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Why High Frequency Program Trading Smells

Posted by Larry Doyle on July 14, 2009 2:24 PM |

Who does not want the American dream?

Get a decent job, save a few bucks, make some reasonable investments, and try to get ahead. As part of that process, there is a premise that our government officials and market regulators will keep the playing field level.

Why are an increasing number of investors in our country questioning the integrity of our markets? The perception that the playing field is not necessarily level.

Is the field level? Is that perception actually a reality?

I commend Joe Saluzzi of Themis Trading for exposing a few weeks back the questionable integrity of  ‘high frequency program trading.’  The nature of the trading involved in these high frequency programs is consistent with my feeling that the equity markets are following technical analysis to a much greater extent than fundamental valuations.

I commend Joe and his colleagues at Themis again today for highlighting an example of the effect of high frequency program trading on their ability to execute equity transactions on their customers’ behalf. From the Themis website today, Real Life HFT Hijinks Example:

I am trading a small cap stock for a customer today (I leave out the ticker for anonymity purposes). It has traded 4,300 shares so far today. I have 75,000 shares to buy.

The scenario: 100 shares offered at $11.16, and 400 shares offered at $11.17. I place an order to buy 1,000 shares at 11.17.  You would think that I should get at least 500 shares executed (100 at $11.16 and 400 at $11.17). Sigh. I get none. As soon as I hit enter, those offers vanish. No trades on tape even. The HFT players offering the stock have convinced the market centers (ECN’s, Exchanges,  and ATS’s) to cater to them and “show” them my order before they have to execute, thereby giving them the split-second option to back away from their offers without honoring them.

Market makers have to honor their quotes, and even have to do so a certain percentage of the time. The HFT’s have to honor NOTHING. In fact, they can back away and even run ahead of your orders!  So much for their liquidity. Again the real danger is that fund managers assume that the markets can handle their 250,000 share small cap position, and that they can exit with a predictable minimal trade cost.

God, I hope we don’t retest.

There is nothing level about that field. This high frequency program trading is done with the blessing of the exchanges and the SEC.

It smells.

I welcome any market participants involved in high frequency program trading to make the case for the defense. Since Joe Saluzzi truly brought this issue out into the open earlier this month, I have yet to see any case, let alone a reasonable one, made in defense of this activity.

Thus, with overall liquidity in the marketplace less than what it may appear, investors should factor that into their overall risk assessment when making investment decisions in the equity and commodity markets.

Challenge your brokers and financial planners on this topic. I’d love to hear their responses. Please share this post with them. Please share their thoughts on this topic, if they are even aware of it.

I think we will all learn who is truly looking out for investors’ interests as we navigate the economic landscape.


  • Day Trader

    I have traded the London Stock Exchange since 2001.

    In the example stated above,
    1. The trader is trying to scare off buyers.
    2. They take a short position on a weak stock
    3. They place an order to sell a small number of shares at say 25,000 shares at 100p
    4. They place an order to short-sell a LARGE number of shares say 1,000,000 at 102p.
    5. The second the smaller order is “Hit”, the larger order is deleted and moved away from “Touch”

    I have complained to the FSA about this practice dozens of times. It has cost me thousands!!.. It has cost shareholders TRILLIONS; It has totally Scrwwed final salary pensions in order to make very few, very rich.

    The FSA, in their incompetence, respond with an e-mail saying thank you for sending them a complaint; they will not tell you if they did or did not take action.

    Government Incompetence… Labour, Tory; They do not understand the ripp off!

    • Hilary

      Don’t play with them

      If they steal your lunch money every time you play with them…

      Then stop playing with them.

  • kevin

    If Themis has proof of this real life example, they need to show it. If this is true, it should be very easy to prove with time stamps and a decent number of examples. If HFT have the ability to see the buy order and duck before execution then a buy side firm or executing broker like themis should be able to replicate this example many times over and then release such bullet proof evidence to the WSJ or some major financial publication.
    If its true, it will rock the markets. However, I will believe it when I see the evidence. I am in the very short term trading game (although not a HFT) and i have seen no evidence of vanishing offers after I put in an order to buy at the offer. While I dont like the idea of dark pools or of some of the games the HFTs play, I think the burden of proof on whether they have the ability to see orders hit the market and back away before filled is clearly on Themis. You need to separate throwing all accusations into one bucket. Backing away or seeing flow routed to the exchange when no one else can would be market crushing and a huge event. However, super short term trading is currently legal and therefore deserves to be treated differently when discussed.

  • jaguar

    This seems to concur with an article I read about Goldman’s algorithmic code which is apparently tightly linked to the FIX system with priviliged access (the FIX Protocol is almost the standard for electronic transactions) and which allowed GS presumably to gain information on the bids and offers, make easy money and possibly manipulate markets. Can’t remember the source article but the article could making valid points.

  • GS would say that without HFT we would not have paid back TARP and our banking system (cause you all need us more than we need you) would cease to exist. Wish I had that German website’s address.

  • DDearborn


    Zoom out a bit look at the larger picture. Wall Street has always claimed that in general the markets are unpredictable. And that is the reason some people make money and some people lose. However I believe if you look at the trading results of the top firms left on Wallstreet you will see a different picture. Their trading “success” is incredibly high. That is to say they manage to make money on the vast majority of their trades. In a truly random market, with nearly limitless variables this should be impossible over the long haul. And yet day in and day out the likes of Goldman Sachs makes money when everyone else struggles. Th retail investors can’t seem to do much better than break even if they are lucky. Is this “skill”, “luck” or is it insider trading and a rigged market utilizing massive computer power? Hmmm… As they say if it looks like a duck, walks like a duck…….

  • Jim Davis

    Some good posts here.

    I agree with Kevin, I have not seen proof of such a thing, and it would be a terrible scandal if true. Should be easy enough to document.

    DDearborn is correct, its a rigged game in that the bog boys have huge edges not available to anyone else.

    As for day trader, I’m not sure that pulling and offer AWAY from the inside after the inside is lifted qualifies as manipulation. You should be able to lift the inside and the 102 pence offer simultaneously if you so desire (called a sweep here in the states). If you are saying that can’t be done , and they get to cancel at will, then you have a case.

  • Jeff Schneider

    The assertion that HFT operations “in general” cause liquidity vacuums, manipulates markets, or “cost” investors of any elk “anything” are all non-sequiturs to anybody with empirical insight.
    Parroting the media’s flawed perceptions of HFT as they pander to the scores of readers trying to process near term deterioration of net wealth smells of nothing more than the memories of Salem and McCarthy. The blame game is the oldest show in town…

    • George


      I am compelled to respond. First off, the exchanges and SEC are in the business of making money. Motive: since the bear raid in october (massive deleveraging of the financial markets), the exchanges foresaw liquidity crisis brewing. Large and small participants with trillions of dollars lost overnight would be timid to step into the arena without confirmation this time. Vital action by the exchanges was required. Approached by goldman, the idea to artificially create liquidity via HFT program was a great solution catering to institutional volumes while bringing the little guy back into the game. Without these participants the exchanges are inefficient. Can you imagine the MLB only having 5 players per team, you can’t play a game! So, these programs developed by MIT’s finest will front-run, pull, sweep 20 cents on 800 shares, and reload millions of shares to manipulate a stocks value. The outcome you say, large institutions are favored by the exchange filling their large orders with great efficiency, their volume in turn benefits the exchange, real traders who add true liquidity are being hunted by programs that flash bullshit size only to screw them of their money, stir it all together and wallah- is this what you call “empirical insight”. Now that “liquidity” is added and confidence is restored!! What a great sell to the investing public and kudos to the geniuses at GS who are robbing us blind. Its not the playing field, but the game itself is flawed with HFT. These programs have artificial intelligence, its more than insight on a stock bid/ask but they are manipulating price action against real traders. Fundamentals? I have no faith in that anymore.

  • Larry Doyle


    To that end, for your benefit and everybody else I am going to host Mr. Saluzzi of Themis Trading on my weekly radio show this Sunday evening, August 2nd from 8-9pm.

    Here is the link: NoQuarter Radio’s Sense on Cents with Larry Doyle

    Hopefully this show will promote a deeper understanding and, in turn, transparency of this topic. I hope you can listen in if not join us by calling in or engaging via the chat room.


  • pat

    has there been any proof of the exchanges offerring special treatment to certain clients? or do they just ahve faster computers and software?


  • Larry Doyle


    How would you define giving rebates? Is that special treatment or just standard business practice?

  • LD

    Going on three and a half years from when Themis Trading’s and Sense on Cents’ Hall of Famer Joe Saluzzi blew the cover off the high frequency trading racket, NOW a few atop Capitol Hill are starting to find religion.

    What a farce. Where was Congress back in 2009? Who believes anything will truly develop from upcoming hearings.

    The WSJ writes, High-Speed Trading In The Spotlight

    An insider of the secretive world of high-frequency trading is set to attack that industry Thursday on Capitol Hill, giving lawmakers a potential road map to address practices that critics say can put ordinary investors at a disadvantage and the financial system at risk.

    Since rapid-fire trading firms now provide many of the buy and sell orders that support the market, investors are at the mercy of automated systems that can run amok during volatile times, according to Dave Lauer, who last year quit his job as a trader for an elite Chicago high-frequency trading outfit.

    Dave Lauer, pictured above near the U.S. Capitol Building on Wednesday, last year quit his job at a Chicago high-frequency trading outfit.

    Mr. Lauer is part of a growing chorus of industry insiders blowing the whistle on approved trading techniques that they say are designed by the traders who derive the most benefit. Mr. Lauer is now a consultant on market-structure issues for Better Markets, a Washington, D.C., advocacy group funded by a hedge fund.

    He plans to tell senators how he came to believe that high-speed trading has made the market less fair for many investors, according to his advance testimony for a Senate panel on computerized trading.

    One way sophisticated firms get an edge over other investors is the use of complex order types, which are commands that traders use to tell exchanges how to handle their buy and sell orders, according to Mr. Lauer.

    A series investigating a new age of murkiness in the financial markets and the challenges that creates for investors.

    Regulators are looking into whether exchanges, in a rush to gain the business of high-frequency firms, have provided advantages to some sophisticated trading firms that allow them to trade profitably at the expense of other investors, according to people familiar with the continuing probes. High-frequency trading accounts for some two-thirds of all trading volume, experts say.

    Three plus years and many hundreds of billions in dollars later, Washington is now awaking. What a joke. Get Joe Saluzzi down there.

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