This Is What Happens When An HFT Algo Goes Totally Berserk And Serves Knight Capital
We also all know that one should buy low and sell high. At least that is what human traders are taught, and that is what they attempt. Because if one consistently does the opposite, one will simply run out of money. Well, the opposite is precisely what the berserk algo in Knight's Market Making group may have done if Nanex, which has done a forensic analysis of one of the trades in question, is correct.
As Nanex laconically notes, "In the case of EXC, that means losing about 15 cents on every pair of trades. Do that 40 times a second, 2400 times a minute, and you now have a system that's very efficient at burning money." ... the NYSE may have just thrown Knight under the bus, because the market maker is suddenly on the hook for tens if not hundreds of millions in inverse market making profits.
This is just another tipoff of the underlying problems and dangers of HFT to the market as a whole. Incidents like these scare traders away and cause illiquidity , not liquidity. During the unchecked 30 minute period volume was erroneously doubled for some markets. How's that for initial "volume profile"? A limited bunch of firms running big volume through HFT close to the exchange taking advantage of the limited speed of light is not traditional liquidity.
Last edited by Cloudy; August 2nd, 2012 at 08:39 PM.