Thanks for sharing that...I also liked the following which was a link in there:
( Attn: @Big Mike)
On Friday, Aug 5, 2011, we processed 1 trillion bytes of data for all U.S. equities, options, futures, and indexes. This is insane. A year ago, when we processed half of that, we thought it was madness. A year before that, when it was 250 billion bytes, we thought the same. There is no new beneficial information in this monstrous pile of data compared to 3 years ago. It is noise, subterfuge, manipulation. The root of all that is wrong with today's markets.
HFT is sucking the life blood out of the markets: liquidity. It is almost comical, because this is what they claim to supply. No one with any sense wants to post a bid or ask, because they know it will only get hit when it's at their disadvantage. Some give in, and join the arms race. Others leave.
Take the electronic S&P 500 futures contract, known as the emini, for example. This is, or used to be, a very liquid market. The cumulative size in the 10 levels in the depth of book was often 20,000 contracts on each side. That means a trader could buy or sell 20,000 contracts "instantly" and only move the market 10 ticks or price levels. Even during the flash crash, before the CME halt, when hot potatoes were flying everywhere, the depth would still accommodate an instant sale of 2,000 contracts.
What used to be the most liquid and active contract in the world, which served as a proxy for the true price of the US stock market for decades, is getting strangled by the speed of light, a weapon wielded by HFT.
Not anymore. On Friday, 2,000 contracts would have sliced right through the entire book. Not during a quiet period, or before a news event. Pretty much any minute of trading that day after the 9:54 slide. And it wasn't just Friday, the trend in the depth of book size has been declining rapidly over the last few week. What used to be the most liquid and active contract in the world, which served as a proxy for the true price of the US stock market for decades, is getting strangled by the speed of light, a weapon wielded by HFT.
Without going into detail at this time, we think we know one cause of the drop in liquidity. A certain HFT algorithm that we affectionately refer to as The Disruptor, will sell (or buy) enough contracts to cause a market disruption. At the same exact time, this algo softens up the market in ETFs such as SPY, IWM, QQQ, DIA and other market index symbols and options on these symbols. When the disruptor strikes, many professional arbitrageurs who had placed their bids and offers in the emini suddenly find themselves long or short, and when they go to hedge with ETFs or options, find that market soft and sloppy and get poor fills. Naturally, many of these arbitrageurs realize the strategy no longer works, so they no longer post their bids and offers in the emini. Other HFT algos teach the same lesson -- bids or offers resting in the book will only become liabilities to those who can't compete on speed.
In summary, HFT algos reduce the value of resting orders and increase the value of how fast orders can be placed and cancelled. This results in the illusion of liquidity. We can't understand why this is allowed to continue, because at the core, it is pure manipulation.
Last edited by kbit; February 2nd, 2012 at 05:38 PM.
The following 5 users say Thank You to kbit for this post:
kbit, as small speculators, why should we be concerned by this, i mean i still see trends or momentum moves, i still get good fills. Why this sudden interest about this almost imperceptible shrinking of volume ?
The following user says Thank You to trendisyourfriend for this post:
Not a sudden interest for me...been bitching about it for a while now but my complaint is that is doesn't trade the same as it used to for me anyway...(I know someone will come out and say there's no difference to them because they are master traders or super genius or something and nothing slows them down...blah blah blah, spare me).
Do I still trade ...yes of course, my complaint lies with the fact that the markets (indexes anyway) are slowing down.
Consider for example how often(the frequency) your watching price and it doesn't even move these days....and think back a few years...do you remember that stuff happening like it does now(as often), and it's not limited to just the recent past it's been slowing down for a few years now.
I use tick charts ...I haven't studied what the average number of bars is in a day but I can tell you that it's probably half of what it used to be a few years ago...there just aren't as many trades happening...I don't care what anybody else says...I've been watching this crap every single freaking day for years.
Look at it this way..if there was twice as much trade activity might there also be more trade opportunities.....I know it's not that simple but think along those lines.
I don't know how to better describe it and I suppose it doesn't really matter...it's just my observation and personal experience. You can still trade this stuff it's just not the same for me.
The following user says Thank You to kbit for this post:
You certainly have more mileage than i since i started my quest in 2008 just before the crash. I consider myself more of a momentum trader probably in the same spirit as perryg and i always get my share of opportunities. I watch the ES but have slowed down my activity there. Nasdaq, TF and 6E together offer more opportunites than i can exploit. Given this, i have some difficulties to see the implication of this shrinking of volume as a small day trader.