We have written extensively on the HFT Algoritmic Machines trading the Markets. The pale argument of the machines providing liquidity is as stupid as ever. Yes, HFT machines trade a lot, and make up an increasing part of daily trading volume, but it is not increasing liquidity and it is not promoting protecting the average Joe's orders etc.
During last week's trading, Nasdaq almost hit the maximum amount of data it can process, before the system shuts down. This is due to the fact the HFT machine's different predatory strategies such as quote stuffing etc slow up the system and give them an advantage over the average Joe. The trader has argued, for the HFT ultimately being the single most important factor in the markets ultimate collapse, as they will drive the liquidity to low levels while all trying to execute similar strategies. Below some HFT update from Bloomberg;
The stock market’s fastest electronic firms boosted trading threefold during the rout that erased $2.2 trillion from U.S. equity values, stepping up strategies that profit from volatility, according to one of their biggest brokers.
The increase from Aug. 1 to Aug. 10 over their 2011 average surpassed the 80 percent rise in U.S. equity volume, showing that high-frequency traders made up more of the market during the plunge, Gary Wedbush, executive vice president and head of capital markets at Wedbush Securities, said in a telephone interview. Wedbush is the largest broker supplying bids and offers on the Nasdaq Stock Market, according to exchange data.
“We’re seeing a tremendous amount of high-frequency trading,” said Wedbush, whose company is one of the biggest execution and clearing brokers catering to high-speed firms. “Their business is a trading business, and volatility creates far more opportunities. Some of their algorithms and automated systems are trading two, three or five times as many shares as they would have in a more normalized volatility environment.”
and the fallacy of providing liquidity;
“The bulk of high frequency traders are adding liquidity to the marketplace,” Wedbush said. “Automated traders employ a myriad of strategies that seek to profit from a stock’s short- term volatility, but the mass of HFT is adding liquidity by being on both sides of the market or doing creation/redemption arbitrage for ETFs.”
Our view is that the HFT Algo machines will cause the ultimate collapse of the Markets. The system has been feeding of a lack of regulation, and therefore we see many of the HFT machines simply conducting a regulations arbitrage. Due to lack of understanding and a huge lobby organization, the regulators and exchanges are simply not in the position to implement the relevant regulations. Arguments of providing liquidity etc are never challenged and become the truth, without further questioning. The ones providing the arguments are depending on the HFT firms paying the bills. Welcome to free markets.
Full HFT Update from Bloomberg.
BOE provided an interesting piece earlier this year;
The Flash Crash left market participants, regulators and academics agog. More than one year on, they remain agog. There has been no shortage of potential explanations. These are as varied as they are many: from fat fingers to fat tails; from block trades to blocked lines; from high-speed traders to low-level abuse. From this mixed bag, only one clear explanation emerges: that there is no clear explanation. To a first approximation, we remain unsure quite what caused the Flash Crash or whether it could recur.1
That conclusion sits uneasily on the shoulders. Asset markets rely on accurate pricing of risk. And financial regulation relies on an accurate reading of markets. Whether trading assets or regulating exchanges, ignorance is rarely bliss. It is this uncertainty, rather than the Flash Crash itself, which makes this an issue of potential systemic importance.
For some insight by at least one of the regulators that seem to address the problem, click here.