More Heat

Yesterday we alerted you to three articles addressing HFT and their regulation that appeared over the weekend. Today we would like to highlight a few more. The articles are a quick read, and we encourage you to dig in. The pieces all ran in the Financial Times (FT): Making Sense of a Million Megabytes, HFT Speed Will Not Always Bring a Bonanza, and Speed and Market Complexity Hamper Regulation.

Given that volatility is expected to stick around a while (in fact some of the new volatility we believe to be structural), we enjoy sharing pieces with you that can aid in our collective understanding of our market structure.

Some Quotable Quotes from the articles:

“A lot has changed since the buttonwood tree,” says Mr Hunsader, referring to the fabled site of the first trades in lower Manhattan more than 200 years ago. “When you trade with someone face to face, you can’t suddenly withdraw your quote after it’s too late or pretend you didn’t trade with them earlier in the day. Over time, that sort of behaviour will either get you banned, a black eye, or both,” he says.

“The problems with a lot of the data that people use to study high-frequency trading is that it is either too old, because things change quickly, or uses one-second, or bigger, averages. That doesn’t work when what used to be a whole day’s trading plays out over 100 milliseconds,” says Mr Hunsader.

At the same time, high-frequency traders are in a race to trade at the speed of light. Trades are now routinely measured in microseconds – millionths of a second – and increasingly pushing at the nanosecond barrier. According to Nanex, a US data provider, a single second on another September day saw 19,000 quotations and 3,000 individual trade executions in Yahoo, the internet company. The Yahoo trade cited by Nanex had another curious feature. Based on official timestamps, Nanex says, Yahoo trades were executed on quotes that did not exist until 190 milliseconds later. It looked like trading broke the speed of light, although is more an indication that official records are struggling to keep up.

On September 12 a small yet highly portentous US markets statistic was smashed out of sight. At one point during the day no fewer than 6.1m data messages per second were being pinged around US trading venues, according to industry data complier The truly eye-opening part is the speed of growth – only a year ago, the record for US markets stood at 1.5m.

Analysts at Birinyi Associates, a stock market research firm, compared the effect of high-speed traders on high-volume days in August with holiday crowds in shopping malls. “The noise level rises, heat and space are less available and the real purpose of the mall – to engage in commerce by selling shoes and hamburgers – is not enhanced and actually made more difficult,” they wrote in a recent letter.

We love that last quote from Birinyi Group especially, likening HFT’s impact to shopping at the mall during holiday season!