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The dark force of indian stock and commodity market.

Leena Sebas at 01:12 AM - Mar 13, 2014 ( ) Views: 2,776

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A good article every one should read and understand.

http://www.forbes.com/sites/richardfinger/2013/09/30/high-frequency-trading-is-it-a-dark-force-against-ordinary-human-traders-and-investors/

 

High Frequency Trading: Is It A Dark Force Against Ordinary Human Traders And Investors

The omniscience of the high frequency computers can see your every move and the land mines are everywhere. The structure of the markets has permanently changed. A human hand that can react in seconds is outclassed by machines operating in milliseconds and even microseconds. It is neither all good nor all bad. It is just the way it is.

(courtessy to forbes)

few of the discussion copy pasted below

Mr. Dick: HFT’s are the new market makers without the traditional affirmative obligation of designated market makers to keep markets orderly. When uncertainty enters the picture, they cancel their orders and liquidity disappears.  Without traditional market makers to step in and be the buyer of last resort, prices can fall quickly as we saw in the flash crash in May 2010. HFT’s big advantage is co-location or speed which helps keep their bids and offers at the front of the order queue. HFT’s goal on the big liquid stocks is simply to make the penny spread between the bid and the offer, and to make exchange rebates. (Explained below)  When HFT’s buy stock, they make sure that there are other real bid’s to buy behind (waiting to buy) them. If they can’t sell on the offer, they can push a button and sell to one of the other bidders at the same price they bought in at and scratch the trade. So the High Frequency Traders of today are just like the old line human market makers except the speed at which they operate and the information advantages they have means they are only going to play when very high probability setups exist. They always want to make sure there are plenty of real bids or offers in line behind them to “lean” on so if markets start to gyrate they can exit the trade flat.

Richard: So do they or do they not provide liquidity for our markets today.

Mr. Hunsader: I don’t think there is a yes or no answer to that one. On a day to day basis the HFT’s are certainly there on the big liquid names to buy and sell so long as you are willing to pay their penny toll, which is not much different than when beating hearts were in charge. Things get dicey when a market dislocation occurs and then bids dry up. With no affirmative obligation to be buyers of last resort, if some big macro news event causes markets to shudder, then the HFT’s simply pack their bags and there are no underlying bids in the markets.

The flash crash of May 6, 2010 is the best example of what can happen. After the “fat finger” trade by mutual fund group Waddell & Reed and markets went into a dive, HFT’s went hiding under rocks and the market for a short period was without any bids and big price dislocations occurred as evidenced by the nearly 10 percent free-fall. I think it fair to say that without the “affirmative obligations” of the human system, HFT’s run like chickens and during times of duress greatly exacerbate market declines. HFT’s were a big reason the flash crash became the flash crash.

Mr. Dick: Despite the enormous edge High Frequency firms enjoy they are starting to show significantly lower profitability. Exchange volumes from 2011 to 2012 are down from 7.8 billion shares per day to 6.5 billion or 17 percent. Another contributor is that, as has been stressed, High Frequency Trading is all about co-location or speed. These giant dominant HFT firms, like GETCO, Citadel, and Virtu Financial are all being forced to constantly upgrade their systems in the arms race to be fastest, to collate information closer and closer to the speed of light. GETCO reported in a 2012 SEC filing it spent $37 million upgrading or “building new trading strategies”. Lower volumes hurt the HFT’s because as fewer orders enter the markets there are just that many less opportunities to “scalp” the bid/offer spread. Another issue which gets overlooked in the media is that there are fewer traders exposing themselves to being gamed by the HFT’s.

Richard: Can you elaborate on that last sentence?

Mr. Dick: I made a video in 2012 which gives an example of how traders who have limit orders floating out there in the marketplace get “picked off” or gamed by the HFT’s. It is called “adverse selection” risk and here is how it works. My example focuses on the S&P E–mini contracts and the release of the Friday morning monthly unemployment reports. When the number came out at 8:30 EST there were hundreds of bid limit orders to buy the S&P E-mini’s representing thousands of contracts. The actual employment number was very bad, meaning claims were higher than anticipated, and the market gapped down over 7 points instantly. But even faster were the High Frequency algorithms which hit hundreds of bids (they sold stock to the bids) before the clock had moved one second……it was still 8:30 sharp not even close to 8:30.01. Traders with limit orders could not withdraw their orders before they were filled by high frequency computers in a matter of micro seconds. In the blink of an eye, the HFT’s bought back shares that they had sold at much lower prices reaping millions in profits. This is information arbitrage where High Frequency Traders take advantage of just released data and profit from it. They react far quicker than any human possibly can. Given this advantage, traders have much less incentive today to place limit orders. The adverse selection risk is simply too high.

Mr. Hunsader: I might add that today in 2013, it is any “limit” orders where the retail investor potentially gets shafted. Say Bank of America (BAC) is trading $13.93 bid and $13.94 offer. The retail investor has very little chance of being able to buy on the bid at $13.93.  That person is typically at the back of the queue, behind all the HFT’s. The only time they get filled is when the quote rolls over them (the bid becomes the offer). In most cases, for the retail investor it is better to buy BAC at the $13.94 offer, get filled and not risk the market moving and not get filled at all……just pay what amounts to a one penny “toll” to get filled. In the old days of human NYSE market makers, or specialists as they were known, the retail investor had a much better chance of buying on the bid.

Mr. Dick: Where the HFT’s become really pernicious is on smaller more thinly traded securities when the bid/offer spread is wide, say 30 or even 50 cents. Say the bid/offer is $25.50/$25.80. The High Frequency computer is programmed to “step in front of” the real buyer willing to pay $25.50 and bid $25.51 or a penny more than the bona-fide buyer at $25.50. This “penny hopping” pushes the real buyer back in the queue so he will not get filled. If the real buyer cancels their bid, (the computers recognize this) then the HFT will withdraw its bid to buy as well. If the HFT gets filled at this price by paying up a penny more they will hold the shares and make an offer to sell at somewhere below the $25.80 offer price so they can once again be first in the selling queue. Now that the HFT owns the shares, machines will watch to make sure that the real buyer is still there so that if they can’t sell the shares within their timeframe they always can instantaneously sell to the real buyer at only a loss of a cent. They have a bid to “lean” on…….with potential loss of only a cent and a possible profit of nearly 30 cents.

Richard: What are some other things you can tell us that I haven’t asked about?



(1 to 12 out of 12) - Latest Replies on Top | First | << Previous | Next >> | Last |
Leena Sebas at 11:16 AM - May 01, 2019 ( )

Finally Sebi wake up !

Congrats 

Leena Sebas at 03:44 PM - Apr 26, 2015 ( )

interesting to read the below comment

This poor soul has been trying his luck for over 5 years and was not so successful at it except on one day when the market crashed. He happened to be on the right side of the trade and made money. I do not believe there is anything more to it than that. The accusation is that he placed trades and cancelled. What about all the trades that he placed and cancelled for all those years when he did not make any money? What about all those trades that he made when he lost money. Just because he made some money on those trades does not make him the culprit. The system should be robust enough to handle large volumes of trade. If he meant to truly cheat the system, he would have opened up several accounts and traded from all those to create the multi-seller situation. Secondly, what about the brokers he used for him to execute the trade. What about the bigger players who placed bigger bets that day? Third, what about Wadell & Reed who executed $4.1B of stock index future, compared to the paltry millions that this guy traded. If the guy was doing something illegal, why did CME and the brokerage allow him to conduct trades. They knew of him much before the flash crash. This is nothing but a bunch of stupid regulators trying to find some low level individual participant for the miserable failure on their part to put in place a system that does not crash.

Leena Sebas at 03:41 PM - Apr 26, 2015 ( )

His arrest has revived criticism of the market oversight by the CME and other regulators—and prompted some to ask whether Mr Sarao has been made a scapegoat while the role of larger players has gone unpunished. And despite untold hours spent by U.S. regulators investigating one of the most mysterious episodes in market history, authorities only brought this case after a whistleblower provided hundreds of hours of analysis of the trades, a lawyer for the whistleblower said.


The problem: Mr. Sarao pumped large amounts of orders into the e-mini market, then quickly cancelled them. Tracking his trades between September 2008 and October 2009, the CME noted that the tactic "appeared to have a significant impact on the indicative opening price" of the market.

"When prices fell as a result of this activity, Sarao allegedly sold futures contracts only to buy them back at a lower price," according to the DoJ. "Conversely, when the market moved back upward as the market activity ceased, Sarao allegedly bought contracts only to sell them at a higher price."

interesting to read the below ...then some interesting observation can be made i guess...The big question is..is this guy a scapegoat?

The regulators allege Mr. Sarao was rapidly placing and cancelling orders on May 6, 2010. In less than two hours he placed six e-mini orders, which were replaced or modified 19,000 times before cancelling them without completing a single trade. In that same period he accounted for between 20 and 29 percent of the entire e-mini sellside order book on CME, regulators allege.

The unmasking of Mr. Sarao has raised eyebrows among traders and the broader industry. Markets by their nature reflect the choices and actions of numerous people and no single trade or activity can be held responsible for big market swings, observers say.

"It is possible that it [Mr. Sarao's trading] was a factor among many that contributed to what happened on that day," says Justin Schack, managing director at Rosenblatt Securities. "What is hard to believe is that this guy is the Franz Ferdinand of the flash crash."

The CME this week reiterated its position that its own investigations, and those of regulators, found that the futures market was not to blame. Regulators say the arrest of Mr. Sarao did not mean that their report was wrong or that other players, like large money managers, did not play a role.


Leena Sebas at 03:26 PM - Apr 26, 2015 ( )

Flash crash: Trader 'a strange character but genius'

Kara Scannell and Philip Stafford

Friday, 24 Apr 2015 | 2:07 PM ET

On May 6, 2010, when the U.S. stock markets plunged 600 points and rebounded within 20 panic-stricken minutes—an event that became known as the "flash crash"—an independent trader from west London received a warning about his behaviour from the US's largest futures exchange.

It was the third warning the Chicago Mercantile Exchange had sent to Navinder Singh Sarao, the 36-year-old British-born trader, and his broker, for placing and then quickly cancelling orders—a practice known as "spoofing." Orders were "expected to be entered in good faith for the purpose of executing bona fide transactions," the CME told him.

If this worried him at all, however, Mr Sarao could at least console himself with the fact that, by the time the market closed, he had made $879,018. And two weeks later, he would brag to his broker that he had told the CME to "kiss my ass."

This week Mr. Sarao has found himself inside a London courtroom facing criminal and civil charges from the US Department of Justice and Commodity Futures Trading Commission for allegedly contributing to the panic that day and embarking on a pattern of behaviour that is said to have netted him nearly $40 million in four years.

Read MoreFlash crash trader: What next?

On Wednesday Mr. Sarao, dressed in tracksuit trousers and a canary yellow sweatshirt, was given conditional bail of £5.05 million as he prepared to fight efforts by U.S. authorities to extradite him to Illinois to be tried for wire fraud, commodities fraud, commodities manipulation and spoofing. He faces as much as 25 years in prison if found guilty.

Mr. Sarao was hardly a masters of the universe type, nor did he fit the mould of the "flash" traders who use ultra-fast internet connections and sophisticated software to gain a millisecond advantage. Instead, he traded on a customised version of an off-the-shelf software program from his modest home in Hounslow, a drab London suburb. So far he is the only person accused in connection with the flash crash.

His arrest has revived criticism of the market oversight by the CME and other regulators—and prompted some to ask whether Mr Sarao has been made a scapegoat while the role of larger players has gone unpunished. And despite untold hours spent by U.S. regulators investigating one of the most mysterious episodes in market history, authorities only brought this case after a whistleblower provided hundreds of hours of analysis of the trades, a lawyer for the whistleblower said.

To critics, the idea that a lone trader could help wreak so much havoc demonstrates that the fragmented U.S. system of regulatory oversight is unsuited to a financial market that is so closely connected by computerised trading.

"The fact that it took five years to catch [arrest] this guy is a symptom of a broken enforcement system," says James Angel, a professor at Georgetown University.

Mr. Sarao came of age just as the markets shifted to electronic trading. With the CME's launch in 1997 of the "e-mini S&P," a compact futures contract based on the S&P 500, investors had a smooth way of betting on the direction of the cash equity market. They could also use the contract to insulate their portfolios from losses.

That attracted Mr. Sarao, a British trader whose family lived under the main flight path into Heathrow airport. He got his start on the trainee programme of a small UK broker in 2003 and quickly stood out. "He was a bit of a strange character but he was a natural, a genius," says a person who watched him trade. "He could read a screen like you and I could read a newspaper." Mr. Sarao stayed cool, wearing heavy-duty headphones to block out the noise of a trading floor. "He also used to dress shabbily as he didn't care," the person said.

More from the Financial Times:
Hounslow was not origin of havoc in New York
'Flash crash' charges spark alarm over regulation of US markets
'Flash crash' arrest puts heat on futures market

He developed a reputation for making big trades, according to two people familiar with his positions. "One day he traded 5,000 lots [equivalent to a notional value of $250,000] while he was talking to me," one said.

Mr. Sarao described himself as an insomniac who slept from 4 a.m. until noon so he could trade on US time, emails in the court filings say.

By 2008 he had started his own firm and bought a seat on the CME, allowing him to trade on Chicago's markets. Almost immediately the CME noticed his behaviour; by the following March the it had contacted MF Global, his brokerage, to alert them. The company passed the message to Mr. Sarao and told him that he may have been breaking the rules.

The problem: Mr. Sarao pumped large amounts of orders into the e-mini market, then quickly cancelled them. Tracking his trades between September 2008 and October 2009, the CME noted that the tactic "appeared to have a significant impact on the indicative opening price" of the market.

"When prices fell as a result of this activity, Sarao allegedly sold futures contracts only to buy them back at a lower price," according to the DoJ. "Conversely, when the market moved back upward as the market activity ceased, Sarao allegedly bought contracts only to sell them at a higher price."

The regulators allege Mr. Sarao was rapidly placing and cancelling orders on May 6, 2010. In less than two hours he placed six e-mini orders, which were replaced or modified 19,000 times before cancelling them without completing a single trade. In that same period he accounted for between 20 and 29 percent of the entire e-mini sellside order book on CME, regulators allege.

He also executed real trades, boosting his returns. By 2009, Mr. Sarao allegedly began to move money offshore to avoid paying taxes on his profits, according to court filings. In 2010 he created a company, Nav Sarao Milking Markets, incorporating it in Nevis, a small island in the Caribbean.

In 2011 he created a company called International Guarantee Corp that he based in Anguilla with a bank account in Switzerland. He used IGC to make loans to his trading firm and invest in other companies. A year later, according to court filings, he authorised a transfer from another Swiss bank account to the United Arab Bank in Dubai.

But Mr. Sarao's allegedly manipulative trading continued, and it was not until at least the end of 2013 that U.S. regulators opened their investigations.

The unmasking of Mr. Sarao has raised eyebrows among traders and the broader industry. Markets by their nature reflect the choices and actions of numerous people and no single trade or activity can be held responsible for big market swings, observers say.

"It is possible that it [Mr. Sarao's trading] was a factor among many that contributed to what happened on that day," says Justin Schack, managing director at Rosenblatt Securities. "What is hard to believe is that this guy is the Franz Ferdinand of the flash crash."

The CME this week reiterated its position that its own investigations, and those of regulators, found that the futures market was not to blame. Regulators say the arrest of Mr. Sarao did not mean that their report was wrong or that other players, like large money managers, did not play a role.

The official report on the flash crash, released in September 2010, highlighted the impact of a rapidly executed $4.1 billion sale of stock index futures by a single institutional investor, Waddell & Reed, which began at 2:32 p.m. EST. A trade of that size went well beyond what Mr. Sarao could have done. According to the complaints, Mr. Sarao switched off his layering program at 2:40 p.m. that day, two minutes before the S&P 500 really started to plummet. He kept trading during the crash and for years after.

Andrei Kirilenko, professor at the MIT Sloan School of Management and joint author of the report into the flash crash, says it is hard to see the connection between the algorithm in his customised program and what happened later. "The complaint says that this algorithm is present a bunch of times before and after the flash crash, but is actually not there during the most volatile period of the flash crash."

While regulators debate the structure of the markets, a new vitality appears to have taken hold among prosecutors. "With this turn of events, we need to acknowledge that it is the FBI and the Department of Justice that are now in charge of how this market will operate," says Prof Kirilenko. "This changes things."

Additional reporting by Michael Mackenzie and Nicole Bullock.

Yatheendradas C.k. at 05:56 PM - Apr 25, 2015 ( )

Thank you for the valuable information which is an eye opener . High Frequency Trading: Is It A Dark Force Against Ordinary Human Traders And Investors? As per the article of , Forbes High Frequency action occurs in only the top three dozen or so most liquid stocks. Weather our regulators have necessorry Checks and Balances to locate and prevent such malpractices ? We the General Retail Investors are in dark  about  the matter.

In U S The National Market System (NMS) delineates how exchanges connect and how trading happens. The NMS has regulations prohibiting one firm having a speed advantage over another. In 2012, the NYSE was fined $5 million for violating this rule and yet the practice is openly continued today.

Leena Sebas at 03:41 PM - Apr 25, 2015 ( )

the missed part contnues....

Richard: What are some other things you can tell us that I haven’t asked about?

Mr. Hunsader: I think it’s important to note that the great majority for High Frequency action occurs in only the top three dozen or so most liquid stocks. These are the “thickest”, meaning computers have the most bids and offers to “lean” on if markets collapse. The computers make money almost every time trading these stocks. Second, depending on who you believe 50 to 70% of all trading volume comes from the HFT’s yet 90 or 95 percent of all quotes come from them. HFT’s are constantly putting out bogus or fake quotes. This “quote stuffing” as it is referred forces other machines to slow down to assimilate the data thus maybe giving the “stuffer” a brief advantage. It is also used to flush out and see which bids are real. Also, an uninitiated trader may be fooled by thinking demand for a stock is there, when it is just noise.

One more thing about speed….. The National Market System (NMS) delineates how exchanges connect and how trading happens. How firms receive their data is something else. The SIP (Securities Information Processor) provides data to firms on a 10 gigabyte line. Both the NYSE and NASDAQ offer more specialized (think faster) quote platforms. NYSE “OpenBook” and NASDAQ “TotalView” offer data on a 40 gig line at prices ranging up to $60,000 a month. The NMS has regulations prohibiting one firm having a speed advantage over another. In 2012, the NYSE was fined $5 million for violating this rule and yet the practice is openly continued today.

Internalization

Internalization is the practice of High Frequency Traders paying for order flow from retail brokerage houses like TD Ameritrade, E-Trade, Charles Schwab, or Scottrade. They in effect get a right of first refusal on these orders. Often these orders come from the “dumb” money who enter market orders and are easy pickings for the HFT’s to easily collect their “toll” spread.  So these trades never make it to the exchange floors for competitive bidding. Eric Hunsader says 40 percent of all trades are either “internalized” or go to dark pools. There are thirteen different exchanges which a trade may get routed to. Each exchange like ARCA, Edge, or BATS has a systemic set of fees that it charges for takers of liquidity and an offsetting list of rebates it pays to providers of liquidity. These fees and rebates range from roughly a tenth to three tenths of a penny. Named the Maker-Taker system, it causes distortions in the way our markets operate. Courtesy of Mr. Dennis Dick here are simplified definitions:

Mr. Dick: The incentive for TD Ameritrade to sell its order flow should be clear. They charge $7 per trade. If they execute a 3,000 share market order and the rate for taking liquidity is 3/10 of a penny then TD Ameritrade is on the hook for $9. And lose $2 on the trade. If they sell the same market order to Knight for 2/10 of a penny they would collect $6 plus the $7 commission for $13 total. I don’t know if there is actual data, but the quality of the order execution is probably less than if the trade were exposed to all the exchanges for competitive bidding. Almost all retail market orders are internalized. If you put your strongest glasses on, it is all disclosed in the fine print. To justify the practice, many HFT internalizers will offer a sub-penny of price improvement to the retail orders. But in essence they are just jumping the order queue by a fraction of a cent.

Mr. Hunsader: What makes this even more unfair is that individuals are not allowed to bid in any increments less than a penny.  I did a study collecting price action on sub penny trades from January 2006 through July 2012 that confirms the “penny hopping” scheme. 54 percent of these high frequency trades improved prices by less than 1/10th of one penny. The remaining 46 percent only increased prices by less than ½ of one penny.

Richard: Rob, how have the traders at Bright Trading adapted to the new HFT world.Mr. Friesen: One of the main adjustments we have been forced to make is to lengthen the time horizon of our trading. No longer are we the liquidity providers scalping for pennies in trades that lasted seconds. The HFT’s have taken over that role. Now our trades last minutes, hours, or even days and our profit objectives may be in dollars rather than cents. We have become much more research oriented. We shouldn’t be surprised about the rise of HFT in trading as many other industries have had automation replace human activity. When High Frequency Trading started to takeoff, we strategically decided that to compete in the game a firm needed to commit tens of millions to build the fastest, most robust computer systems……so instead of playing a game we couldn’t win we changed our focus.

As professional traders, we continue to evolve in hedged trading strategies which are not usually done by the retail trader or investor. HFT is unaware of our game plan, our time frame, or our reason for entering the trade. In some cases we may have to pay the penny toll, in other cases we may be able to remain passive and actually be a true liquidity provider. It all depends on the traders agenda which he will not advertise.

Our traders strive, as much as possible, to avoid notifying the HFT’s of what they are doing by avoiding Smart Routers, and instead routing to a specific destination with a marketable limit orders and pay the offer. I am very proud of Bright Traders like Dennis Dick that have adapted over the last few years and continue to excel in this trading profession they love.

What Does It All Mean?

At the end of the day High Frequency Traders in the large volume stocks probably are good providers of market liquidity and allow for average investors to easily transact. The “toll” is the penny bid/offer spread which is what you probably would have paid under the old specialist system. Some claim the HFT’s have caused bid/offer spreads in high volume securities to be tighter, thus benefiting investors. In times of turmoil and market corrections the HFT’s run for the hills and declines are exaggerated. This is scary and causes many investors to be wary of the stock markets. This is born out in the 17 percent volume decline over the 2011 to 2012 period.

Small illiquid stocks are another matter. The “penny jumping” is grossly unfair and distorts markets and often denies legitimate buyers and sellers from entering and exiting their positions. “Internalization” is a by-product of the “Maker-Taker” system the exchanges have implemented. Consumers certainly get poorer execution but the tradeoff is much lower commissions than in the past. Imagine you can trade 100 shares or 10,000 shares for under $10 at any number of discount houses

Paying tens of thousands a month for Direct Feed from NASDAQ “TotalView” or NYSE “OpenBook” on a 40 gigabyte line gives an advantage over receiving quotes over a 10 gig line from SIP. In my opinion it doesn’t really matter to a small long term investor. Once again, this is High Frequency titans battling over turf. It shakes the earth a little, but it doesn’t knock your house down.

If stock buyers are long term investors, then the HFT’s are not really a factor at all. While they exacerbate market declines, over time the market adjusts and is fairly valued. High Frequency Traders simply cause a lot of extraneous noise as they battle each other through the cat and mouse of order stuffing and spending millions to achieve the unachievable grail of speed of light order flow.

The one lesson to take away is that unless you are tied up with a reputable firm like Bright Trading that understands the trading landscape and will teach you to adapt to the new playing field, it is folly to be a day trader. The omniscience of the high frequency computers can see your every move and the land mines are everywhere. The structure of the markets has permanently changed. A human hand that can react in seconds is outclassed by machines operating in milliseconds and even microseconds. It is neither all good nor all bad. It is just the way it is.

Vivek Sharma at 11:05 PM - Apr 24, 2015 ( )

Smile 

so we are competing with machines

Sethuraman Naganathan at 04:43 PM - Mar 13, 2014 ( )

How should we catch these HFTs.  But, my view is let them do their work and we will do our work.  Let the Supreme Market give reward and risk to the concerned.  As an ordinary man, what more we can do?? Nothing else.

 

Leena Sebas at 09:49 AM - Mar 13, 2014 ( )

dont forget to read all two pages of this article and the real hidden meaning of each words and phrase he is using..

.then you all understand why from time to time the news is planted and the real objective behind that..all news coming to the market is for this sentimental game change..

Aravind Prabhu at 09:39 AM - Mar 13, 2014 ( )

Oops. We ought to be very careful. Hope a normal trader's technology increases too. Unless pockets will be entirely ripped off from our shirts.

Leena Sebas at 09:33 AM - Mar 13, 2014 ( )

the below trading style is what happening in our market, from time to time planted news is created for   sentimental impact change , and this sentiments is encashed by the speed traders..what all mentioned in the below discussion seems  witnessing  in our market  daily.

http://www.forbes.com/sites/richardfinger/2013/09/30/high-frequency-trading-is-it-a-dark-force-against-ordinary-human-traders-and-investors/


Where the HFT’s become really pernicious is on smaller more thinly traded securities when the bid/offer spread is wide, say 30 or even 50 cents. Say the bid/offer is $25.50/$25.80. The High Frequency computer is programmed to “step in front of” the real buyer willing to pay $25.50 and bid $25.51 or a penny more than the bona-fide buyer at $25.50. This “penny hopping” pushes the real buyer back in the queue so he will not get filled. If the real buyer cancels their bid, (the computers recognize this) then the HFT will withdraw its bid to buy as well. If the HFT gets filled at this price by paying up a penny more they will hold the shares and make an offer to sell at somewhere below the $25.80 offer price so they can once again be first in the selling queue. Now that the HFT owns the shares, machines will watch to make sure that the real buyer is still there so that if they can’t sell the shares within their timeframe they always can instantaneously sell to the real buyer at only a loss of a cent. They have a bid to “lean” on…….with potential loss of only a cent and a possible profit of nearly 30 cents.

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