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According to an article on the Finextra website, Europeanregulators will publish new trading rules, MiFID II, this week. Underthe new rules, high frequency traders (HFT's) will have to explain how theydesign their computer algorithms, and how they work. Also, HFTs tradingover a certain volume will have to be authorized investment firms withrisk controls.
A fast trader can submit five trades a minute,whereas an HFT can submit 60 million trades a minute, according to aReuters report. That means on a regular trading day of 6.5 hours, or 390minutes, a fast trader could make about 78 trades, while an HFT couldmake 23.4 billion. To increase profits HFTs are constantly trying totrim milliseconds off trading time. There are 300 to 400 milliseconds inthe time it takes to blink.
One TSX-V-listed company, SeafieldResources Ltd., is exhibiting what the United States Securities andExchange Commission calls the "hot potato volume effect." This is whenHFTs buy or sell to one other very rapidly. Eventually the stock willland in the hands of a fundamental investor, someone willing to hold thestock for more than a few seconds. On Friday, Dec. 3, Seafield rose 34cents to 57 cents on 91.35 million shares. On Monday it continued itsunnatural ways, adding six cents to 63 cents on 45.48 million shares.Opponents to HFT say the hot potato effect helps order execution butdoes not add true liquidity to the market. U.S. Commodity FuturesTrading Commission chairman Gary Gensler has said repeatedly that "volume does not equal liquidity." Themis Trading's Joe Saluzzi agrees;he says playing hot potato is similar to circular trading, in which agroup of traders work together trading a stock to make it look like thestock is on its way up before dumping it.
SCARY STUFF, Not for the faint of heart
GLTAL-GLAP
Cheers
Stanley