|HFT is Out-of-Control
The explosion in quote traffic rates obsoletes most research papers
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Lately, readers have sent in links to a few research papers extolling the virtues
of HFT, namely, that they provide liquidity, reduce spreads, and probably cure cancer. At first,
it appeared that some of these papers were written based on data from another planet,
but, upon closer inspection, we realized that they were simply based on very old data.
You see, as HFT races towards zero, the data it generates decays just as
In other words, any research paper written just 6 months ago,
or one that does not take into account recent data, might as well
have been written for people on another planet, because it won't accurately describe what is going on in the market today
here on Earth.
Take a look at the images below, which show just how much, and how quickly trading
has change since 2007. We sifted through 1,152 trading days of U.S. Equity data, from
January 2007 through August 16, 2011, and plotted this data for each minute of the trading day. There were 513 billion quotes and 34 billion trades, during regular trading
hours. The time scale indicates
the hour or minute in Eastern Time (Military format). Charts are colored by date according to the legend, which shows dates in the
format M/YY (so 8/11 indicates August 2011).
The most recent data on all the charts
is colored red, with older data using colors towards the blue end of the spectrum. Click on any
of the charts for the full resolution image.
If the research paper predates 2011, or worse, ignores recent data, it's probably not worth the paper it's printed on.
Note the significant changes from late 2009 (light green/aqua-marine). That was a year that many Pro-HFT research papers are based on. It is always a good idea to first
check the data used in any research paper on HFT. If the research paper predates 2011, or worse, ignores recent data, it's probably not worth the paper it's
The first chart shows the one-second peak quote rates.
Note how the spikes at 10am, which were driven by significant news events in years
past, pale in comparison to normal trading today. Those 10am events would always saturate
and overload quotation systems. They still do, but at much higher levels.
You can see that the rates in 2007 (way at the bottom of the chart in black) were about 100 times
lower than the peaks of today.
One-Second Peak Quote Rates
The next chart shows the Quotes Per Trade Ratio (QPT), which is simply the number
of quotes divided by the number
of trades. It is a quick and useful number that indicates the activity level of HFT
algos. In 2007, this ratio was about 6: for every trade, there were 6 quotes. Beginning
in August 2011, we have seen QPT often exceed 50.
The news about the budget impasse, the S&P downgrade, and the
Fed Announcement after a tumultuous week had less impact on traffic rates than talk
of a potential tax on financial transactions in Europe.
The highest level of QPT occurred on August 16, 2011, which are the two red spikes in the middle of the chart. This record explosion of quote traffic, with relatively few
when the market threw
a tantrum on the shocking news of a possible financial transaction tax. The news about the budget impasse, the S&P downgrade, and the Fed Announcement
after a tumultuous week had less impact on traffic rates than talk of a potential
tax on financial transactions in Europe. This temper tantrum exposes the willingness
of certain types of traders to wreak havoc on our quotation system to make their point.
Where is the outrage? We need a Senator or Representative to put a stop to this now.
This temper tantrum exposes the willingness of certain types of traders to wreak havoc
on our quotation system to make their point. Where is
Quotes Per Trade
The next chart shows how the value of a quote is rapidly vanishing.
If you multiply the size of a trade by its price, you get the value of the trade
or Trade Value (TV). If you now sum the Trade Value over an interval, and divide by
the number of quotes
in that interval, you get the Quote Value (QV). The Quote Value, is similar to the
Quotes Per Trade, but also takes into account the trend of smaller trade sizes.
The last chart chronicles the number of stocks that had high quote rates in each one-second interval over the trading day.
More stocks are falling victim to unrestrained algorithms. Note
that very few stocks exhibited this abomination until about the Summer of 2008.
Number of Stocks with High Quote Rates
Publication Date: 08/18/2011
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