Electronic Trading Glitches Shake Market Confidence

Stock markets are impacted by distortions arising from high-frequency trading algorithms as this article by SUZANNE MCGEE discusses. We really need to consider the benefits versus the costs of HFT. Benefits of HFT liquidity are vastly overstated: what use is an umbrella if withdrawn at the first sign of rain? The costs are far more than the additional +/- $2.5 billion — profits from HFT trading — that institutional and private investors pay for stocks each year. By far the greatest cost is the damage done to market efficiency and to investor trust. An efficient market requires accurate communication of pricing information to market participants. My belief is that HFT distorts this function. And the only reason it is encouraged by exchanges is the huge profits they make from it.

Even if Knight’s [Knight Capital] losses are as large as $300 million, that’s a drop in the bucket when set beside the $862 billion that was temporarily wiped off the value of the U.S. stock market in 2010. High-frequency trading systems and the algorithms they use, these advocates argue, add liquidity to the market, which is a Good Thing.

Well, not really. Not it results in a major crisis of the kind we saw two years ago and a slew of smaller trading anomalies, day after day, week after week, month after month on top of that. Less than two weeks ago for instance, traders reported seeing a bizarre “sawtooth” pattern of trading in a handful of large-cap stocks, including Coca-Cola KO and Apple AAPL. Their prices swung higher and lower with an uncanny degree of synchronicity, zooming higher every hour on the half-hour, and lower once more thirty minutes later. More algorithms, traders muttered gloomily to one another.

via Electronic Trading Glitches Shake Market Confidence.

Securities Technology Monitor: Dark Trading Bad, HFT Good

“HFTs appear to assist in decreasing excessive price volatility,” [Professor Alex Frino, CEO of Capital Markets Co-operative Research Centre (CMCRC) and Professor of Finance at the University of Sydney Business School] said. “This is partly due to the way HFT algorithms identify trading opportunities – they’re built to recognise when prices are abnormally high or low, and respond in a way that naturally pushes prices back towards the middle.”

via Securities Technology Monitor: Dark Trading Bad, HFT Good.

Securities Technology Monitor – Quote Stuffing Aims to Slow Rivals

Mao Ye, Chen Yao and Jiading Gai of the University of Illinois at Urbana-Champaign found that “exogeneous technology shocks that increase the speed of trading from microseconds to nanoseconds dramatically increase” order cancellation rates and found “evidence consistent with quote stuffing.”

“As speed is of value to a trader, it is almost equally valuable to slow his competitors down,” the researchers said in their paper The Externality of High Frequency Trading.

via Securities Technology Monitor – Quote Stuffing Aims to Slow Rivals.

Schapiro Questions Role of High-Frequency Traders – WSJ.com

Securities and Exchange Commission Chairman Mary Schapiro said Wednesday she is worried about the role of high-frequency traders in the stock market and hinted at new policies aimed at curbing frenetic market activity.

A large portion of trading in the equities market has little to do with “the fundamentals of the company that’s being traded” and more to do with “the minuscule aberrational price move” that computer-assisted traders with direct connections to the exchange can “jump on” in fractions of a second, Ms. Schapiro said.

Such activity “worries me,” she said in a wide-ranging breakfast meeting with reporters. One solution would be forcing high-frequency traders to pay for the canceled trades that make up more than nine-tenths of their orders, she said. Another possible remedy: requiring such traders to maintain competitive buy and sell orders in the market throughout most of the trading day.

via Schapiro Questions Role of High-Frequency Traders – WSJ.com.