14
Jul, 2009
14
Jul, 2009
Real Life HFT Hijinks Example
I am trading a small cap stock for a customer today (I leave out the ticker for anonymity purposes). It has traded 4,300 shares so far today. I have 75,000 shares to buy.
The scenario: 100 shares offered at $11.16, and 400 shares offered at $11.17. I place an order to buy 1,000 shares at 11.17. You would think that I should get at least 500 shares executed (100 at $11.16 and 400 at $11.17). Sigh. I get none. As soon as I hit enter, those offers vanish. No trades on tape even. The HFT players offering the stock have convinced the market centers (ECN’s, Exchanges, and ATS’s) to cater to them and “show” them my order before they have to execute, thereby giving them the split-second option to back away from their offers without honoring them.
Market makers have to honor their quotes, and even have to do so a certain percentage of the time. The HFT’s have to honor NOTHING. In fact, they can back away and even run ahead of your orders! So much for their liquidity. Again the real danger is that fund managers assume that the markets can handle their 250,000 share small cap position, and that they can exit with a predictable minimal trade cost.
God, I hope we don’t retest.
[…] to execute equity transactions on their customers’ behalf. From the Themis website today, Real Life HFT Hijinks Example: I am trading a small cap stock for a customer today (I leave out the ticker for anonymity […]
[…] ability to execute equity transactions on their customers’ behalf. From the Themis website today, Real Life HFT Hijinks Example: I am trading a small cap stock for a customer today (I leave out the ticker for anonymity […]
If this is actually happening it is quite disturbing.
I have read many things about the HFT circus, but backing away from a matching order is not one of them.
I can’t see how the SEC would allow this. If you logged the tape on multiple occurrences of this sort of action, you’d have a very good case.
[…] ability to execute equity transactions on their customers’ behalf. From the Themis website today, Real Life HFT Hijinks Example: I am trading a small cap stock for a customer today (I leave out the ticker for anonymity […]
This scenario is under your control – depending on where you choose to send your order (e.g., NYSE does flash while BATS, NASDAQ, Direct Edge, etc., do), the order may or may not flash.
And even the exchanges/ecn’s that offer flash do so optionally (though typically you have to opt-out). What happens, though, is that often brokers chase the rebates if they get hit on a flash order without regard for their clients’ overall price drifting – since it may still hit the vwap benchmark.
David,
Thanks for your comment. I will say that theoretically, you can opt out, or choose not to FLASH, just as you can theoretically choose to opt out of having your personal information shared on websites and marketing etc. In reality traders and brokers use third market DMA platforms. Your provider may or may not have written in the code to opt in or out of FLASH, or BATS’s version, or EDGX’s version, and so on. Have they? And if you are retail, using Fidelity or Schwab or Ameritrade, for example, do they give you the opportunity to send in your order and not FLASH? Do you have the ability to control that?
Again thanks for weighing in.
Sal
Sal,
Really appreciate your blog.
I’m not a trader – I’m a vendor. Our application (for sellside brokers) absolutely lets brokers opt out and we notified our users when flash became available that they could choose to opt out. This includes our brokers who choose to use our app to provide DMA to buysides.
But opting out as a broker is difficult. It means that you will lose out on some rebates (and possibly some liquidity) and without any guarantee of changing the actual price of the stock, as other people aren’t opting out. And certainly the exchanges have a different view of flash than you do – they believe it offers more liquidity to the broker and to the HFT, rather than simply more information to the HFT. So this is the way they promoted/marketed it.
Sal,
This is a great blog. Very informative. This example of blatent “backing away” seems to repeat quite often. Seems like much of the time nothing trades at all, and when I call the exchange to inquire about my execution (or lack therof) I am told that the offer cancelled before my order was received.
Question is this: Why would it be to someone’s advantage to do this? If I post a quote and do not execute any shares, I don’t get any rebate from the exchange for providing liquidity. Why would I want to post a quote, and then cancel it just because someone is taking the offers, If I have a quote out there would I want to get taken so that I can get my rebate? I can’t get my quarter penny a share unless my offer gets taken, right?
Dcraig,
I’d think that the HFT is establishing two things:
1. That the quote is from an algo or pegged at the exchange (as it moves up so quickly)
2. What the upper market is – based on when other sellers step in (presuming the HFT is selling) and based on when the buyer stops chasing the quote.
So it lets them walk the market up to the top level, before executing.