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MadMarketScientist

Has High Frequency Trading Ruined The Stock Market For The Rest Of Us?

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If you are an investor, high-frequency trading (HFT) is a part of your life even if you don't know it. You have likely purchased shares offered by a computer or sold shares purchased and then instantly sold by another computer. HFT is controversial. Traders disagree with each other and studies contradict other studies, but regardless of the opinions, what is most important is how HFT affects your money.

 

What Is HFT?

HFT is a broader term for various trading strategies that involve buying and selling financial products at extremely high speeds. Computers can identify market patterns and buy or sell these products in a matter of milliseconds based on algorithms or "algos."

 

One strategy is to serve as a market maker where the HFT firm provides products on both the buy and sell sides. By purchasing at the bid price and selling at the ask price, high-frequency traders can make profits of a penny or less per share. This translates to big profits when multiplied over millions of shares.

 

 

Does It Hurt the Market?

One would think that because most trading leaves a computerized paper trail, it would be easy to look at the practices of high-frequency traders to provide a clear-cut answer to this question but that is not true. Because of the volume of data and the firms' desire to keep their trading activities secret, piecing together a normal trading day is quite difficult for regulators. Those who debate this issue often look at the "flash crash."

 

On May 6, 2010, the Dow Jones Industrial Average mysteriously plummeted 10% in minutes, and just as inexplicably, rebounded. Some large blue chip stocks briefly traded at one penny. On Oct. 1, 2010, the Securities and Exchange Commission (SEC) issued a report blaming one very large trade in the S&P e-mini future contracts, which set off a cascading effect among high-frequency traders. As one algo sold rapidly, it triggered another. As more sell stops hit, not only were high-frequency traders driving the market lower, everybody, all the way down to the smallest retail trader, was selling. The "flash crash" was a financial snowball effect.

 

This incident caused the SEC to adopt changes that included placing circuit breakers on products when they fall past a certain level in a short period. In the wake of the flash crash, many asked whether imposing tighter regulation on high-frequency traders made sense, especially since smaller, less visible flash crashes happen throughout the market with regularity.

 

Does It Hurt the Retail Investor?

What is important to most of the investing public is how HFT affects the retail investor. This is the person whose retirement savings are in the market, or the person who invests in the market in order to gain better returns than the near non-existent interest that comes from a savings account. A recent study shed some light on this question.

 

According to The New York Times, a top government economist found that HFT firms are taking significant profits from what they call traditional investors, or those who are not using computer algorithms.

 

Studying the S&P 500 e-mini contracts, researchers found that high-frequency traders made an average profit of $1.92 for every contract traded with large institutional investors and an average of $3.49 when they traded with retail investors. This allowed the most aggressive high-speed trader to make an average daily profit of $45,267 according to the 2010 data. The paper concluded that these profits were at the expense of other traders and this may cause traders to leave the futures market.

 

Although the authors did not study the equity markets where high-frequency traders account for a large amount of stock trading volume - possibly 70% or more, according to some reports - they say it is likely that they would reach the same conclusions.

 

The Bottom Line

The overall sentiment that the small investor cannot win in this market is beginning to proliferate. Some blame the massive amount of uninvested cash as proof that many have given up and lost confidence in the markets. This has become such a problem that even high-frequency traders are looking to other world markets to find the liquidity they need to conduct operations. Regulators around the world are looking at ways to restore consumer confidence in the stock market. Some have proposed a per share trading tax while others, such as Canada, have increased the fees charged to HFT firms.

 

Because of the relative newness of HFT, the process of regulation has come slowly, but one thing that does appear to be true is that HFT is not helping the small trader.

 

http://www.investopedia.com/financial-edge/0113/has-high-frequency-trading-ruined-the-stock-market-for-the-rest-of-us.aspx

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Why are regulators even allowing HFT ? HFT could destroy not only stock markets but the ideologies of corporate financing in near future if it stays like this...

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Nice blog... lot of new information for me! But I don't trade stocks. The author writes:

 

Futures market microstructure should be the model and standard for reforming our equities markets.

 

I see 2 great concerns for HFT. One is that the HFT trading is speeding up the market making it more risky for traders and the second is that HFT is taking away normal liquidity which is another form of risk. Important to note that HFT should be defined as trading strategies that require and take advantage of speed advantages requiring co-location and unavailable to other traders and that it doesn't include day traders, scalpers, or other technical traders.

 

It does seem that equities have been hardest hit by HFT and that equities proprietary traders are the hardest hit followed by retail day traders. I would add its not just HFT but also dark pools and all manner of shenanigans that compromise the NBBBO pricing mechanism.

 

Curtis

-

Home - OrderFlowDashPro

Edited by Predictor

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  Patuca said:
hell no it doesn't ruin trading. bring on the hft's.. the more... the better.

 

Amen.

 

The net effect of ultra-HFT is greater liquidity and more stable prices. The flash crash did not come from normal HFT but from "rogue code" and is but one instance.

 

My guess is that the loudest complaints come from those that were never really profitable anyway and have never really taken responsibility for the downs in their life.

 

A favorite quote of mine is:

 

"Success in the markets is not about instinct, divine inspiration or spontaneous intellectual combustion. It is about intelligent data processing, sound method and the management of risk and resource that is both effective and adaptive to change."

 

HFT is a fact of life and trading - if you can't deal with it other than to blame it for your own weaknesses - then you are in the wrong game.

 

UB

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Whether the blame lies on HFT or other factors that led to a mistrust of the market I cannot say, but the market is definitely void of the retail traders it once had.

 

A 55 Tick chart on the TF used to be a fast moving chart, you can set it to 15 ticks now and it still wont be as fast as the 55 once was.

 

And you know that the difference is caused by a huge decrease in the number of small or "retail" traders trading the market.

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I've been trading futures for 30 years. Anyone who thinks that HFT has not negatively affected the trading environment is a fool. When I was in the pit people would blame order fillers for reducing order flow to traders, turns out this was true imagine knowing where all the orders lie in the market and being able to place your own personal orders ahead of those orders. Dual trading was eventually outlawed.

Order fillers found a way around this problem by creating a friend on the top step of each pit that they could trade with during the day and gave peference to above all other traders. Although every honest trader in the pit knew that this was taking place there was very little that we could do about it, occasionally the exchange would find collusion and issue fines. Once again true free market activity was inhibited by the actions of the few. HFT is worse than top step trading and order filler trading combined. The profits of the many have now been reduced to the pockets of the few. Competing in this arena requires anywhere from 1 million to 100 million in infrastructure, if that doesn't say this market is unfair I don't know what does. Sure there are some prop firm traders that are being allowed to trade enormous size with very little of their own money being put at risk but for those of us that use our own money to trade , competing in this environment is very difficult if not impossible.

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  sunshinejim said:
competing in this environment is very difficult if not impossible.

 

Hi Sunshinejim,

 

It's great to have seasoned traders with experience on the floor of an exchange contibuting here - I hope you'll find the time to contribute to TL often.

 

Given your thoughts above, and the fact that you continue to trade, where do you feel that the possible advantage now lies for retail traders without vast amounts of capital and Aurora rackspace?

 

Regards,

 

BlueHorseshoe

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  liahwy said:

And you know that the difference is caused by a huge decrease in the number of small or "retail" traders trading the market.

 

I'm not so sure about that - I believe "retail" accounts for, at best, a fraction of trading volume, and always has done.

 

If you can identify that there is a difference, why cant you define it and adapt to profit from it?

 

BlueHorseshoe

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  Gekko78 said:
I just happened to stumble upon this thread. I am actually writing a paper about this right now in a class for my Masters program.

 

I'm probably stating the bleeding obvious here, but have you read 'Dark Pools'?

 

One of the issues is that HFT is an umbrella term, and the only thing that all such operations have in common is the frequency with which they trade. Some use traditional strategies such as stat arb but at lightning speeds, where others exploit new loopholes that are only available with the advantage of speed (and often strong relationships with the exchange), relating to latency, server jamming, and gaming the order book.

 

There's another good book written by someone who worked at Citadel setting up the HFT infrastructure, but I can't remember the title or author - I'll try and post this tomorrow for you.

 

BlueHorseshoe

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Pre hft leaves basically the same footprints and chart patterns...etc as present day htf. It might affect if you are scalping 1 to 3 ticks but is does not affect swing trading very much... if any.....if you know how to pick only trades that have a 40% to 60% probability. At least i haven't found much difference but then i could a tad bit off of my rocker....,:haha: most people think i am.. I could care less:cool:

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  liahwy said:
Whether the blame lies on HFT or other factors that led to a mistrust of the market I cannot say, but the market is definitely void of the retail traders it once had.

 

A 55 Tick chart on the TF used to be a fast moving chart, you can set it to 15 ticks now and it still wont be as fast as the 55 once was.

 

And you know that the difference is caused by a huge decrease in the number of small or "retail" traders trading the market.

most got there ass burn't between 2007 and 2011 and are onthe back porch licking their wounds.

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  BlueHorseshoe said:
I'm probably stating the bleeding obvious here, but have you read 'Dark Pools'?

 

One of the issues is that HFT is an umbrella term, and the only thing that all such operations have in common is the frequency with which they trade. Some use traditional strategies such as stat arb but at lightning speeds, where others exploit new loopholes that are only available with the advantage of speed (and often strong relationships with the exchange), relating to latency, server jamming, and gaming the order book.

 

There's another good book written by someone who worked at Citadel setting up the HFT infrastructure, but I can't remember the title or author - I'll try and post this tomorrow for you.

 

BlueHorseshoe

 

Actually Yes! and it was because of a posting that I saw you made last week. It was very ironic .......I am about halfway through it and it is a great book. If you remember the name of that other book let me know.

 

Thanks ! :)

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  BlueHorseshoe said:
I'm not so sure about that - I believe "retail" accounts for, at best, a fraction of trading volume, and always has done.

 

If you can identify that there is a difference, why cant you define it and adapt to profit from it?

 

BlueHorseshoe

 

I should have clarified that. I wasn't referring to overall volume when I said "you know the diff was because of a reduction in Retail traders" The TF had a lot of 1 lot traders. With a 55 tick chart most (almost all) of the transactions that made a candle print were 1 contract trades. You could watch the Time & Sales book along side and see that. There were some 10 lots and of course when the Bigs were in larger order sizes but mostly the candle print was made up of 1 lot trades.

 

So the situation is that it now takes longer for 15 transactions to print a candle than it used to take 55 transactions to print a candle. This difference in time is due to a lot less 1 contract traders.

 

So while they were small traders and you may not notice a big difference in the overall volume it did however make a huge difference at a micro level.

 

I had developed a system that was based upon the speed of the market. Its too long to go into here but basically the side that has the speed wins. This is why I was using such fast moving charts. With practice you could become very good at reading the changes in speed. For this reason I would use Tick and not Vol charts because I wanted to read what the majority of traders were doing not the number of contracts. For example: Lets say that it took 3 seconds for 1 55 tick candle to print, or said another way it took 3 secs for 55 transactions to happen, but then 4 candles print in the same amount of time. You have a situation where 4 times as many Traders got excited about the market at that point in time vs the previous points in time. So what changed? Why did their level of enthusiasm increase? I don't really care its not important I just want to see if their enthusiasm persists and then capitalize on it (the side with the speed wins). Its more complicated than that but you should get the idea. Anyway if the market is void of these speed changes for you to pick up on then the strategy is useless which has been the case ever since the number of traders dramatically dropped off. Its like trying to read a room full of people if they all just sit there with blank expressions on their face.

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  Gekko78 said:
Actually Yes! and it was because of a posting that I saw you made last week. It was very ironic .......I am about halfway through it and it is a great book. If you remember the name of that other book let me know.

 

Thanks ! :)

 

Michael Durbin - High Frequency Trading

 

The nuts and bolts of HFT infrastructure, and a glimpse of strategies.

 

BlueHorseshoe

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I am seeing the average daily volume of ES dropping for the most part of the past 12-18 months.

 

I am not sure if it was because of HFT but I would argue that at some breaking point the HFT would not be able to find enough trading profits if the volume of ES is low enough?

 

That is, if there are enough HFT going on, wouldn't they trade against each other and eventually they would find no real edges / not enough profits in their systems? :2c: As such, the ever decreasing daily volume is a sign of this? :2c:

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  FFTrader said:
I am seeing the average daily volume of ES dropping for the most part of the past 12-18 months.

 

I am not sure if it was because of HFT but I would argue that at some breaking point the HFT would not be able to find enough trading profits if the volume of ES is low enough?

 

That is, if there are enough HFT going on, wouldn't they trade against each other and eventually they would find no real edges / not enough profits in their systems? :2c: As such, the ever decreasing daily volume is a sign of this? :2c:

they have been trading against each other from the start of the molasses.

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  Patuca said:
they have been trading against each other from the start of the molasses.

 

If they are fighting against one another, the odd loters are not concerned and probably should find a way of profiting from it !?

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This is most likely true, the HFTs are entering the cannibal phase but that will only lead to fewer competing HFTs, they are never going away.

We need to demand that our exchanges provide free markets that do not favor one party over another. Exchange leaders have argued that allowing this HFT innovation to proceed is facilitating a free market. This is patently false, if it were true than the actions of the Hunt brothers in the silver market would not have been wrong, they were true pioneers in trying to corner the market. There will always be gamers in any system and HFT is no better than the Hunts, just because they don't drive tVhe market in a single direction does not mean they are not cornering the market thru volume and order book manipulation.

Watch for new exchanges to develop that will not allow any order to enter the market in under a certain time limit nor can that order be canceled until it has been resting in the market for a set time limit. The only way to level the playing field is to provide retail clients their own exchange. One where honesty and integrity rule and not special interest groups.

Shame on the CME for calling themselves leaders in innovation and for their free market hyperbole.

 

There will be many that disagree with me but having 20 plus years of pit trading and 10 years of electronic have taught me to understand the dynamics of both systems. I was all for electronic trading and in the beginning many professional traders like myself flourished without these market manipulators. When the exchanges allowed them unlimited and biased access to our markets.....well sadly most traders careers have crashed.

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I find this discussion interesting and one that is best said by UrmaBlum

 

""Success in the markets is not about instinct, divine inspiration or spontaneous intellectual combustion. It is about intelligent data processing, sound method and the management of risk and resource that is both effective and adaptive to change."

 

HFT is a fact of life and trading - if you can't deal with it other than to blame it for your own weaknesses - then you are in the wrong game."

 

I write algos, and am a computer geek. I personally find HFT equalizing. Before algos the stock market was reduced to a set of "men" like in the movie Floored. In fact I loved the movie for the one quote said by the trader, "before we were making fun of the nerds and now they own us". Yeah exactly! I remember how back then their attitude was, "suck it up pumpkin". Now I say to anybody who whines and cries that the market is destroyed, "suck it up pumpkin!"

 

Do I sound angry? Partially I am, because to a degree I am laughing as the market is now a quants dream. I can live with that. Does it mean many will not make money? No, in fact not true at all. You just have to adapt and change.

 

I don't write HFT's for myself because I don't have the desire to enter an arms race. But I do write algos that catch when HFT's and markets make "mistakes" and "mispricings".

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I don't think that HFT's are bad for the markets so long as they play by the same rules we retail traders play by. More volume = more liquidity which is good for the day trader. However, I have heard some complaints that HFT's can place "feeler" orders and quickly remove them to slightly manipulate small market movements. If they execute the same orders the rest of us do, then welcome to the party. HFT's did not cause the flash crash, but algos did. A flash pop is just as likely as a flash crash, but no one would complain about a +1,000 pt move in the Dow regrdless as to whether it was value based or not. Market behavior continually evolves. Just use good money management techniques and you'll do fine regardless as to the new players and the tactics they employ.

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suck it up pumpkin :rofl: :rofl: gotta like that. if anything they are making the market more precise...more liquidity as they operate off..well "perfect exact science" aka as math calculations devoid of emotionalism that humans have. our friend mitsubishi with out a doubt must love the algo's and hft's as he believes in trading with perfect math..right mitzy? they could affect ultra scalpers but not swing trading much. besides they are constantly evolving..if you are making money now, then you are beating them..so what is the worry? they are responsible for 70% or so of the volume. now a rogue algo/hft is a horse of a different color. but as long as they operate normally it is business as usual just more precise and more liquidity.

 

SUCK IT UP PUMPKIN :rofl: :haha: :rofl:

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Gold’s Outlook – Uptrend may continue, but US jobs data could trigger profit-taking. Always trade with strict risk management. Your capital is the single most important aspect of your trading business.   Please note that times displayed based on local time zone and are from time of writing this report.   Click HERE to access the full HFM Economic calendar.   Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding of how markets work. Click HERE to register for FREE!   Click HERE to READ more Market news.   Michalis Efthymiou HFMarkets   Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. 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    • Date: 31st March 2025.   Trump Confirms Tariffs on All Countries, Sending Stocks Lower.   The NASDAQ continues to trade lower due to the US confirming the latest tariffs will be on all countries. In addition to this, bearish volatility also is largely due to the higher inflation data from Friday. The NASDAQ declines to its lowest price since September 11th 2024. Core PCE Price Index - Inflation Increases Again! The PCE Price Index read 2.5% aligning with expert forecasts not triggering any alarm bells. However, the Core PCE Price Index rose from 0.3% to 0.4% MoM and from 2.7% to 2.8% YoY, signalling growing inflationary pressure. This increases the likelihood that the Federal Reserve will maintain elevated interest rates for an extended period. The NASDAQ fell 2.60% due to the higher inflation reading which is known to pressure the stock market due to pressure on consumer demand and a more hawkish Federal Reserve. Boston Fed President Susan Collins recently commented that tariffs could drive up inflation, though the long-term impact remains uncertain. She told journalists that a short-term spike is the most probable outcome but believes the current pause in monetary policy adjustments is appropriate given the prevailing uncertainties. Although, certain investment banks such as JP Morgan actually believe the Federal Reserve will be forced into cutting rates. This is due to expectations that the economy will struggle under the new trade policy. For example, JP Morgan expects the Federal Reserve to delay rate cuts but will quickly cut towards the end of 2025. Market Risk Appetite Takes a Hit! A big factor for the day is the drop in the risk appetite of investors. This can be seen from the VIX which is up almost 6%, Gold which is trading 1.30% higher and the Japanese Yen which is the day’s best performing currency. Most safe haven assets, bar the US Dollar, increase in value. It is also worth noting that all indices are decreasing in value during this morning's Asian session with the Nikkei225 and NASDAQ witnessing the strongest decline. Previously the stock market rose in value as investors heard rumours that tariffs would only be on certain countries. This bullish swing occurred between March 14th and 25th. Over the weekend, President Donald Trump indicated that the upcoming tariffs would apply to all countries, not just those with the largest trade imbalances with the US. NASDAQ - Technical Analysis In terms of technical analysis, the NASDAQ continues to obtain indications that sellers control the price action. The price opens on a bearish price gap measuring 0.30% and trades below all Moving Averages on all timeframes. The NASDAQ also trades below the VWAP and almost 100% of the most influential components (stocks) are declining in value.     The next significant support level is at $18,313, and the resistance level stands at $20,367.95. Key Takeaway Points: NASDAQ falls to its lowest since September 2024 as the US confirms tariffs on all countries, adding to inflation concerns. Core PCE inflation rises to 0.4% MoM and 2.8% YoY, increasing the likelihood of prolonged high interest rates. Investor risk appetite drops as VIX jumps 6%, gold gains 1.3%, and safe-haven assets outperform. NASDAQ shows strong bearish momentum, trading below key technical levels with support at $18,313 and resistance at $20,367.95. Always trade with strict risk management. Your capital is the single most important aspect of your trading business.   Please note that times displayed based on local time zone and are from time of writing this report.   Click HERE to access the full HFM Economic calendar.   Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding of how markets work. Click HERE to register for FREE!   Click HERE to READ more Market news.   Michalis Efthymiou HFMarkets   Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
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