HFT Shenanigans appeared first on Floating Path

With HFT Shenanigans, Floating Path looks to highlight some of the crazier examples of high frequency trading running amok in the markets while bringing to light developments relating to the HFT industry.

DAX Flash Crash

Thursday morning, coinciding with the ECB’s release of its decision on interest rates, Germany’s DAX index suffered from a flash crash. The entire market dropped 2% in 410 milliseconds on 1488 contracts in 491 trades, according to Nanex.

HFT Shenanigans DAX Flash Crash 600x400 HFT Shenanigans: More Cards In The Stacked Deck

Zooming in on the next chart which shows less than one full second of time, we can see that the DAX did not drop straight down. The upticks in price would seem to rule out a single bad or fat-finger order.

HFT Shenanigans DAX Flash Crash 2 600x400 HFT Shenanigans: More Cards In The Stacked Deck

Early News Again..Or Still

Scott Patterson put out an excellent piece at the Wall Street Journal on news wires and their ability to deliver not just economic data, but specific company data (like earnings releases) milliseconds early to high paying customers. While this practice is no doubt rampant and Patterson’s ultimate employer, Dow Jones, likely is a participant, it is yet another card in HFT’s stacked deck.

Breaking down an earning’s release by Ulta Salon Cosmetics & Fragrance, he does a great job showing how someone was able to get out of nearly a million dollars worth of Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) before the stock dropped as slower participants received the bad numbers.

Business Wire issued the company’s earnings, which missed analysts’ forecasts, about 150 milliseconds after 4 p.m., according to a person familiar with the timing of the release…Within about 50 milliseconds, nearly $800,000 of Ulta’s stock was sold on stock exchanges in a series of rapid trades. But major news wires hadn’t yet distributed Ulta’s earnings, according to the news wires. Bloomberg News issued the release 242 milliseconds after 4 p.m. Dow Jones issued it 464 milliseconds after 4 p.m. Thomson Reuters Corp. issued the release about one second after 4 p.m.

That 300 millisecond head start to Business Wire subscribers saved them plenty of losses as ULTA dropped from $122 to $118 in that final second of trading and opened the next day below $95. A quote from Joseph Spano, head of high frequency trading firm Spano Trading, sums up the entire process. ”The faster you want the data, the more it costs, I guess this is capitalism.”

WhiteWave Foods Co (NYSE:WWAV)

1 hour and 20 minutes, 2.04 million quotes, and 3 (three) trades for 400 shares total. It’s not uncommon for HFT’s to test algorithms during pre-market hours and produce some wild quote or trade patterns. This could be the case for White Waves Food Company when their stock was subjected to an onslaught of quotes, curiously almost all occurring on Direct Edge according to Nanex data.

New HFT Study

new French studyRock Around the Clock: An Agent-Based Model of Low- and High-Frequency Trading, has shown that HFT’s ability to place and cancel orders faster than most other participants gives them an edge and creates havoc in the market. According to the authors, HFT order cancellations “play a key role in shaping asset price volatility and the frequency as well as the duration of flash crashes.”

None of this may be news to those closely following the topic, but as Mark Melin shows,these findings fly in the face of a recent U.S. study which claimed no ill effects of high frequency trading. The French study, however, was crystal clear in its findings that the advantage always goes to the house.

..we find that the presence of high-frequency trading increases market volatility and plays a fundamental role in the generation of flash crashes…Our results suggest that order cancellation strategies of HF [high frequency] traders cast more complex effects than thought so far, and that regulatory policies aimed at curbing such practices should take such effects into account.