High Frequency Trading Debate

To conclude and sum up the last five articles, I would like to introduce this video, which is a debate about the advantage and disadvantage of the high frequency trading.

The Flash Crash

“On May 6, 2010, in the course of about 30 minutes, U.S. stock market indices, stock-index futures, options, and exchange-traded funds experienced a sudden price drop of more than 5 percent, followed by a rapid rebound. This brief period of extreme intraday volatility, commonly referred to as the “Flash Crash”, raises a number of questions about the structure and stability of U.S. financial markets”.

The video is a recording of a trader from the S&P 500 futures during the flash crash on May 6 2010

A survey conducted by Market Strategies International between June 23-29, 2010 reports that over 80 percent of U.S. retail advisors believe that “overreliance on computer systems and high-frequency trading” were the primary contributors to the volatility observed on May 6”

Source: The Flash Crash: The Impact of High Frequency Trading on an Electronic Market- October 1, 2010

The reason for the the Flash Crash of may 6, 2010 still a mystery.  No evidence shows that the responsible are the high frequency traders. However, the investigation conducted by the SEC and The CFT, concluded that a trading firm, which the name has not been mentioned in the investigation report, executed a computerized trade of 4.1 billion dollar. (Read more)

Some argued that the trade was not intentional, but a bug in one of the firm's machines was responsible for this heavy sell-off. On this topic, staff at Nanex, a computer programing company, made a comment on the event: : “On the subject of HFT systems, we were shocked to find cases where one exchange was sending an extremely high number of quotes for one stock in a single second -- as high as 5,000 quotes in 1 second! During May 6, there were hundreds of times that a single stock had over 1,000 quotes from one exchange in a single second. Even more disturbing, there doesn't seem to be any economic justification for this. In many of the cases, the bid/offer is well outside the National Best Bid/Offer (NBBO). We decided to analyze a handful of these cases in detail and graphed the sequential bid/offers to better understand them. What we discovered was even more bizarre and can only be evidence of either faulty programming, a virus or a manipulative device aimed at overloading the quotation system.”


Even if the name has not been mentioned on the official reports, Waddel and Reed, a investment company has been the target of many blames because of its likelihood to execute these kind of orders.

The massive sell-off was not the only reason that lead to the Flash Crash. The sudden injection of 4.1 billion to the stock market created a great deal of stress and panic, which lead all computers on the network to sell positions dragging the stock market down. In reaction to this, many high frequency trading firms just turned of their computers and left the office. Manoj Narang, the CEO of a high frequency trading firm, said: "Flash Crash was worst day for high frequency traders...We hit our stop-loss as the market was going down,... we turned our systems off... We did not turned the high frequency trading system on for the rest of the day " 

The video is called the truth about May 6,2010 and express an opinion about the linkage of the Flash Crash and High Frequency Trading.  


As a response to all the criticisms against high frequency trading, Manoj Naranj argued against these accusations during an interview conducted by Bloomberg, the content of the interview is available on the following 
video

The Dark Side of High Frequency Trading

Please click to see the video

The video is about Senator Ted of Delaware explaining high High Frequency Trading became a large bubble that dominate the market and even too big to be regulated.

High Frequency Trading has dramatically grown since its beginning in the late nineties. Today it became the ultimate force that control and manipulate the stock market. With their sophisticated computers, High Frequency Traders influence and anticipate slow traders moves and even behaviors. In july 2009, an example of this type of manipulation happened. The issue of the New York Time released on 07/24/2009 discussed this.  

“It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.”

In addition to action and behavior manipulation of slower investors,  High Frequency Trading can create a crash on the stock market like the one happened on may 6, 2010, and more popular as “The Flash Crash”*, in which the Dow Jones Industrial Average plunged about 900 points (about 9%) and recovered those losses within minutes. This kind of situation can occur given that all the transactions made by the High Frequency Traders are done through machines and robots that use very complex algorithms. As opposed to a human being, a robot is only able to perform the tasks it has been programmed for. Also, robots, computers, and machines can “bug”, which can be dramatic for the market given the access of computers to liquidities, and the network that relates all of them to the stock exchange. "The interaction between automated execution programs and algorithmic trading strategies can quickly erode liquidity and result in disorderly markets," said The the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission report about the Flash Crash of May 6 2010 .