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How HFT Destroys Markets: 50 Pages Of Evidence
Back in 2009, when aside from a few insiders, nobody had heard of HFT, Zero Hedge launched its crusade to expose the algorithmic scourge that has since then caused an equity, treasury and now US Dollar flash crash, and has been the subject of a Michael Lewis bestseller and resulted in countless market halts and failures.
More importantly, there is now roughly 50 pages of just bibliography citing the evidence-based, academic research that has shown just how pervasively, maliciously and premeditatedly HFTs manipulate, destabilize, impair and otherwise destroy every single market in which they participate, and what's worse: result in incremental costs to investors, debunking the biggest lie HFTs spread about themselves - that they, being the gregarious humanist vacuum tubes they are, make trading cheaper and more accessible for the small investor.
And the biggest paradox: despite all this proof - which we urge every readers to sent to their favorite SEC regulator - America's corrupt enforcers of securities laws continue to turn a blind eye to all the crime that takes place every single day. Why? Because they collect a portion of the proceeds, of course, and because they need a scapegoat to blame once the market crashes.
We are grateful to "R. T. Leuchtkafer" who put it all together.

Some of key excerpts and findings:
This is a bibliography of resources on the capital markets, particularly on some of the negative effects of high frequency trading (HFT). Since the December 2013 edition of this document there has been an explosion of fact-based evidence on the damaging effects of HFT. This year's bibliography highlights a wide variety of academic, government, and industry data-driven research from institutions around the world, including MIT, Harvard, Princeton, the Federal Reserve Bank, the Bank of England, the University of Chicago, BlackRock, Cornell, the SEC, the European Central Bank, Yale, Cambridge, the London School of Economics, the United Nations, and many others.
Research listed here also explores how the most common business model employed by today’s high frequency traders - unregulated or under-regulated market making, often called “scalping” - can be abusive and disruptive. Several of these studies even predate automation.
Along with evidence-based research, separate sections of this bibliography include press editorials, op-eds, other commentary, and a variety of statements from government bodies and government officials from around the world about high frequency trading.
The bibliography begins with a brief overview of the evidence-based research. A detailed research bibliography containing over 100 studies begins on page six. Please also note various industry, academic, and government definitions of high frequency trading listed in the final section of this document, and note the special section on Michael Lewis's "Flash Boys."
Manipulation
Egginton et. al. (2012) found systematic evidence of "quote stuffing," a term coined by the market data and research firm Nanex to describe the many events it found where exchange technology infrastructure was slowed by floods of order and order cancel activity. They wrote that "We find that quote stuffing is pervasive with several hundred events occurring each trading day and that quote stuffing impacts over 74% of US listed equities during our sample period," and found that "stocks experience decreased liquidity, higher trading costs, and increased short term volatility.” Direct Edge (2013) launched a service to help its customers "mitigate the risks" of quote stuffing. Tse et. al. (2012) "present a detailed study of a variety of negative HFT strategies including examples of Quote Stuffing, Layering/Order Book Fade, and Momentum Ignition to demonstrate what bad HFT 'looks like', how often it happens, and how we detect it." Ye et. al. (2013) analyzed U.S. stock market data from 2010 and found "that stocks randomly grouped into the same [technology] channel have an abnormal correlation in message flow, which is consistent with the quote stuffing hypothesis." Industry regulator FINRA (2014) alleged a firm's high frequency trading customers employed "aggressive, potentially destabilizing trading strategies in illiquid securities." The United States Securities and Exchange Commission (2014) sanctioned a high frequency trading firm for manipulating the closing prices of thousands of stocks over a six month period.
Market Quality
Baron et. al. (2014) studied U.S. futures data and found a "winner-takes-all market structure" where "HFTs have strong incentives to take liquidity and compete over small increases in speed in an industry dominated by a small number of incumbents earning high and persistent returns." Biais and Foucault (2014) "recommend developing trading mechanisms that cate specifically to slow traders" and said "This could require regulatory intervention to overcome exchanges' conflict of interests." Kim and Murphy (2013) examined more than a decade of U.S. stock market data and found that after controlling for changes in market dynamics in that time period, market spreads were much worse than have been reported. Kirilenko and Lo (2013) surveyed the research literature and concluded that "In contrast to a number of public claims, high frequency traders do not as a rule engage in the provision of liquidity like traditional market makers." Lee (2013) analyzed Korean futures data and found that "high frequency trading is detrimental to the price discovery process." Machain and Dufour (2013) investigated U.K. stock market data and found empirical evidence for "a minimum period of time a limit order should be kept on the order book to avoid speculative practices." McInish and Upton (2012) explored U.S. equity data and wrote that "the ability of fast liquidity suppliers to use their speed advantage to the detriment of slow liquidity demanders...unambiguously lowers market quality." Yildiz et. al. (2014) "provide empirical evidence to support the theoretical predictions...that HFTs may play a dysfunctional role in financial markets." Van Kervel (2014) studied U.K. data and found that "trades are followed by excessive cancellations of limit orders, and the magnitude depends on the fraction of traders who can access several venues simultaneously" and "high-frequency traders can observe the first part of the trade and quickly cancel outstanding limit orders on other venues before the second part of the trade arrives." After analyzing U.S. stock market data, Ye et. al. (2013) concluded that speed improvements do not improve spreads but do increase cancellations and volatility. Johnson et. al. (2013) "uncovered an explosion of UEEs [ultrafast extreme events] starting in 2006, just after new legislation came into force that made high frequency trading more attractive."
And much, much more in the entire document below (link).
h/t Themis Trading and Nanex
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As with everything else this will be ignored and only brought to light publicly when 'officials' are chasing scapegoats.
This report is bullshit! Everyone knows Waddel and Reid are responsible for the flash crash!
The disinformation around here is getting tough to take.
at some point they will destroy each other I hope
Very simple solution (hence it will never come to fruition by the porn watchers at the SEC): sliding scale fee rebate to the exchange for quote life*quote size and cancelled quote fee. The shorter the life of the quote, the higher the fee as a percentage. Also, the fee for cancelled quotes is proportionate to the quote size.
Or just throw the fuckers in jail, but what do I know. I'm just a very poor sailor who keeps sinking PM-laden vessels on the open seas...
People are so "generally",
dis·en·fran·chise ?dis?n?fran(t)SH?z/ >>>edUsing humor and satire to break down barriers can be effective.
I gave up trading a long while ago. One can never fight the HFT Traders. They operate with the Governments behind them ( meaning the corrupt bureacrats, the SEC,the CFTC, Comex. Nymex, Fed, Congress, Senate etc ).
The fight if any is between the TBTF with each ones program vieing for the best.
Individual traders may win a round or two but loose the majority of trades.
Watch the documentary Wall Street Code for a good inside look at the HFT network and the psychopaths behind it
https://www.youtube.com/watch?v=GEAGdwHXfLQ
You are correct, any way they can use code to rig, they'll do it. A little off topic but maybe not, new rigging the next rig...Nanex and I started chatting about this a year ago and even MIT had an article a few months ago about the journobots...they can program the news just like trading software to come and go to influence stock prices, buying, selling...toss the articles in the SIP, right:)
http://ducknetweb.blogspot.com/2015/03/major-us-newspapers-sign-up-and-invest.html
Wait until you have to start paying for news articles too..NYT, WSJ, Washington Post all say they are in on it. Guess what the 20 cent charge has to be taken from your credit card too so more transactions for data sellers to sell about us...they get a two-fer.
That was a very good documentary on Haim Bodek with the Wall Street Code and it's how stuff gets out with code hosing and cheating.
One final comment before moving on to the rig count: no one knows what U.S. production is yet for December, January or February. EIA and IEA ultimately get their U.S. production data from the states. State reporting on oil production is lagged by at least 3 months and it takes another month or two for adjustments to be included. IEA and EIA use sampling methods of certain large producers that are then put into algorithms to approximate recent production.
I guess we can expect ZH to lead the charge into telling us why the EIA has Jan oil production for ND and Texas continuing to increase when numbers out of those states show production declining in Jan.
Or should we expect more of this? "Crude has never been lower since I first beat off to the lingerie section of the Sears catalogue."
Back in the day, before decimalized trading, you paid a fair bit for transaction cost. Now transaction cost is nearly zero, but you pay it in the price of the security as you are chiseled a couple shekels on the buy/sell price every time.
None of the costs have changed for the average investor, only their structure. If you're HFT you can make out like a bandit, though.
Reality asserts itself only in ACTUAL trading volume. Which is down dramatically. 10X more"quotes", but volume contines to decline overall. And what volume remains is increasingly HFT-driven (held only a few miliseconds before traded again).
Real/organic/human/actual volumes haven't been as low as they are now in 30 years.
Worst since LehmanTM and then some.
Anywhere from 50% to 90% of markets now are fake: fake money (unbacked), fake commodities (futures paper), fake stock valuations, fake transactions (HFT quotes).
Most of our 'wealth' today is entirely imaginary. But repent ye, as the day of discovery approacheth!
Fantastic report; thank you, Tyler, for making it available for download. By now the Hedge must be one of the world's foremost authorities on HFT. Today this is information. Someday, it will be EVIDENCE.
why the moaning...just BTFD
A 50 page conspiracy theory......
HFT is just another brick in the wall. (my apology to Pink Floyd)
The door is shutting. The haves have it all, while the have nots sit wondering wtf is really going on.
Fuck it and go bowling.
Any idea what the tubes are supposed to represent?
Basically replaced by the transistor though 'valves' had/have their advantages.
I think the valve retro look coming back as well.
How sad.
Disparaging the verable vacuum tube (analog device there).
Those Russian NOS mil spec are the .... bomba ... for audio.
Disparage HFT with the eFking silicon chip for cripe's sake.
Here's your proper HFT symbol:
http://commons.wikimedia.org/wiki/File:ULN2803A_Transistor_Array.jpg
It even looks like a bug.
verable ~ venerable?
"Any idea what the tubes are supposed to represent?"
They are old radio tubes used in radios and other electronic devices before 1960. Some of the first WW2 - fifties era computers used tubes.
It is a quaint symbol for electronic trading, an ironic comment in picture form if you like.
Nothing new under the sun. I founded following quote about the 1987 big one "A popular explanation for the 1987 crash was selling by program traders, most notably as a reaction to the computerized selling required by portfolio insurance hedges"
"Flash Boys" tells you everything you need to know about HFT.
It is just micro-second insider trading, picking up information on orders and then front running them.
verable ~ venerable?
Well.
That ought to result in absolutely nothing being done.
Once upon a time, economists accounted for the work of Claude Shannon. There should be no need to explain the ill effects of HFT. I suppose it doesn't matter anyway, HFT's a fad, it's transient, because at the rate they're going, all the players in this racket will eventually collide with quantum mechanics and relativity. When they do, it's back to Shannon and perhaps a real appreciation for his work.