Here Is How High Frequency Trading Hurts Everyone

Tyler Durden's picture

The market value of a stock quote continues to plummet. As Nanex shows so graphically below, it's taking more quotes to get the same amount of trading done in today's stock market, meaning that everyone has to process more information than ever before, yet actual trading continues to stagnate.


Via Nanex,

High Frequency Trading (HFT) algorithms that place and cancel quotes faster than most people can physically process them, are causing market data inefficiencies to soar.

Here is how HFT harms everyone, including long term investors (well, except for HFT CEO's and the Exchanges).

Data is for SPY between January 2005 through February 19, 2014.

The number of quotes each day in SPY is skyrocketing..

..but the total dollar value of SPY traded each day stagnates..

..exposing the gross inefficiency of an HFT Quote.

This is how many quotes it took to trade $100,000 worth of SPY each day. Higher values means less efficiency (bad).



As Better Markets explained previously,

That is why it is imperative to understand that volume and liquidity are not synonymous.


Sufficient liquidity is essential for healthy markets, but much HFT-created “volume” actually subtracts liquidity, as in the case illustrated above where the predatory behavior of the HFT merely appears to narrow spreads while in fact increasing costs for investors.


...suggests that not only are predatory HFT strategies like so-called “latency arbitrage” taking money out of the pockets of investors, but they are actually destroying wealth and not merely redistributing it.

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debtor of last resort's picture

High frequency is in everyone's head. Twitter posts, bills, boobies, speeding tickets, civil wars and debt rollovers. Nanex just tries to monopolize the market.

redpill's picture

Can anyone provide a legitimate reason as to why you would need to buy or sell a stock (or enter an order to do so) more than once per second?

This is like pissing in the pool and claiming you're helping your fellow swimmers by keeping the water warm.

ZerOhead's picture

I am working on a crazy new money making program loosely based on high frequency trading.


It's called high frequency booking, where I get paid by my client to book all the seats on their competitors flights...

zaphod's picture

This is probably the one instance where I think taxes makes sense. 

The whole reason we have long-term and short-term taxes is to encourage investment at the expense of financial speculation. The problem is the tax code is out of date, short-term today means 1millisecond not 1 year.

Simply make more brackets: "long-term" bracket >1 year as is, "mid-term" bracket 1 year to 1 day at personal rates, "daily market making" bracket 1 day to 1 second at 2x personal rates, "penny stealing" bracket <1 second at 99%. 

max2205's picture

Quote bubble....when it crashes does that mean there will be no quotes?

Turn the machines off !

N2OJoe's picture

Don't be silly, Janet Bernanke will just print more quotes...

Vampyroteuthis infernalis's picture

There is a simple solution to this problem. 

1) All stock will be priced in increments of $0.10 or 10 cents.

2) All traders purchase stock at the same increments of 10 cents

3) Stock once bought can not be sold until the following trading day

HFTs will go away.



Uni's picture

Hmm I seem to remember the days of 1/8s prices and they were wonderful for market makers. Who do you speak for?!

Already been tried and failed. Today is much better with the algo taking .002 than the makers taking 0.05

mccvilb's picture

And like all solutions offered up on these and other boards, none of it matters. Who here will actually do something about it? No one.  Resistance is futile.

There are many logical solutions, but one of the biggest fallacies is that things were better before HFT. They weren't. Things just weren't as ubiquitous or as sophisticated. The MMs had their pre-market lounges at the NYSE where deals were cut. There was quote stuffing and auto refresh and dark pools; they just weren't called by these fancy names.

Before allowing HFT, Mary Shapiro advertised for written opinions from the public, Few had any idea what HFT really would mean for traders. Those who did, protested it but were forced to air their reasoning. She did what she needed to do - she provided a public forum. Then she ignored the responses the SEC received, and another Kappa Beta Phi was born.

UGrev's picture

Let me know when you've made a million per seat as the only seats available and then I'll cancel my positions with the competition.. all of them. Oh, and you can mail my check as soon as possible.. ty. 

philosophers bone's picture

In other words, a quote does not necessarily provide "liquidity" if it is submitted illegally (ie. with the intention to withdraw it) and then actually withdrawn before anyone on the other side can "hit" it.

keating's picture

The accumulated wealth of HFT  traders manipulating very small market moves, combined with the fees that compensate the exchanges for such trading  are no more than a tax on transactions. If you try to avoid them by not selling at the market, you will still pay if you stipulate a price, as you are less likely to have your transaction due to the HFT expense.

The easy solution would be to have periodic periods of transactions, so that no one could have more than one transaction per second or some unit of time. This reduces the profit from HFT and reduces the commissions for the exchanges. The regulation would take a single paragraph and would cost exchanges a substantial percentage of their fees.

Fight-Club's picture

"One common feature of HFT is co-location, which is the practice of running your trading computer in the same room as the exchange computers."    

ebworthen's picture

"Listen to the bargain holler
Listen to the barter holler
Listen to the auctioneer...

...another engine, another engine..."

R.E.M. "Auctioneer"

withglee's picture

Why isn't this fixed? All it takes is to add a random number of seconds to each transaction. By doing that, you don't impede the marketplace one bit, but you do make high frequency trading an unworkable practice.

UGrev's picture

You don't even have to do that. Just add a set minimun of seconds between each transaction as either 3 or 5 on the high end and problem solved. 

Racer's picture

And isn't all this placing and cancelling ILLEGAL?

The evidence is there, where are the prosecutions?

UGrev's picture

Yes it is and we should all be molotoving the HFT data centers right now. 

NOTaREALmerican's picture

What is the "everyone" concept in read I the article?

This is Merican, goddamn-it!   If we started worrying about "everyone" that would be communism!

balolalo's picture

Looks like a 9.2 on the Richter scale centered 100 stories above NYC.

WhyWait's picture

This is a reason why a small tax on financial transactions would actually be good for smaller investors.  

HR 1000 would put a 0.25% tax on all stock and bond transactions and 0.1% on derivatives transactions.  The sponsor believes it will raise close to $1 trillion a year which will be earmarked for spending back into the economy on public works, infrastructure and green economy projects, with a significant part of the money targeted to generating job programs for young workers.

Before you jump all over this, three questions:

* How would it affect you if the result is a major slowdown in high-velocity of trading?

* In a healthy market, what is the velocity of your money?  How many times a year does each of your dollars cycle through a transaction?  And what percent would you be paying on this?

* Do you have any other bright ideas about how to put people to work and revive the demand side of the economy?

I know there will be problems with trading moving offshore.  But is it worth trying?

NOTaREALmerican's picture

The Might Sword of Libertarian Justice demands an end to all taxes and regulations on the honest hardworking bidness men that made this great-n-glorious country great-n-glorious.

What is next,  taxes on success!?!?  

WhyWait's picture

Hear! Hear!

End all taxes and regs!  Liberate the economy and watch it Boom!

Boom da da Boom!  And have a Hot Pocket!

... Buurp!

TBT or not TBT's picture

We already had such taxes before HFT. There was an FSA backing the Dems well before LBJs Great Society, and before FDR's First 100 Days, back through Wilson's proto fascist regime.

Blammo's picture

Not worth trying! Your assumption that money going to government is a positive is wrong. Gov. is defined by it's economic drag.

withglee's picture

Three cheers for Blammo!!! He gets it! Taxes are for services rendered ... not for discipline!

GolfHatesMe's picture

I wouldn't mind a Big Tax on "investment" profits that are less than a Week, Day, Hour or Minute with increasing amounts for each shorter period owned.  These short to extremely short term trades are the noise that should shoulder extra costs. 

Seahorse's picture

How about just a human has to place a trade?

Bear's picture

The chance of this happening is about the same as short term rates .... ZERO

WhyWait's picture

It has 50 co-sponsors in the House.  

Zero press coverage.

So yes, zero chance ... unless the Powers that Be be good and scared.


WhoMe's picture

New Stock Exchange to combat High Frequency Traders. I hope this works and catches on.





pndr4495's picture

HFT is a scourge upon the land.  One thing an exchange floor provided was a central location where PEOPLE could be observed either overtly or covertly and where the floor community - together - could ostracize individuals who took the criminal route.  People had to stand for something , anything , because to work there one had to look others in the eye and MEAN what they said and did.  It was rumored to have been said so simply by a Boesky era trader , " when they come to get me they can arrest the computer " or something along that line of thought.  Having worked on an exchange floor , I'd love to see these mathheads and physicists trade the same way floor traders and brokers trade.  After all it's simple addition and subtraction , and division and multiplication.  One doesn't need a computer engineering degree or PHD in Physics to do simple arithmetic.  C.S. Lewis is helpful here.  He said something like this: in summing numbers , if I have made a mistake in my addition then to continue summing is foolhardy. The man who makes PROGRESS is the man who goes back to where his error arose and starts again from there.  What is occurring now is criminal I believe since some peopl have 0 , ZERO risk of loss when trading while other less well armed traders will NEVER post a yearly profit.

U4 eee aaa's picture

I notice a lot more if my fills when the market open are getting filled at the exact price. It used to be that if I put in a bid and the market opened below the bid price, you would get a lower price and thus your cost would be lowered. Unless I change the bid before open, I find that most of my bids hit at the exact price but the price of the stock (usually index) is lower at open. I can only see a HFT trade doing something this quick. More vigilance on the open is definitely required these days if you want to shave some pennies or dimes off your opening bids.

I can imagine these bots just wait until the open to vacuum up all the open bids before they get back to their job of setting a lower or higher price

Archduke's picture

which exchanges?
what modalities?

Spungo's picture

I don't quite understand what the problem is. I want to buy a stock at $10 so I enter a limit order for 37 shares at $10. How does an algo fuck up my order?

pndr4495's picture

Your order becomes part of the algo's backstop - when the selling comes in and 10 bucks sucks because it's now worth 8 and offered - you have no shot to CXL your order. You are filled , too lat to cxl.  You are fighting with a capgun while High Frequency Traders have Gattling guns , and THEY are weaponized.

Uni's picture

Tylers why not put the spreads? This is a heavily biased article. Who gives a shit how many quotes there are without discussing the variance of the quotes.

Tegrat's picture

I am working on an algo now that swing trades. I just dont get the advantage of in/out ms - in theory it's smaller risk - but I can't imagine the fees and the costs to do such a thing when you can swing trade and make a chunk of change...


Palladin's picture

Take a look at MVIS. It's a very small company that makes some sort of sensor that goes into a projector.

On 12/20/13 MicroVision, Inc. (MVIS) announced today that it received a notice on December 17, 2013 from The Nasdaq Stock Market advising the company that for 30 consecutive business days preceding the date of the notice the company was not in compliance with the $50,000,000 minimum market value of listed securities required for continued listing on The Nasdaq Global Market pursuant to Nasdaq’s listing requirements. In accordance with Nasdaq’s listing rules, the company has 180 calendar days, or until June 16, 2014, to regain compliance with this requirement.

The company has 67 employees, and generates $7 million dollars a year in revenues, and loses $22 million doing it. The stock trades on average 100,000 shares per day

On Jan 2, 2013  SHMUEL FARHI  (Dad) gave/sold to BEN FARHI (17 year old son)

Jan 2, 2013    FARHI BEN Beneficial Owner (10% or more)    3,011,443    Direct    Statement of Ownership    N/A
Jan 2, 2013    FARHI SHMUEL Beneficial Owner (10% or more)    3,011,443    Direct    Disposition (Non Open Market) at $0 per share.    N/A
May 22, 2012    FARHI SHMUELBeneficial Owner (10% or more)    3,011,443    Direct    Statement of Ownership

Today, 2/20/14 Sony revealed a new projector module incorporating MVIS technology.

And after that announcement the stock was up 100% on an eye popping 32,000,000 shares, a mere 320x normal daily volume.

This seems a bit unusual to me. I wonder what the people at the SEC think about all this?


venturen's picture

I love the three card monty trade!

Spungo's picture

"Your order becomes part of the algo's backstop - when the selling comes in and 10 bucks sucks because it's now worth 8 and offered "

But this can go in both directions. I can buy it at 10 then it suddenly goes to 12 for no apparent reason.