Submitted by Joe Saluzzi and Sal Arnuk at Themis Trading
My partners frequently poke fun at me (ok there is a long line of folks doing this…), specifically for thinking too deeply about a topic, and expressing an idea with too much detail.
I would like to get real simple here. High Frequency Trading is proprietary computer trading with the goal of collecting rebates, and/or detecting real order flow (ie. instititional flow) and frontrunning it and making pennies.
What bothers me? Two things:
First, whether the market is trading at a 16 P/E, or a 22 P/E, or a 30P/E… this is decided by 30% of the volume in the market. 70% of the volume is noise. In the “olden days” there were many different types of market participants (Value players, MOMOGOGO momentum players, Chartists, GARP players, and so on). None of them were 70% of the volume. This made for an efficient market. This made for a market where we felt strongly that the pricing in the market reflected actual asset values. This new HFT 70% market share makes me very nervous. I hope it does you, as well.
Second, the HFT players are courted by the Exchanges, ATS’s, ECN’s and Dark Pools. They are given whatever they want, as these for-profit destinations all want their volume. Would they (HFT) have grown to this level if the exchanges and trading destinations were not for profit?
Is there a national interest in insuring that (1) our exchanges are the fairest, with equal access for all to the best prices, and not just those with their servers located inside the actual exchange, (2) our exchanges are transparent, and (3) that the system is working as it should, where asset values are reflected in prices? Was it the beginning of the end when all our exchanges went to a for-profit model?
High Frequency Trading Alert -CIT
CIT had some awful news out this morning. The stock was halted right after the opening and once reopened it tanked almost 50%. But then a magical thing happened, the stock traded back to $1 from a low of $0.75. What is so magical about $1? Any stock that trades under $1 is not eligible for a liquidty rebate from the exchanges/ecn’s. The cost to trade sub $1 stocks is FREE but you don’t get the rebate. But if the stock gets over $1, the the liquidity rebates which could be as high as $.003/share kick in. So, it appears that the high frequency traders will be desperate to keep this stock above $1 today so they can keep collecting those rebates. There is no fundamental valuation for $1, it is simply a matter of high frequency economics.