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HFT liquidity vaporizes at the slightest hint of unusual behavior. These algorithms are designed to function in 'typical' markets, and their authors don't want

• tptacek 12y ago
  That's dramatic hyperbole. The event people think of when we talk about electronic liquidity "vaporizing" is the Flash Crash. The Flash Crash was a series of mistakes whose impact was profound enough that nobody could trust market data; the system, in its corrupted state, was in fact untrustworthy, and the idea of providing liquidity across it seems in retrospect pretty dubious. Unusual things happen all the time in the markets. Many of those unusual events involve bugs and errors in the exchanges. Liquidity does not routinely vanish from the markets in response to those events. How many major "evaporations of liquidity" can you name in the last several years apart from the Flash Crash? 5? 10? How do you think those counts will compare to liquidity during the specialist system? Warren Buffett's favorite business book, _Business Adventures_, opens with a chapter on a liquidity crisis from the 1960s so profound that the market data technology of the day was backed up several hours --- that's how long you'd have to wait simply to see what the current price of a stock was.