Still wondering why the market has such bizarre action? Why the Mom-and-Pop investor wants little to do with it? Wondering if fear of Flash Crash II runs high? Look no further, High Frequency Trading (HFT) has been indicted in full.
The blog Zero Hedge, one of the most cutting-edge and informative places to get inside knowledge on how the market works, has been pointing to anslysis from Nanex, a market data provider, on how HFT is corrupting markets and trigger May’s “Flash Crash.” It paints an incredibly disturbing picture of a dysfunctional market rigged by crooked robots.
I won’t reprise the entire analysis — you can wade through the orginal posting on Nanex discoveries yourself, and it’s worth a look if only to see the fascinating and bizarre charts. But I can summarize it: The markets have run amok with diabolical “quote stuffing” programs that try to mine holes in the market system and fool other computers and markets into coughing up stock quotes at absurd prices.
Just one example, as Zero Hedge quotes Nanex:
“During May 6, there were hundreds of times that a single stock had over 1,000 quotes from one exchange in a single second. Even more disturbing, there doesn’t seem to be any economic justification for this. In many of the cases, the bid/offer is well outside the National Best Bid/Offer (NBBO)”
For a full analysis of the Flash Crash, see the data and charts on the Nanex Website showing how a flood of computer quotes pushed the market over the edge.
HFT participants like to argue that they are “providing liquidity” by introducing automated stock bids and offers. The only problem is many of their bids for stocks are simply pilot orders not representing real intention to buy or sell — often computers push massive numbers of price quotes into thinly-traded markets to try to game the system. When their quotes overwhelm a system, they can move a stock out of a reasonable price range and sweep into to grab some at attractive prices before the markets have a chance to recover and move back to more rational price in minutes, if not microseconds.
Is this the future of “efficient markets”? I certainly hope not. Otherwise we look forward to a world of insidious volatility where the common mortal is afraid to enter a simple order in fear of being duped by a black box in a wiring closet.
Zero Hedge started to publish this stuff months ago and the mainstream press is just catching on. This will probably develop into the next big “market scandal” story, and at pace the SEC moves at, we’re likely to see them make progress on this front sometime in the year 2025.