Below is a very interesting interview with a large institutional broker/dealer, complaining about high frequency trading firms. HFT firms are responsible for about 70 percent of the “volume” on the exchanges. They are computer based, and their software authors have rigged the software to benefit from preferential treatment afforded them by the exchanges. In return for multi-million dollar fees paid to the exchanges, the exchanges allow these firms to co-locate their servers right next to the servers of the exchange. 50 milliseconds advantage, might as well be 50 hours.
If you watch the video, you will understand that the volume is fictitious. These firms are not market makers. They are not providing liquidity. They are under no obligation to honor their fictitious bids and offers.
So while the volume looks good, the liquidity is out the window.
This will be evident the next time there is a bearish cycle. Right now, the volatility is churning higher. If the scenario changes, we will be back where we were in Jan/Feb/March of 2008. With bids evaporating, with no liquidity, and a gigantic mess on our hands again.
2ndly, the flash orders allow these hft funds to get a glimpse of every market order that comes on the screen, and gives them the right to step in front of that order before the customer or trader without access to that ‘right’. In other words, if a generic person or fund wanted to hit a bid for 1000 shares, if the bid was showing 10000, the hft fund is allowed and encouraged, to step in front of that order, hit the bid first, and then the 1,000 lot trader is left to his own devices. That 10000 lot order, also, has the tendency to be written so that the whole order is pulled once a 5 lot is hit. Its all done in less than Milli seconds.
But in essence, its legal front running.
Just an interesting idea for a smaller trader to chew on, the next time you can’t get filled on a market order, of you wonder how the bid or offer disappears faster than is humanly possible. That’s because its not humanly possible. Its the computer. So if you have any ideas left at all about scalping these markets, give them up.
You’re only chance is to utilize technical analysis, have your bid and offer resting, use stops judiciously, and wait and hope for the day when in fact there is a level playing field once again.
It won’t happen until there is a major meltdown, and the investigation makes these current practices no longer acceptable.
Good Trading
