On July 13, 2015, the U.S. Department of Treasury, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, the U.S. Securities and Exchange Commission, and the U.S. Commodity Futures Trading Commission released a joint report analyzing the significant volatility in the U.S. Treasury market on October 15, 2014 (press release, paper [pdf]). We'll simply call it the "Fed paper".
On July 29, 2014, Representative Scott Garrett (R-NJ), Chair of the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, held an equity market structure round-table at the Library of Congress in Washington, D.C.
While internalizers matching retail trades claim they use direct feeds for pricing, there is overwhelming evidence that retail customers, in fact, are getting prices based on the SIP (Securities Information Processor also known as the consolidated quote).
During regular market trading hours on February 13, 2014, we found 633 extreme high frequency trading (HFT) quote spamming events. We define an event when 1 symbol has 6,000 or more quotes and less than 300 trades in 1 second of time. Events like these are rare, usually only a few appear in a trading day. There were 633 such events on February 13.
Ask them to define what liquidity means. Here's the Chairman of the FIA Europe who completely gets it wrong. Here's an email exchange with an academic who helped write the SEC flash crash report who also, completely gets it wrong! Yes, HFT provides liquidity, but only if we are using the term liquidity to mean something else.
This is the paper that led to a Fed Policy Change. One of Einstein's great contributions to mankind was the theory of relativity, which is based on the fact that there is a real limit on the speed of light. Information doesn't travel instantly, it is limited by the speed of light, which in a perfect setting is 186 miles (300km) per millisecond. This has been proven in countless scientific experiments over nearly a century of time. Light, or anything else, has never been found to go faster than 186 miles per millisecond. It is simply impossible to transmit information faster.
Links and commentary on an explosive paper that changed everyone's view of HFT. On November 14, 2012, Adam D. Clark-Joseph published Exploratory Trading, which analyzes CFTC audit level trading data in the eMini S&P 500 futures market. This is a special, "regulators-only" data-set that contains all orders and trades, and each order and trade has a trader identifier. What this paper exposes is astounding.
In June 2010, while analyzing the Flash Crash, we noticed that many stocks had extremely high rates of canceled orders (1000+ per stock, per second). We then looked at data back to 2004 and found hundreds of thousands of examples: the first beginning in July 2007, which not coincidentally is when High Frequency Trading (HFT) began exploiting the flaws of Reg. NMS.
From the 1990's through the end of 2006, electronic trading increased transparency which attracted liquidity, leading to to narrower spreads and greater market stability. The graphic in this recent New York Times article shows the steady reduction in trading costs up until about 2006. Since that time, trading costs have not changed significantly on the execution side but on the analysis side (not factored into the New York Times article), both the number of quotes and the cost of receiving and processing them has exploded.1 Spreads have also become considerably less stable.
The High Frequency Trading (HFT) firm Virtu published a response to our analysis, Einstein and The Great Fed Robbery, in which we showed that Fed FOMC news had to exist in New York and Chicago before it was released at 2pm in Washington D.C. Although it may appear to some that Virtu’s intent was to discredit our work, we will show that Virtu's own data actually corroborates our findings: Virtu's paper, in fact, agrees with our analysis.
On June 13, 2014 at 9:32:46, the stock of Nike, Inc. (symbol NKE, market cap $65 Billion) suddenly dropped 2% in less than a second on thousands of trades. 9 exchanges and an unknown number of Dark Pools and ATS participated vigorously. There were plenty of quotes - with some exchanges sending 20 to 30 for each trade during the event. This will simply be another event to add to a growing list.
In the course of researching another issue, we reread transcripts of SEC/CFTC meetings that took place in the months after the flash crash. But this time, we read those transcripts with the gift of hindsight, having gained considerable knowledge from extensive analysis of market data