High Frequency Trading a.k.a. Algo-Computer Trading, Manipulation, and Your Money Living Together Peacefully!
Monday’s trade was somewhat of a surprise about an hour into the session. The equity markets seemed to initially take the extreme overbought readings left after Friday’s slow grind to new highs more seriously in that sellers were present at the opening. This didn’t last though and I was somewhat surprised to see the bears give up without much of a tug of war. Corrections are still in line with near-term expectations. The volume remains light on rallies and algo-traders are still in buy mode as earnings season gets into full swing. Surprises and disappointments could begin to switch the trend to sell mode and move the markets into the much needed period of consolidation.
Gold burst through resistance at 1303 without looking back which puts the precious metals into a different perspective – a much more positive one – at least for the near term. A pull back (consolidation) is likely within the next couple of days, but additional upside would be expected to test 1350 and more likely 1400.
Treasuries held higher prices on Monday, but again ran into trouble at the 136 area in the 30-year bond and the 127 area in the 10-year note. Near term expectations remain for another swoon lower to take place for a more sustained rally attempt is made.
High Frequency Trading
HFT or algorithmic computer trading has been around for many more years than most think. The use of HFT to manipulate the markets has been honed into a fine art. Big market players in an attempt to continue to have an “edge” in trading have included more and more data into their algorithmic calculations. Developing more triggers and ways to trigger the competitions triggers is what in my opinion changed the way the markets are manipulated. Manipulation of prices has been around since the dawn of trading. There have always been those participants who believed they either had the perfect scheme or trade that would net huge profits and go unnoticed for lacking moral principles.
Here are some additional major changes to how day traders and investors have reformatted the definition of Conventional Wisdom’s “buy and hold” theory. Investors are more apt to hold stocks for an average of five days compared to 8 years in the 60’s when so much of Conventional Wisdom was put into practice. But wait, it gets way better – for those who still believe the status quo is not changing – read on:
“Investors have turned into day traders, Day traders have turned into algo-traders, who not only make trades in 10 milliseconds or less, but also typically hold stocks for no more than 16 seconds. The days of watching the ticker tape to get a sense of where a stock is headed is over.” – The Equedia Letter: A Nuclear Threat, January 2013.
The New York Times ran an article titled “Fair Play Measured in Slivers of a Second” on July 12, 2013. It was revealed that many were paying Thomson Reuters for a two second advance release of economic data provided by TR. The New York State Attorney General Eric Schneiderman reached a settlement with TR to ban this type of notice. Two seconds may not seem like a lot but to a high-speed trader it’s an eternity. Check this out: On July 12th TR reported the latest University of Michigan Consumer Sentiment Index. In the SPY (S&P 500 ETF) 500 shares traded during the first 10-milliseconds within the 2-second window before the TR released the data to its regular clients according to Nanex research. This compared to the same data released the previous year on July 13, 2012 when 200,000 shares traded during the same 10-millisecond period. Score one for the “leveling the playing field” guys and then take it back – you see Thomson Reuters agreed to suspend the 2-second advance advantage during the AG’s investigation, but continues to give its regular clients a five-minute jump on the general public. I do however; give Mr. Schneiderman credit for picking up the fight in reducing the perception that the securities markets are rigged in favor of those with money, power and special access.
In January 2013, Adam Clark-Joseph published the article Exploratory Trading, which analyzes CFTC audit level trading data in the eMini S&P 500 futures. Below is a summary done by Nanex Research:
Exploratory trading is a form of manipulation designed to test the market’s reaction to a trade. Probing for stop orders would be one form of exploratory trading. This paper specifically investigates exploratory trading that attempts to determine whether the bid/ask spread is about to shift up or down a level. The impact on the market would be an increase in intraday volatility. Exploratory trading distorts the market’s view of supply and demand and induces trading activity from other participants. Furthermore, as participants learn of the strategy, they will employ counter-measures – which will further muddy an accurate picture of supply and demand for everyone else. This is why regulations ban manipulation.
The Top 8 HFTs Remove Liquidity 59% of the Time
Passive market making involves buying at the bid, and selling at the ask, which earns the market maker the bid/ask spread. Passive market making provides liquidity, narrows spreads, and lowers trading costs. Aggressive trading removes liquidity: buying at the ask (removes sell orders) and selling at the bid (removes buy orders).
Between September 17, 2010 and November 1, 2010 in the eMini futures contract (December 2010 contract, symbol ESZ0):
- 41,778 accounts traded this contract
- 30 of these accounts (less than 1/10th of 1%) met criteria to be classified as HFT.
These 30 HFT accounts:
- participated in 46.7% of total trading volume.
- grossed $1.51 million per trading day.
Of these 30 HFT, the top 8:
- were aggressive 5.2% by volume (the other 22 were aggressive 35.9% by volume).
- grossed $793,342 per trading day.
– Source www.nanex.net March 12, 2013
For those wanting to actually see and hear what high frequency trading looks and sounds like click here.
Brings about the question: How can the retail (average) trader compete with a program that can make decisions faster than any human could? Add to this that most HFT programs are using arbitrage; either via scalping or via options, ETFs,or futures.
The only way I see is to join them. If the SEC and CFTC and other commissions put in place to guard against this are rendered ineffective in having the power or resources to regulate and stop unfair practices then I believe it is up to the trader, albeit small in comparison to figure out how. Again, if you can’t beat them join them. As a retail trader, yes, most of us former floor traders – market makers – have become off floor traders and that in affect has made “us” retail traders. My account in comparison is small and unable to compete via the ability to make thousands of trades across several sectors to arbitrage 0.0001 cents, which equals $1 every second, $60 a minute and $3,600 an hour.
Indicator Warehouse has in my opinion the best platforms available covering a wide range of traders from novice to expert.
The Diversified Trading System from Indicator Warehouse offers cost effective products that allow a trader to enter into the “chaos” and trade more effectively.
Trade Manager from Indicator Warehouse automatically calculates the correct amount of contracts or shares based on your account size or market volatility. Automated stop-loss management and position sizing eliminates most of the problems most individual traders have. Day trading and position trading both require (actually demand) good risk management. Trade Manager does the job across the board and is an essential trading tool that ensures that you take the maximum profit from all your trades.
A newer member of the money management tools available from Indicator Warehouse is the Profit Finder – System Back Tester. When implemented it allows the user to:
- Immediately know the impact of parameter changes.
- Automatically reads all of your DTS entries and exits
- Calculates the profit/loss of each trade
- Performs a wide number of essential intelligence boosting calculations instantly
- Provides solid details about the effectiveness of your trading strategy/ methodology/ indicators
The last two points above are valuable tools to use. It will show you where some “tweaking” is needed to improve results through the back testing feature.
My point on money rotation and sector rotation is similar to that on parabolic moves that they happen with frequency within many time frames. As traders these types of moves can be a bonus for day trading or position trading so again don’t get caught up in the “what’s the catch.” Realizing a rotation is occurring within a stock you trade or a sector is a great source of stocks to plug into the Diversified Trading System. Allowing DTS to cleanly and beautifully capture the moves though any or all three DTS trading platforms. Our goal remains to assist traders to make greater profits during all types of markets. Sector and money rotation is another tool.
The Diversified Trading System used together with Trade Manager should continue to produce numerous trading signals in the DJIA, YM (mini), S&P 500, ES (mini), RUT, TF (Russell 2000 mini), AAPL, AMZN, GOOG, NFLX, and LNKD, GS, and Tesla Motors (TSLA). In the near future I will be adding options strategies to the trading list.
Here is an updated list of the markets where I have found that DTS (all three birds) are producing numerous signals. Continue to bear in mind that there are days when trading opportunities are not as plentiful. These are days when not trading is likely more profitable than attempting to “force” a trade”:
- DJIA future (e-mini available) – highly recommended
- S&P-500 future (e-mini available) – highly recommended
- Russell 2000 future (e-mini available) – highly recommended
- NASDAQ 100 future (e-mini available) very highly recommended
- US$/Euro futures (e-mini available) – very highly recommended
- GS (Goldman Sachs) – good two way volume –
- AAPL (Apple Computer) – highly recommended
- GOOG (Google) – highly recommended
- LNKD (LinkedIn) – solid intraday range
- NFLX (Netflix) – solid intraday range
- TSLA (Tesla Motors) – highly recommended
- 30-yr Treasury Bond future – highly recommended
- 10-yr Treasury Note future – solid two way trade
- TLT (Treasury Bond Long ETF) – very active
- TBT (Treasury Bond Short ETF) – very active (moves inversely to TLT)
- Gold (futures and ETF – GLD) very active – not suitable for all traders
- Silver (futures and ETF – SLV) – very active – not suitable for all traders