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Interesting observation [1] on the lack of liquidity in this event: "What's disturbing is the depth of the market during the event -- or rather, the utter lack

Interesting observation [1] on the lack of liquidity in this event: "What's disturbing is the depth of the market during the event -- or rather, the utter lack thereof. You can see the size map essentially disappear as the market's depth goes "cold." One of the classical arguments raised by proponents of high-frequency trading and computer-based trading in general is that it "adds system liquidity." But if that was all it did there shouldn't be any impact on the market's price if that liquidity disappears. That is, if HFT and computer-based trading merely add liquidity then there should be no directional bias in their decisions nor in the outcomes when it goes away. But there are -- repeatedly. We don't see liquidity evaporate during "flash skyrocket shots" in the general sense. Instead, we see it happen during sharp downward moves. The original purpose of the specialist system on the NYSE was to interject a human being in the trading environment who had a duty to buy when there were no other orders to do so, and to sell when there were only buy orders. In exchange for the risk of getting caught glad-handed during severe events the specialist was given the privilege of making a spread the rest of the time. Now we have computers that the operators claim provide the same function as the old specialists. But in fact they do not, because there is no duty associated with their actions. We allow them to effectively front-run through physical location and latency advantages (that is, they see quotes and price before anyone else and thus can react faster than anyone else) and as a result during normal circumstances they effectively get to skim just as the specialists did. But they have no duty to remain online and provide that liquidity during severe market events as the specialist did and does." [1]: http://market-ticker.org/akcs-www?post=220071 http://market-ticker.org/akcs-www?post=220071

gd1 14y ago
>In exchange for the risk of getting caught glad-handed during severe events the specialist was given the privilege of making a spread the rest of the time. No, they had old fashioned ways of withdrawing their liquidity. Not answering the phone, or pretending they can't see you across the pit. >We allow them to effectively front-run through physical location and latency advantages (that is, they see quotes and price before anyone else and thus can react faster than anyone else) That isn't front-running. Front-running means seeing the order flow before it reaches the matching engine and stepping in front. >You can see the size map essentially disappear as the market's depth When depth levels are taken out you have a great big empty space between the bid and the ask. It may have been 20 ticks wide yesterday (it was about 8 on eurostoxx, and those are chunky ticks). It's empty because someone has traded through those levels and taken all of the liquidity, so naturally it takes time for new orders to replenish the market. It isn't only because participants are withdrawing liquidity. Also, greater volatility means a greater dispersal of opinions about the correct price - so even when orders are put back in following the shock they are likely to be spread over a wider range of ticks. If you're a market maker (algorithmic or otherwise) who has just been smashed on the bid and seen the market drop 30 ticks, where do you put your new bid in? The disinformation campaign by Wall Street against the HFT bogeyman is impressive. It isn't much different to record labels against MP3s or any other industry that is being disrupted by technology, but it is surprising to see a lot of the HN crowd falling for it.
theorique 14y ago
We allow them to effectively front-run through physical location and latency advantages (that is, they see quotes and price before anyone else and thus can react faster than anyone else) and as a result during normal circumstances they effectively get to skim just as the specialists did. But they have no duty to remain online and provide that liquidity during severe market events as the specialist did and does. The difference is that there are no regulatory barriers to entry. Anyone else who wants to is completely free to play this game - buy the computers and the connectivity and "see quotes and prices before anyone else". The comment suggests that HF market makers are taking risk-free profits, which is untrue.

gd1 14y ago

>In exchange for the risk of getting caught glad-handed during severe events the specialist was given the privilege of making a spread the rest of the time. No, they had old fashioned ways of withdrawing their liquidity. Not answering the phone, or pretending they can't see you across the pit. >We allow them to effectively front-run through physical location and latency advantages (that is, they see quotes and price before anyone else and thus can react faster than anyone else) That isn't front-running. Front-running means seeing the order flow before it reaches the matching engine and stepping in front. >You can see the size map essentially disappear as the market's depth When depth levels are taken out you have a great big empty space between the bid and the ask. It may have been 20 ticks wide yesterday (it was about 8 on eurostoxx, and those are chunky ticks). It's empty because someone has traded through those levels and taken all of the liquidity, so naturally it takes time for new orders to replenish the market. It isn't only because participants are withdrawing liquidity. Also, greater volatility means a greater dispersal of opinions about the correct price - so even when orders are put back in following the shock they are likely to be spread over a wider range of ticks. If you're a market maker (algorithmic or otherwise) who has just been smashed on the bid and seen the market drop 30 ticks, where do you put your new bid in? The disinformation campaign by Wall Street against the HFT bogeyman is impressive. It isn't much different to record labels against MP3s or any other industry that is being disrupted by technology, but it is surprising to see a lot of the HN crowd falling for it.

theorique 14y ago

We allow them to effectively front-run through physical location and latency advantages (that is, they see quotes and price before anyone else and thus can react faster than anyone else) and as a result during normal circumstances they effectively get to skim just as the specialists did. But they have no duty to remain online and provide that liquidity during severe market events as the specialist did and does. The difference is that there are no regulatory barriers to entry. Anyone else who wants to is completely free to play this game - buy the computers and the connectivity and "see quotes and prices before anyone else". The comment suggests that HF market makers are taking risk-free profits, which is untrue.