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Stealthy = Inconceivable ; Another Real World HFT example.

23

October, 2009

I like examples.

My client routed her small stray sell order (about 5,000 shares)  to a well-known electronic brokerage firm’s stealthy algorithm, which utilizes dark pool aggregation, and has a very cool macho helicopter-military-like name.  These are the facts.

The stock: small cap OTC restaurant stock, ticker left out of the discussion. Average daily volume = 62,000 shares

The bid/ask: 28.66 28.68 200 shares up

The situation :

1) Very cool macho helicopter-military-like named Algo gets the order. It is a “dark” algo.

2) The stock drops from 28.66 – 28.68, to 28.61 – 28.64. No shares trade. The stock dropped only when she entered the

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2 Responses to “Stealthy = Inconceivable ; Another Real World HFT example.”

  1. Brennan Carley
    October 23rd, 2009 at 4:12 pm
    avatar

    Sal, this is interesting, but I have two problems with it:

    First, it is always easy to find examples that make a point, even though those examples may be outliers. How typical is this example?

    Second, how do you show that this is due to HFT? Traders have had quotes move against them on no/low volume long before anyone heard of HFT. I don’t see any causality here.

    What would be interesting is to see some solid quantitative analysis of trade execution quality. When I was at NYFIX we used QSG to do some analysis, and the data that I saw showed that the Millennium dark pool provided better executions for some categories of names, worse for others.

    I have yet to see any objective analysis that shows the impact of HFT.

    Brennan

    (In the interest of disclosure, while I have friends at NYFIX and QSG, I don’t currently have any professional relationship with either firm, don’t own any of their stock, etc..)


  2. sarnuk
    October 23rd, 2009 at 8:47 pm
    avatar

    Brennan,

    I hope you are well. We respect you greatly, and long for the good old days at Instinet. Let’s connect and we can talk. In the meantime, check out the article in Barron’s this weekend that Joe is linking to this morning. It cuts to the meat of how the markets have changed, and why examples like the one I have pointed out are occurring. Some studies are coming; they were initially slow to come out for two reasons: 1) lack of incentive 2) lack of access to data. I would love to see a tag on orders called HFT.

    Best,
    Sal


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