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Robots run amok?

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New York, NY
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There are two characteristics of this market that lead me to this conclusion. The first is a significant lack of liquidity. Before this move started it was common to see 3k offered at any level in ZN. At some major points such as before options expiration we were seeing 5k and even 10k's put on the DOM. Last week we were barely seeing 2k, and at some points they would only put up 100 on the inside levels.

[This is not the first time we've seen this. This is exactly the same behavior we saw during the flash crash in 2010. Some market making algorithms start losing so much money that the operators just turn them off completely, and liquidity dries up.

Not really. You don't really 'turn off', you just widen your spread to compensate for the increased risk.

During the 2007-2008 meltdown, a lot of electronic market making firms did turn off on one particular day, and 1 famed market maker chose not to, and they traded about 40% of the entire US equities market that day. And they were very profitable.

It changed from favoring HFT liquidity providers to HFT aggressive traders.

There's no certain argument that passive orders are disadvantaged vs aggressive orders in any scenario. If the hypothesis that "high vol/low liquidity => aggressive makes more money" were true, then this would be an amazing signal because it's so easy for anyone to trade it, and then the aggressive-passive arb would disappear - an apparent self-contradiction.

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