9, 10, 11, 12, 13, 15, 16, 17
Uh, where's 14 (2 p.m.)?
The chart goes right up to 14:04 then jumps to 14:21 then to 15:15 (2:04 p.m. EDT / 2:21 / 3:15)
CME, where CL (Crude Futures) trade, went berserk apparently from an algo. They shut down the system, cancelled all open orders and restarted. As far as we know right now, it looks like an HFT algo was responsible, there was unusual trade in USO just before it shut down the data stream.
I've been meaning to cover this topic for a while, although I'm no expert, I do know that these algos/HFT firms can flash and pull mindboggling numbers of quotes and bids in nano-sconds. This is not what valuations and discounting in the market is about.
In fact, way back in the low tech year of 1987, there's good evidence to suggest computers were caught in a spiral of selling in response to falling prices causing the '87 crash. Now imagine how much further they have come, they are literally trading at the speed of light. Several very well respected institutions including the Wharton School of Business think HFT has the potential to crash the market.
It may have started in a benign way, some of you probably remember when prices were quoted at the nearest 1/16 of a dollar. Computers allowed bis/ask spreads to be quoted to the nearest penny, which helped many traders. When the SEC mandated that prices be quoted nationally instead of on individual exchanges in 2005, computers could play the arbitrage game and take advantage of price discrepancies between two different exchanges.
One thing HFT can do is earn volume rebates and while they may be small ($.005 per share), when they are executed millions of times, it adds up. Imagine what they can earn churning a stock (basically buying and selling for no other reason then to earn volume rebates) and none of that action has to do with price discovery or valuation.
Advocates of HFT say that HFT provides liquidity to the market, BUT, unlike a traditional market maker or specialist that MUST, by law, provide a market for any orders at market, even if a stock is in free fall, they must buy, HFT firms have no such obligation. They can provide immense liquidity on day and when a stock starts crashing, just turn and walk away leaving what ever is left of the market making community to try to provide liquidity. As you can probably imagine, this can lead to some incredible flash crashes, something I have a keen interest in and try to document whenever I see them One thing I have noted with 3C, is there always seems to be a set up just before a flash crash, I don't think I've sen one yet that didn't have a set up in which 3C shows distribution in the minute of hour leading up to the flash crash.
When the SEC banned short selling in 19 financial stocks, the spreads increased dramatically and volume fell off dramatically, why? Because the HFT firms couldn't short sell and therefore couldn't arbitrage their trades. So we have already seen proof of what happens when these so called, "providers of liquidity" step out of the market and the impact it has had on liquidity is large, where traditional specialists on the NYSE use to make up 80%of the transactional volume, they now make up 25% or less, this means they don't carry the same inventory levels that they use to. If a crash happens and the HFTs step out of the market, the specialists will be in a bad position as their inventory will swell from what they are now use to, to whatever they MUST take on by law. This could easily set them up to be taken advantage of and cause huge volatility swings that effect the entire market.
When the Dow fell 700 points in 5 minutes on May 6th 2010, it was a warning of what HFT can do.
Several years back, a cousin of mine was and I assume still is working on what I knew as a Black-box system, I didn't know exactly what they were doing and he wasn't a trader, but a technology /IT guy so he couldn't really explain it to me other then to tell me that they made thousands of roundtrip trades in a few stocks every day and that they were setting up hubs very close to the major market centers. I now know what they were doing was high frequency trading. Their information/trades, are traveling over fiber optic cables at the speed of light, but to get an edge, they needed to be as close as possible to the actual trading center, so in effect, they were spending millions of dollars to reduce latency by fractions of a millisecond!
Many High Frequency Trading Firms are "Predatory". One of the tactics they specialize in is pinging for Icebergs, or large institutional orders near... you may have guessed it, VWAP! They can do this by sending out multiple bids or asks in nano seconds and seeing if they get a bite, then they have an idea there's a large hedge fund order out there and they work to find it and jump in front of it, thereby driving price against the hedge fund. It's more complicated then that, but that is the gist of it.
Another example is HFTs buying large numbers of stocks at the same time, triggering large institutional orders, they can then sell them the stocks or even short them before the institutions get a complete fill, and whatever was filled, becomes a loss to the institutional trader.
However I still think the real danger is that HFT have largely displaced traditional market makers, but when the market plunges and the HFT firms step out of the equation, what you end up with is a May 6 2010 700 point fall in 5 minutes. Although since these HFTs are getting faster and faster and taking more market share away from market makers who unlike HFTs, are regulated and must be in the market, the next plunge could be even worse.
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