This astonishing GIF comes from Nanex, and shows the amount of high-frequency trading in the stock market from January 2007 to January 2012. (Which means that the Knightmare craziness of last week is not included.) The various colors, as identified in the legend on the right, are all the different US stock exchanges. You might think there are only two stock exchanges in the US, but you’d be wrong: there are only two exchanges where stocks are listed. There are many, many more exchanges where stocks are traded. http://blogs.reuters.com/felix-salmon/2012/08/06/chart-of-the-day-hft-edition/
High Frequency Trading (HFT) has warped the stock market. Literally millions and billions of trades are made lasting only micro-seconds, sometimes pulled just before completion, affecting the stock price up or down, then entering again to buy or sell at that newly affected price - scraping profits off of manipulating transactions within the market system - not based on buy and hold. It's what the day-traders of the 80's and 90's used to do - only done over micro-second intervals, not hours or days.
One of the points here is that there is a chance to generate some revenue and hold down the manipulation of the market by adding small transaction fees - particularly for these rapidly traded transactions - not for your purchase of XYZ Inc. for dividend or long-term investment.
If not "significant losses will end up being borne by investors with no direct connection to the HFT world" - and just like in the 2008 market collapse, the guys with the computers and suits will profit, while the rest of us take it in the shorts.
td
Update from a SlashDot comment on the post - where I first saw the HFT article.
by cpm99352 (939350) on Tuesday August 07, @07:51PM (#40911727)
To repeat my comments from just a few days ago [slashdot.org] , the fine article [caseyresearch.com] states on page 4:
Many HFTs will make near-simultaneous trades on different exchanges and profit because of the delay in one of the exchanges. An example will help me explain: let’s use the NASDAQ and EDGE exchanges, and say that ABC stock is trading at $1.00. The HFT will send a bunch of quotes (offers) to NASDAQ and EDGE, trying to sell ABC stock at $1.01. Once the NASDAQ order is accepted, the HFT can simultaneously cancel the $1.01 sell order on the EDGE exchange and replace it with a buy order at the original price of $1.00. EDGE immediately accepts that $1.00 order, because its system has not caught up to the new price of $1.01, and the HFT’s net position becomes zero. This is possible because of latency, which is jargon for delay in the system. The net result is, the HFT captures a $0.01 arbitrage. By scalping this tiny amount from many trades, the profits add up quickly
Let's repeat: the HFTs are putting orders on the system for which they have no intention of fulfilling. This is a violation of SEC rules, yet the SEC does nothing. There was an AC responder to my post who made a blanket denial cancellations were happening. Care to respond?
Many HFTs will make near-simultaneous trades on different exchanges and profit because of the delay in one of the exchanges. An example will help me explain: let’s use the NASDAQ and EDGE exchanges, and say that ABC stock is trading at $1.00. The HFT will send a bunch of quotes (offers) to NASDAQ and EDGE, trying to sell ABC stock at $1.01. Once the NASDAQ order is accepted, the HFT can simultaneously cancel the $1.01 sell order on the EDGE exchange and replace it with a buy order at the original price of $1.00. EDGE immediately accepts that $1.00 order, because its system has not caught up to the new price of $1.01, and the HFT’s net position becomes zero. This is possible because of latency, which is jargon for delay in the system. The net result is, the HFT captures a $0.01 arbitrage. By scalping this tiny amount from many trades, the profits add up quickly
Let's repeat: the HFTs are putting orders on the system for which they have no intention of fulfilling. This is a violation of SEC rules, yet the SEC does nothing. There was an AC responder to my post who made a blanket denial cancellations were happening. Care to respond?
Chart of the day, HFT edition | Felix Salmon:
"The stock market today is a war zone, where algobots fight each other over pennies, millions of times a second. Sometimes, the casualties are merely companies like Knight, and few people have much sympathy for them. But inevitably, at some point in the future, significant losses will end up being borne by investors with no direct connection to the HFT world, which is so complex that its potential systemic repercussions are literally unknowable. The potential cost is huge; the short-term benefits are minuscule. Let’s give HFT the funeral it deserves."
'via Blog this'
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