High Frequency Trading HFT is here to stay. The Securities and Exchange Commission SEC has an ongoing study of how HFTs impact price action. It continues to develop rules, regulations, and restrictions for this high profile Market Participant Group. HFTs provide liquidity to the Exchanges such as NYSE, NASDAQ, BATS, and ISE which is much needed as a huge amount of trading transactions are now off the exchanges.

Why is this important to you as a Retail Trader? It is important because it affects the stock charts you watch during the day, and how price and volume develop on the stock charts. If you are a Day Trader or a Swing Trader, volume matters and can adversely affect your trading profits if you are unaware of what is going on in the 70+ venues where stocks are traded.

Off exchange activity is not just giant Institutions using Dark Pools, it includes the Retail Broker oligopoly which is also under severe scrutiny by the SEC.

Fortunately, HFT action is obvious on a stock chart. It stands out even on one minute scale charts, which are the smallest time frame Retail Traders can use. Although HFTs trade on the millisecond meaning 6000 to 9000 per second, Independent Investors and Retail Traders can only view the minute so that becomes 60,000-90,000 orders bundled into one minute on your charts.

The first goal for Retail Traders is first to be able to recognize what an HFT triggered pattern looks like on a chart.

How to Identify High Frequency Trading Trigger Orders is by one of two ways:

1. HFTs form a huge long candle at the open of the day on the stock chart. Usually the candle run is extraordinarily long for the chart, and is easy to recognize. Also the percentage gains will be unusually high for that stock.

OR

2. HFTs can create a huge gap up and long candle. This occurs when the HFTs see news on a stock that is being promoted everywhere on retail social media, and retail broker or retail stock chart media. HFTs have specialized algorithms and formulas that quickly scan around the retail social media, chatrooms, and retail broker feeds to find what the retail crowd is watching.

HFTs also use corporate news, press releases, etc. which the HFT can and does trigger on ahead of market open filling the ques with orders. This then forces the Market Maker computers to gap price on that stock, due to unusually high order activity on one side of the trade. By raising the price premarket, the computer Market Maker balances the order flow.

The chart example below for Best Buy Co. Inc. (BBY: NYSE) shows an HFT gap up, that opened many points up due to heavy social media chatter and corporate earnings news.

Martha_Aug_30.jpg

 

The candle gaps, and volume spikes to an extreme. Both are the footprint of an HFT premarket automated triggered huge order flow.

The second goal for Retail Traders is to be able to ANTICIPATE, and plan an entry before HFTs move price.

The third goal for Retail Traders is to enter a stock before these huge gaps, then sell the next day or few days later. Stocks with huge gaps will be under profit taking pressure thereafter.

Summary

Retail Traders need to learn about the Market Participant Cycle, and be able to identify who is in control of price. For BBY on August 23rd HFTs controlled the open price for this stock. Once a gap of this size occurs, entering a stock is just chasing after it and often results in trade losses. Entering before the gap occurs is crucial, and is a visual skill all traders should learn.

Trade Wisely,

Martha Stokes CMT

www.TechniTrader.com

TechniTrader technical analysis using TC2000 charts, courtesy of Worden Bros. Inc.

Disclaimer: All statements are the opinions of TechniTrader, its instructors and/or employees, and are not to be construed as anything more than an opinion. TechniTrader is not a broker or an investment advisor; it is strictly an educational service. There is risk in trading financial assets and derivatives. Due diligence is required for any investment. It should not be assumed that the methods or techniques presented cannot result in losses. Examples presented are for educational purposes only.