Nanex Research

Nanex ~ 08-Jan-2014 ~ Exaggerated Prices Moves around News Events

In today's markets, with the presence of High Frequency Trading  (HFT) machines that place and cancel orders in less than a millisecond, financial markets are significantly more volatile during a news release. The same volume that would barely budge the market during normal times, can cause severe price swings right before and during a news event. This is because there is no liquidity (resting orders) when news is expected, because only the fastest traders are able to participate in this sub-second ecosystem. The "slower traders" aren't willing to leave orders near the top of the book, and have learned that they need to be more aggressive after digesting the news, because of the fickle nature of HFT quotes (many are placed for the sole purpose of giving the appearance of liquidity, but are canceled and won't be honored if the algorithm determines it might get a better price milliseconds later).

The faster we allow orders to be canceled, the fewer participants we'll have to take advantage of short term price dislocations and cushion the market from severe volatility.

There are simply no market makers anymore as the term was once defined. Today's HFT market makers can, and will, disappear immediately, when it's to their advantage: it would be naive to think otherwise. This is what Andrew Haldane from the Bank of England meant when he said HFT provides liquidity during a monsoon, but withdraws it during a drought.

1. March 2014 5-Year Treasury Note (ZF) Futures.

2. March 2014 2-Year Treasury Note (ZN) Futures.

3. March 2014 Dollar Index (DX) Futures.

4. March 2014 eMini (ES) Futures.

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