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The Out-of-Control Explosion Of Equity Quote Rates Or Why Any And All HFT "Research" Is Already Obsolete
From Nanex.net
The Out-of-Control Explosion Of Equity Quote Rates
Market dynamics have changed considerably; obsoleting many research papers in the process
Lately, readers have sent us links to a few research papers extolling the virtues of HFT, namely, that they provide liquidity, reduce spreads, and probably cure cancer. At first, it appeared that some of these papers were written based on data from another planet, but, upon closer inspection, we realized that they were simply based on very old data. You see, as HFT races towards zero, the data it generates decays just as fast. In other words, any research paper written just 6 months ago, or one that does not take into account recent data, might as well have been written for people on another planet, because it won't accurately describe what is going on in the market today.
Take a look at the images below, which show just how much, and how quickly trading has change since 2007. We plot U.S. equity quote and trade data for each minute of the trading day, from the beginning of 2007 through August 16, 2011 (about 1165 trading days).
Note the significant changes from late 2009 (light green to aqua-marine). That was a year that many Pro-HFT research papers are based on. If the research paper predates 2011, or worse, ignores recent data, it's probably not worth the paper it's printed on.
Peak 1 Second Equity Quote Rates for each minute from 2007 through Aug 16, 2011 (click any chart for hi-resolution)
Note how the spikes at 10am, which were driven by significant news events in years past, pale in comparison to normal trading today.
Quotes Per Trade Ratio
The Peak occurred on August 16, 2011 (see red spikes in the middle of the chart), when the market threw a tantrum on the shocking news of a possible financial transaction tax. We are serious.
Count of Stocks with very high quote rates
More stocks are falling victim to unrestrained algorithms.
The Sum of (TradeSize * TradePrice) / NumberOfQuotes.
The value of a quote is rapidly vanishing.
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Looks like a pretty stinking clear trend to me! Each year, there is a clear step up (or down) on average. Cheers to Nanex once again!
Shapiro might be all over this, if she wasn't so worried about giving oral to a corn dog like other idiots in government that we all know.
Pictures without porn is probably too difficult for the SEC, so I'll help them out: The x-axis is the time of day in EST.
WTF
FIGHT: Nouriel Roubini Has 4 Questions For ZeroHedge
http://www.businessinsider.com/nouriel-roubini-has-questions-for-zerohedge-on-inflation-2011-8#ixzz1VLCJJSN3James Workman on Aug 17, 10:04 PM said:
@facebook-expert:Please no truth.. the quality of the readership here needs one line catch phrases that have tesedt well in multiple major markets before it can be accepted as truth! LULZ!!
Read more: http://www.businessinsider.com/nouriel-roubini-has-questions-for-zerohedge-on-inflation-2011-8#comment-4e4c73c8eab8ea8459000018#ixzz1VLHafXZf
James Workman on Aug 17, 10:07 PM said:
Anyone with the BackBone that would like to go book for book.. step up, other than that.. this is all traffic for losers.Read more: http://www.businessinsider.com/nouriel-roubini-has-questions-for-zerohedge-on-inflation-2011-8#comment-4e4c756f69beddf27700002f#ixzz1VLJIX9Oa
James Workman on Aug 17, 10:14 PM said:
The substance of this site is? Tyler (in any one of his different personas) is imperfect? and this site has NOT! EVER! seen this much traffic.. riding ZeroHedge's Traffic Coat Tails.Read more: http://www.businessinsider.com/nouriel-roubini-has-questions-for-zerohedge-on-inflation-2011-8#comment-4e4c756f69beddf27700002f#ixzz1VLJSxwOv
James Workman on Aug 17, 10:17 PM said:
@John for tOday:http://en.wikipedia.org/wiki/John_Law_(economist)
Read more: http://www.businessinsider.com/nouriel-roubini-has-questions-for-zerohedge-on-inflation-2011-8#ixzz1VLKVLkGm
http://www.youtube.com/watch?v=Noyzfx4trZY&feature=autoplay&list=PL0442BCED7088535E&index=61&playnext=1
this is the best video you will never see on Cable News in Heavy Rotation of Afganistan!
buy & hold, bitchez!
@nouriel
how much money was getting offshored from CIA drug cartels in 30s?
there's a reason places like the middle east blew up first. that's a big dumping ground for the $3-400 billion in CIA drug profits that provides a big part of the differential in domestic and international dollar based inflation
history, bitchez
@nouriel
now, how can you not see that the low bond yields are an artifical construct that fly in the face foreign countries and even joe blow domestic buyers drying up? t-bill yields are almost soley a function of what the fed's want them to be - not a relevant market signal except with respect to the fact that all the monies going towards their purchase are freshly printed -->hyperinflation, doubley so with a depression because all those fresh bills are buying fewer goods
The colors in the charts are pretty.
Something like this?
Let me see if I get this strait;
Al-Qaeda is a concoction of the CIA.
Did I get that right?
maybe not the CIA.. maybe the NSA? or other 3 letter Government Organization of Controled Demo!
dope
yeah, it made me see the same kind of colors when I was a student :)
gold is a false signal. it is in a bubble. zero hedge est plus wrong.
remind yourself of the 5 stages of a bubble:
http://upload.wikimedia.org/wikipedia/commons/thumb/4/4b/Stages_of_a_bub...
deflation, bitches.
Get short and post a screenshot numbnuts.
gold has room to run, I will buy far out of the money big cap gold producer put options when gold crosses 2300-2600/oz. The gold bubble hasn't peaked yet.
exactly. Calling the top is a fools game. Wait for the momo break.
anyone who says gold is in a bubble is a complete fool, and should get short and post screenshots, to weed out trolls.
i recognise america is going through something like japan, but guess what — gold has gone up in japan too. that's because gold's rebirth is part of a long term trend. the driving factors are global money printing, global debt monetisation, the BRIC central banks (especially china), the failure of monetary policy, and the fact that the corporate game likes to rape pillage and burn shareholders, the rise of china and arabia, the rebirth of russia, and most importantly the death of the dollar as the global reserve currency.
deflationists need to get their facts straight:
http://azizonomics.com/2011/08/15/why-qe-didnt-cause-hyperinflation-2/
......or gold is running on an inverse relationship to Obumma's popularity...if you think his popularity is about to reverse field, you would want get short gold....
I got lost somewhere around gold is in a bubble and his deflationary fiat price modeling...as golds "fiat price" in every country is going up.
Now if he meant fiat is a worm that eats itself, always, thus being deflationary to itself, well, all righty then ;-)
Hey DR, That is a GREAT graph. Thank you.
Who of your friends actually holds a physical piece of gold? Any at all? I've got many friends and acquaintances and I'm the only one who has any metal in possession. Anecdotal, I know, but there's no bubble till your shoeshine boy is tellin you about his stash...
Or the metaphorical "shoeshine boy" will only accept gold as payment.
Point taken, perhaps we haven't seen the bear trap yet. Or the bear trap was 1982-2002. I'm sure you know exactly where we are on that curve. Check back in when Newmont and Barrick have been nationalized.
...and apparently he wants his goddamned answers RIGHT FUCKIN' NOW!!!
Hmmm -- Tyler and Dr. Doom, toe-to-toe in the basement at Lou's Tavern. Yeah, I'd be forced to dust off the TV and pay-per-view that one.
He is Dr Wimpy now, Dr Doom...jeez.
@anynonmous
Thanks - hadn't been over there in a while. I had no idea Weisenthal had become so hated, even by his own readers. What a waste of what I once thought was real tallent. Interesting read too. Looks like Tyler and Roubini were talking past each other, as both are right. Yes, there is deflation in depression, and yes, money printing causes inflation. Regardless, I just wanted to say thanks for the fun link.
I feel you. That site went from interesting reporting on boobs and 10 click "random ripoff of cracked.com list" slide shows to sell ads. Joe is really just Johny5, pushing Blodget's book.....
Who the fuck is Roubini?
And who fucking cares what he has to say?
SERIOUSLY!
That's was fascinating, thanks! So there's still an inflation and deflation debate going on? Who knew.
Nuriel "John Law" Roubini better Skype the Chinese quick and tell them they're just acting a fool.
Bernanke's scholarly take on the Great Depression was that they were too tight and didn't print enough money, hence, his own helicopter response metaphor.
Shadowfacts reports inflation at 8.5%, and it is much higher if you're a corn kernal.
Then There's this from Roubini himself, as reported at Bloomberg, February 2011:
"It’s not hyperbole when Nouriel Roubini, the New York University economist who predicted the U.S. financial crisis, says surging food and energy costs are stoking emerging-market inflation that’s serious enough to topple governments. Hosni Mubarak over in Egypt can attest to that."
And then there's this from Marc Farber's site, back in the stalled out 2009 economy, after Farber predicted severe hyperinflation:
"Prof. Nouriel Roubini at New York University, one of the few who predicted the ongoing economic turmoil, is talking about a milder but still severe inflation. During a press conference last week on the sidelines of the Seoul Digital Forum, Roubini said double-digit inflation would wreak havoc on the U.S. economy."
I think Roubini has either been hanging out at Davos too much, or, he's been swimming in dirty pond water and contracted one of those brain eating amoebas.
Tyler only gets a TKO if Roubini has the amoebas.
There are only a finite of delta hedge, stat arb, and other abitrage opportunities in the market for a given period of time, T. But the number of hedge funds has been growing since 2000. So you have to find the arbitrage opportunities first, before your competitors, or else you miss out, and are force to apply more leverage for the opportunities you do find. Thus the HFT wars began.
As the hedge fund industry grows linearly, but the arbitrage opportunities remaind constant, you have a structural problem. More and more hedge funds will be forced to use ever more leverage for the arb opportunities they do find. So if there is ever a fat tail event in the near future (cough Euro problem. cough. unwinding of the yen carry trade, due to the USD losing reserve statusm or QE3), it will be like cluster bomb hit the financial markets, as cascade builds on top of cascade.
...yep, it'll make LTC look like a day on the bitch.....
I guess all that was learned from LTC was that if your are really big, you cannot fail....though one might wonder why there are no dinosaurs today....
IMHO LTC was the beginning of our current problems with Wall Street. Amazing after LTC that anyone would even want to employ a Nobel economist or listen to anything they say.....
I admit it, I'm a dumbass.
LTC <-? WTF?
Long Term Capital Mgmt http://en.wikipedia.org/wiki/Long-Term_Capital_Management
Long Term Capital Management. He missed out the last letter.
Captain Benny,
She probably doesn't understand it.
DavidC
Pretty charts, but my old brain can't get any useful information out of them. I guess that means the algos are eating my lunch.
which is why sitting out the fraud/manipulation and holding Gold is the best opinion any smart investor can take.
Let these algos and the big boyz blow themselves up. They will one day eat their own cooking, bailout or not.
Nothing seems to make sense anymore. Look at all theses charts and graphs your like wth.
We got alot of issues, but nothing is being done to fix it. Then we get this
http://www.dailyjobcuts.com
Crazy Times
The charts make perfect sense. There is none. That is the point. It is 100% manipulation and fraud against our capital markets.
These people, HFTs with their fancy software which knows were every order, executed or has not been executed but waiting, need to be stopped.
Until then, it is a ponzii scam worse than Bernie Madoff.
This is the perfect example of where the information gets lost in the noise.
"The Peak occurred on August 16, 2011 (see red spikes in the middle of the chart), when the market threw a tantrum on the shocking news of a possible financial transaction tax."
Didn't anyone see or read '2001: A Space Odyssey'? When they were going to shut down Hal, the self aware computer, for just a bit he turned killer to protect himself. Here they talked about taxing (= killing) the little critters when we know they read the news? We're lucky they just went apeshit and there weren't any nukes sent flying.
Think of them as a forest fire moving from small brush to outright sky-high flaming hell while the quality of the market is reduced to dust.
Well I do see that bots drink their binary coffee at 10am.
Wouldn't a transaction "tax" of even a penny or fraction of a penny cut down on all this bullshit and quote stuffing? I see no value for people to load up a whole bunch or fake orders to cancel them a fraction of second later just to build artificial demand. Am I missing something here?
Incredible. Like attending an auction where anyone can cancel a bid. This is not price discovery, it's fake. Same with futures.
Id fight Gandhi,
You can't have a transaction tax if no transaction has taken place. Quote stuffing is just that, one algorithm stuffing quotes to slow down other algos while they analyse the quotes, and (relatively speaking) few of the quotes leading to trades, many of which get cancelled or traded out of straight away for the rebates.
What should happen (although unlikely will) is that quotes should be made to stand for, say, half a second (preferably longer, but half a second is a lifetime where 5 milliseconds or less is the norm), a large number of cancelled quotes relative to total sent should result in a fine, and cancelled trades likewise.
Everything the SEC has done has been to fix the problem once it's occurred, NOTHING has been done to STOP the problem BEFORE it happens.
DavidC
Hopefully this decay rate is exponential and they all reach the singularity at the same moment.
Fireworks anyone? Or should I say one firework anyone?
They're all just tap dancin' on the event horizon.
This one's bound to blow off a few fingers.
"Hopefully this decay rate is exponential and they all reach the singularity at the same moment."
And then... the world changes for ever.
I have been on the street for 28 years...HTF is a drug that the exchanges need for revenue..period..it is also a illusion the world needs to imply that investors still trade or purchase stocks..both are lies...only when the quote stuffing computers die...will the rich know that Bernie Maddoff is their bitch....
ZH you kick ass...great stuff!
HFT's are bizarre, yes narrowed bid/offers, blah blah blah. They flip out on news, that's the trade. Either short or hold and sell once a machine goes mental with a quote and/or (example) Germany goes to riot central. A swing trade on a flash crash, that's it.
Without HFT Pong there is no illusion of a market. Bitchez
One can argue this is a function of tier 1 bank and dealer impaired balance sheet capacity, and HFT simply serves as a replacement source of liquidity.
The spin-off of prop activity and regulatory changes is putting banks in an even worse spot, so it will probably get even worse before it gets better.
It's all aimed at hiding that fact that the real spreads are a mile wide. Admitting that would mean admitting that daytrading profitably is near impossible without luck and technicals are way inaccurate representations of the price action.
Like the surface of the Sun.
I think I see my 401k in there somewhere. I think it is on fire.
With solar flares and shit
NASA is on it today.
http://www.myweathertech.com/2011/08/17/solar-flare-activity-prompting-nasa-to-convene-a-news-briefing-thursday-in-washington/
HFT trading is created to rape the institutional buyers who create block trades, PERIOD. HFT does not rape retail traders, it rapes the seperately managed account holders, mutual funds, and other positional long/short hedge funds.
Most decent sized funds are doing algorithmic trading nowdays, why do you think they're getting raped? They're part of the problem... they outsource to the same HFTs causing the quote stuffing.
Yes, the positional long/shorts use HFT to fill their orders but the HFT trading programs they are using to fill their big orders are easily exploitable by more predatory programs.
That happened cause PMs were too stupid to outsource their trading duties and used to literally enter orders for huge blocks in a single short, just cause they had the capital to do so. i.e 1mm lot of XYZ and people tracking levels of the order book realized theres a major arb apparent there.
Chart two is the perfect evidence that HFT is the only thing keeping these markets afloat when there is no QE. As the quotes roll off, so did the markets. Just shows how the flash crash was more than w&r selling some es. If HFT were pulled, then we'd see the true value of the markets...my guess is 450 on the spx.
What I want to see, as a downside bet, is a HFT freak out again on news. HFT's mine news reports and adjust trades, spreads etc. If nerds are setting up HFT's programs, it is HIGHLY unlikely they have sufficient volumes to justify the 'support liquidity' myth.
Volatility will widen, crashes will become more drastic and a major FUBAR trade is lurking. Just gotta time it. Maybe soon...
It would be nice if there was a legend describing what the hell I'm looking at in each chart. Oh wow! A lot of spikes and colors, something bad must be going on.
I believe it's a problem but it would be nice to be able to better comprehend what info I'm reading.
The color is the month/year of the measurement, the x axis is the hour of day, the y axis is different on each graph and is clearly labelled.
TD is simply saying HFT is becoming a higher relative volume each year and old data studying HFT data is irrelevent. This is probably a post that will be built upon later to make another point.
So, buy?
God, I do so luv chart porn.
Save this for the (and/or send this to anyone you know who will have to sit through another) annual benefits meeting re their employer sponsored IRA/401k, and bring up the events of May 6, 2010, just for the fun of stealing all the air from the room during the Q&A time when the retirement plant reps pretend to be knowledgeable and re-assuring.
If anyone will still have a plan when December comes, that is.
The "market" is absolutely inhospitable for the retail investor and the fucking sales reps sent by the "Retirement" plans should be sent packing if only to send the message back to their masters that the sheep dogs are on alert.
Get Em!
ot justice dept investigating s&p over mbs
double
The Fix is on Bitchez!
Anyone else wonder why none of the developers that work on HFTs bother to post here on ZH?
Because they are working on T1000.
HFT 2.0 They call it A.I. HFT.
Let your mind run with that one....
somthing flipping asia out, HFT's are running the AUD. tight.
volatility is a huge source of income if your HFT program is set up right. Yes most of the quotes are not actually processed but the action causes major moves in individual stocks. I love when CNBC runs a tick for tick on a stock and you see the price occilate between 5 cents up and down every tick.
Look at the month of August. There has only been one trading day with an up and down spread of under 100 points. If you add all the bottom to top moves you probably will wind up with over 5000 points in the Dow average for ten days.
For quite a while the headlines of nearly every MSM business story have been positive when the story itself isn't nearly as good as the headline would lead you to believe. All the green shoot news stories were just headlines for the HFTs to bbi up worthless stocks.
What i always like seeing is 30% moves up in stocks when there are hundreds of headlines about law firms looking into corporations. Fraud it seems is a great way to juice your stock. the only solution is to ban HFT but that won't happen because the funds and investment banks would go under overnight.
Drug dealers also provide liquidity when you need cash yet find yourself searching for an ATM.
Drug dealers also provide liquidity when you need cash yet find yourself searching for an ATM.
...gold...have been an advocate of its sigificant asset allocation in one's portfolio since 2004. Deflation, or its doppelganger outcome, will be irrelevant (I think...disclaimer: I am not an economics PhD) to golds ultimate 'value'. In one, money supply shrinks while gold will not depreciate much (think central bank buying). In the other, gold rips north...its a 'golditisation' process of the subsisting money supply (whatever that may be when the dust settles).
Personally?... I am certain we are in for deflation. Been in the market 25 years and have never been more certain. Then we reflate. I think I will get a better topping up (ie my gold hoard) price than that currently quoted. But not alot better. Anyway, I live on a 10 hectare block of land (avocado orchard) on the coast in beautiful, stable New Zealand. I am not a doomsayer though. I think ZHers can get a bit carried away at time.
Lady Heather,
Be patient----coming to a theater near you
Well, the whole world can't have what you've got, so we've got to engineer a solution. You can only shoot so may zombies...
That is some seriously juicy chart porn right there.
Sean Corrigan is awesome on CNBC Europe right now.
In an earlier post I called HFT : "Hard fisted tantric-algorithms". I hope that it won't become a new WS industry norm. Otherwise pornography and finance will become synonymous!
Gold is north of $1800 again ... $1850.11 now ... in very strong move up ... more margin hikes?
http://finviz.com/futures_charts.ashx?t=GC&p=m5
Meanwhile, Dow futures off 198
It's not surprising (given the regulatory incompetence), but it still disappointing that Mary doesn't flip the switch. In short, thanks again for posting this.
first, the prop hft papaers come out of places that are tainted. like the securitization people saying how good that is.
the liquidity issues rests on the assumption that liquidity is good. that premise itself should be debateable, and gillian tett of the ft did a very good piece on why that may not be the case.
I would have much less of a problem if they paid like normal people to trade, instead of being paid, then it's quote churn.
Goldman has admitted to having a program that can manipulate the markets, and if you trade it's rather clear it's all about the technicals, not
in regards to trading this maket, europe has sold off on almost every time the us has been up, with a lower open in the morning so you have been able ton trade this both ways if you were amart. it n9ot hard. a problem has been the sand p manipulated hft piece of crap,
My Online Broker now allows sub penny trades. Up to 4 desimals.
How in the world is Mary Shapiro going to fix all of this if she is in jail?
I don't think Mary Sharpiro has the desire nor plan to fix it.
Great article!