High Frequency Trading

A recent story in Advanced Trading goes after some of the minutae of High Frequency Trading and provides a glimpse of the total value that HFT may provide to behemoth PT powerhouses such as Goldman Sachs. The article presents a very valuable perspective on just why HFT is so critical these days, especially when cash traders go for 6 hour Starbucks breaks between 10 am and 3:30 pm: "high frequency trading firms, which represent approximately 2% of the 20,000 or so trading firms operating in the US markets today, account for 73% of all US equity trading volume. These companies include proprietary trading desks for a small number of major investment banks, less than 100 of the most sophisticated hedge funds and hundreds of the most secretive prop shops, all of which operate with one thing in mind—capture profit opportunities by being smarter and faster than the closest competition." And as the market keeps going up day in and day out, regardless of the deteriorating economic conditions, it is just these HFT's that determine the overall market direction, usually without fundamental or technical reason. And based on a few lines of code, retail investors get suckered into a rising market that has nothing to do with green shoots or some Chinese firms buying a few hundred extra Intel servers: HFTs are merely perpetuating the same ponzi market mythology last seen in the Madoff case, but on a massively larger scale. When it all blows up, the question is whether the SEC will go after the perpetrators of this pyramid with the same zeal that it pursued Madoff himself. We think not.

There has been alot of talk over the past few weeks about high frequency trading. We have argued that the volume these high frequency traders are creating is not beneficial to the market. Lets take a closer look at what a high frequency favorite stock looks like. The poster boy for HFT this week is none other than 80% U.S. government owned, AIG. AIG recently underwent a 1 for 20 reverse split since the “issuer” wanted to make their stock look more attractive to institutional clients. You would have expected volume in this stock to be reduced by 20x. Instead, volume has remained at a consistent pre split level of 75 million shares/day. How could this be? Did something change to attract more institutional buyers? Did the black hole of AIG liabilities somehow close? No, the answer here is that the High Frequency traders found a new stock to play in.

Joe Saluzzi of Themis Trading has put together a great synopsis of a High Frequency Trading roundtable held today, called, in traditional HFT egomaniacal fashion, “High Frequency Trading: The New World Order.” Useful insight for many, who have been increasingly inquiring about the topic on Zero Hedge. Joe's conclusions is worth highlighting: