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.
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.