the shit storm you caused while Wall $treet firms struggled to sell to you at the "best price".

Tue, 12/11/2012 - 20:20 | 3053777 dreich8688
dreich8688's picture

Point well taken,  the cost of execution goes up significantly.  What u miss, along with the regulators, is the order you entered is coded by the exchanges as retail.  The HFT reads this code before it is displayed to the market and has the millisecond of opportunity to penny the order.  We think our firm has paid an additional $500k in execution costs due to HFT and we are a small RIA

Tue, 12/11/2012 - 20:32 | 3053825 1000924014093
1000924014093's picture

And people wonder why retail left . . .

Tue, 12/11/2012 - 20:47 | 3053893 slightlyskeptical
slightlyskeptical's picture

Just put in buy orders every time you want to sell and let the HFT take it in the bhole like they deserve.

Tue, 12/11/2012 - 21:03 | 3053967 Drachma
Drachma's picture

Anyone ever consider a Stuxnetesque HFT bug? I'd love to see these things literally "flash-crash" themselves. Just saying.

Wed, 12/12/2012 - 00:42 | 3054746 Cthonic
Cthonic's picture

That's a job for alciaduh

Tue, 12/11/2012 - 21:41 | 3054169 Mediocritas
Mediocritas's picture

If you want to see something even more obvious, go looking for issues with a completely blank order book (ie, totally illiquid). Easiest to find them outside the USA, but HFT is still active there. 

Watch the book.

No quotes, still no quotes, continue for half an hour, no quotes at all. Now place an order and, surprise surprise, there's a quote printing just in front of yours, before your quote prints at all. Of course, the book lights up like a christmas tree when your quote appears and the price jostles around while your quote is live. Now cancel the quote, watch the shenanegans for a while until they all disappear again.

It has been like this for years.

In my experience, the way to play it is to take advantage of the fact that these bots have to close net neutral. If you're on the bid, run them up a bit, get them to take positions, then back right off and sit until the end of day. They'll hit you to clear in the last ten seconds. If not, try again tomorrow. Don't, under any circumstance, place a market order, and try to avoid giving in to frustration and handing the bots their pennies.

It can take days, sometimes even weeks, to get into a good position in the desired price range, in this supposedly highly liquid market. In my opinion, measures of "liquidity" should exclude bots or trades involving a position that lasts less than 5 minutes. We'd see how truly "liquid" the markets are.

Tue, 12/11/2012 - 23:12 | 3054536 helping_friendl...
helping_friendly_book's picture

Would it make sense to require a penny tax on all CANCELLED orders?

Make the HFT pay everytime they cancelled an order?

Seems legite buyers would execute and HFT would get to pay for the billions of cancelled orders which transpire trying to scalp you.

Wed, 12/12/2012 - 00:55 | 3054773 jackinrichmond
jackinrichmond's picture

make them pay what we pay !  

Wed, 12/12/2012 - 06:19 | 3055063 Non Passaran
Non Passaran's picture

No it wouldn't to me. Sometimes I need to cancel my orders because I have a limited amount of money at my disposal.
I don't care that it's only $0.01 but I don't want to be taxed (fined) because I didn't do anything wrong. Let the Nobel prize winners tax their people in the EU.

Wed, 12/12/2012 - 08:49 | 3055199 helping_friendl...
helping_friendly_book's picture

But, if you make HFT very expensive by charging them for the millions of cancelled orders market transparecy would result. HFT is BS anyway. It drives investors, me anyway, out of the market.

 

Tue, 12/11/2012 - 22:03 | 3054282 villainvomit
villainvomit's picture

Man o Man.....I can't invest or trade in these markets at all.  Pulled out almost three years ago.  Just doesn't feel right, doesn't look right.  Yeah, yeah it ain't right !!

F these markets

F the fed

F the sorry ass politicians we "elected"

Oh, and while I am at it......F the alledged apollo moon landings.  Hahahhahahaahahahahah!!

Tue, 12/11/2012 - 22:59 | 3054482 fast mover
fast mover's picture

This is why God created MKT order.

Wed, 12/12/2012 - 00:49 | 3054760 Johnny Yuma
Johnny Yuma's picture

I agree that the HFTs need to be disposed of for the most part but shouldn't you just hit the offer (i.e. market order) here? Last time I checked, putting capital into preferred stock should not be based on the exact execution price. Let's say the par value for the preferred shares is $25 and the shares are trading at a premium. What difference does a few cents make if its already trading at a premium? Yeah HFTs are a pain in the ass but you should see the BS that goes on in the fixed income market... Preferred stock's attraction is the income it produces. When trading at a premium, your yield is affected obviously. But who the heck buys preferred stock these days?! If you really knew how sketchy these were, you wouldn't touch them with a ten foot pole and I'm not referring to their intra-day trading liquidity...

Wed, 12/12/2012 - 00:52 | 3054766 Johnny Yuma
Johnny Yuma's picture

Also, if you really want to learn how to trade... Learn VWAP you newb!

Wed, 12/12/2012 - 01:43 | 3054836 resurger
resurger's picture

Keep the ponzi running, i got fucked by so many algos .... not any more. i quit

Wed, 12/12/2012 - 06:33 | 3055048 campag
campag's picture

My experience in trading is mainly oil. I have observed that if i wish to buy say Brent i am best putting a sell stop order in the market. The market will normally head lower to hit my stop , i cancel my stop and then buy the market. The exchange in question ICE say no one can see my stop. I dont beleive them , I believe the security of the exchanges has been busted . Proof I have none !As a trader of many decades experience I see this on a regular basis for it not to be so. 

The HFT have greater viewing of the market - the Exchanges say they dont - as the HFT,S are the exchanges best customer who do you beleive ?

As for S***ing Alpha - should have  fingers removed to stop  comments.

 

 

Wed, 12/12/2012 - 06:56 | 3055095 q99x2
q99x2's picture

Ya but if you get rid of HFT everyone would know what the PPT are buying.

Wed, 12/12/2012 - 12:27 | 3056077 swmnguy
swmnguy's picture

Here's a very clear illustration of the real bailout of Wall Street.  What we see on the front pages of the papers is just the window-dressing.  All the QE and Operation Twist and the buying up of all the worthless real-estate backed securities is the headline stuff, not the real shit.  The real shit is allowing the HFT's to scalp pennies on every single trade.  It's like in the movie "Superman 3" where Richard Pryor figures out how to steal all the half-cents.  Allowing naked front-running like this is how the Fed is letting the TBTFs to restock the larder.  If public outcry gets to be too much and they have to scale back the QEs (highly unlikely), they still have the HFT plasma drip to keep them alive.  If they institute some sort of Tobin tax (extremely unliikely), then they have to massively ramp up the QE and out-front socializing of losses and privatizing of profiits.  People are a lot more willing to get scalped a few pennies here and a few pennies there, adding up to real dollars annually.  Why do people spend $4.00 for a cup of coffee at Starbucks, rather than buy a decent $20 thermos and brewing their own coffee at home for a quarter a cup?  Drip, drip, drip.

Everything the Feds and the FED are doing is designed to divert the flow of money through the TBTFs.  ZIRP through at least 2014?  I don't see any break on my credit cards.  Sure, my mortgage is about 4.675%, but that only leaves the bank a 4.25% profit, backed by my house, and it's front-loaded so they get the profit part first.  Student loans are non-discheargeable, so they can lend a king's ransom to burger-flippers taking online basket-weaving classes, get paid by the Feds, and leave the debt for the rest of us to cover.

The whole system is a scam.  All one can do is form an S-corp, funnel all one's income and expenses through that, claim a small but plausible salary, and take the rest as capital gains.  Buy PMs, and keep any interest-bearing debt as minimal and short-term as possible.  Eventually the algos will eat themselves, like the rest of the economic clusterfuck is doing.  You can only run an economy where money is a commodity and debt = money for as long as you have infinite markets, resources, and money supply.  We've hit the wall on markets and resources, so all that's still infinite is money supply.  Once that happens, any growth has to come from within the system.  In short, it has to cannibalize itself.  Here we go. 

Wed, 12/12/2012 - 12:52 | 3056180 vinoverde
vinoverde's picture

They don't break the law, the exploit the margins of the rules,

Of course outlawing fractional prices would make a ton of this shit leave the markets, A 0.05 spread, or even 0,01 minimun quote would not harm investors and would do so much,

Yet, people tell me straightfaced, Getco;s just a market maker now, benign,

A mess.

Wed, 12/12/2012 - 12:53 | 3056181 vinoverde
vinoverde's picture

They don't break the law, the exploit the margins of the rules,

Of course outlawing fractional prices would make a ton of this shit leave the markets, A 0.05 spread, or even 0,01 minimun quote would not harm investors and would do so much,

Yet, people tell me straightfaced, Getco;s just a market maker now, benign,

A mess.

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