Nanex Research

Nanex ~ 31-Jan-2014 ~ Lobbyists, Lies, and HFT

While we welcome a frank debate into the problems of the U.S. stock market and the role of high frequency trading (HFT), it is crucial that participants are honest and willing to shine a spotlight on outright fraud or misrepresentation. We feel obligated to respond to this article, written by the HFT lobbyist group Modern Markets Initiative (MMI).  In the article, MMI attempts to discredit the Wall Street Journal's A Suspect Emerges in Stock-Trade Hiccups: Regulation NMS, and seizes the opportunity to "revisit some commonly held misconceptions about electronic markets and high frequency trading (HFT)". We'll seize the opportunity to point out some intellectual dishonesty.

MMI writes:
First, an inaccuracy in the article. Mr. Bunge writes:
“Computerized firms called high-frequency traders try to pick up clues about what the big players are doing through techniques such as repeatedly placing and instantly canceling thousands of stock orders to detect demand. If such a firm’s algorithm detects that a mutual fund is loading up on a certain stock, the firm’s computers may decide the stock is worth more and can rush to buy it first.”
One is hard pressed to figure out how “placing and instantly canceling” orders garners any information about someone else’s intent. The only concrete information you gain is that your own orders were not filled. Even if one accepted this vague claim at face value, to associate all high frequency trading with this activity is a gross mischaracterization that ignores the diversity of strategies and many benefits HFT brings to the markets.

Is MMI is unaware of basic information gathering techniques, or that the industry already has a term for this strategy? It's called "pinging". Put simply, the absence of a response is valuable information. Take a look at this slide from Deutsche Bank Research describing "High frequency trading strategies".

The slide gives attribution for this information to Aldridge 2010 (circled in red): that's the well known HFT proponent Irene Aldridge.

The same Irene Aldridge whose book is prominently linked on the front page of MMI as a trusted source of information about HFT.

In other words, MMI's hand-picked, trusted source, just destroyed any credibility MMI may have had.

But just in case you don't have the same level of respect for Aldridge as MMI, it's easy to find other sources that talk about this strategy, such as this graphic from Business Week:

It helps to remember that MMI is a lobbyist organisation. They are paid to change people's minds: which is fine if it is accomplished with facts. Unfortunately, MMI presents very few, if any, real facts.

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