By: Brandon Rowley
Sean Hendelman has been a leading voice in the high frequency trading debate notably in advocating the idea of an order cancellation tax. Today, The Wall Street Journal added Sean’s thoughts on the causes of the Flash Crash in the lead article titled “SEC Probes Canceled Trades“:
One thing is clear, say traders and regulators: An eye-popping number of the stock quotes entered in the U.S. market’s exchange system are canceled.
For example, on Feb. 18, trading volume on the Nasdaq exchange totaled about 1.247 billion shares, according to data compiled by T3 Capital Management, a New York hedge fund. However, over the course of the same day traders submitted offers to buy or sell stock for roughly 89.704 billion shares. In other words, only 1% of the orders posted on Nasdaq actually traded.
While a portion of cancellations are part of the natural course of trading, Sean Hendelman, chief executive officer at T3, says he believes most of these canceled stock quotes are from traders loading up a stock’s computerized order book with essentially fake bids and offers.
Mr. Hendelman, whose firm employs other high-frequency trading tactics, says the practice creates an inaccurate picture of the true supply and demand for a stock. “People are relying on the [stock quote data] and the data is not real,” he says.
Sean has long been arguing that market participants are relying on liquidity that is not real, particularly in times in stress. Regulators placed their trust in HFT firms to provide liquidity to the markets but then stopped watching. While many HFT firms do not have any duty to provide liquidity, designated market makers (DMMs) and special liquidity providers (SLPs) are offered particular exemptions in exchange for maintaining orderly markets. It is fair to say, coupled with a structural problem between the ‘slow market’ initiated by the NYSE and the lightning speeds of ECNS, that DMMs and SLPs failed in their duty during the Flash Crash.
