Before we get to the study, may we please remind you to tune in to the Congressional Panel on HFT that begins at 9:00 this morning? Invesco’s Kevin Cronin is on Panel I, and he is the only person on that six-person panel who remotely represents investor interests. If you have seen Kevin debate, then you know that it is a lopsided panel, and that the other five don’t stand a chance. This is his prepared Opening Statement.

In addition, today Joe is in Washington DC also, and is participating on the CFTC’s TAC panels on HFT. As you may recall, his panel is attempting to define HFT, and there sure are many differences on that panel as to who should be included in the definition. You’ll learn more soon enough.

Now onwards to the study; as it makes me proud to be an NYU Stern Alum. Vincent Van Kervel is the author of the April 2012 study: Liquidity: What You See is What You Get? His study examines “liquidity provision” by high frequency traders across multiple trading venues, and it examines the behavior of that same HFT when it interacts with you through your broker’s Smart Order Router (SOR).

He develops a model that can predict the effect on liquidity that you can actually access and touch, versus what you initially can see. What he finds is that the deep quotes you see on the stock Exchanges are not what you actually can access. Trades in one venue that get executed result in a cancellation of limit orders on competing venues, the result being that what you see in the quote overestimates what you can actually trade with… by 53%! Additionally, aside from cancelling limit orders on competing venues, the HFTs enter limit orders on the opposite side of the market – the same side as the SOR that hit the bid. So much for smoothening volatility!

Kervel’s model demonstrates what we all intuitively know: the liquidity lie that the stock exchanges and pro-HFT camp flaunts regarding the deep liquidity pools that they provide for you all. His model demonstrates how Lucy holds the football, and when you go to kick it, she yanks it away. And his model also shows that she not only yanks the football away, she throws it at your head after you slip.

This study is worth printing out and filing with your other HFT Academic Studies.