RE: RE: RE: RE: really??...FYI Fred,
You are a victim of a market structure that has morphed over the past 15 years from a quote driven market to an order driven market. “Market makers” of today have little to no obligations. The role of a market maker and specialists used to be to commit capital and maintain orderly markets. That role disappeared as new regulations reduced the economics of market making.
The void that was created as the old market makers and specialists were driven out of the market has been replaced by HFT market makers. These are mostly private firms who make markets with the intention of adding to their bottom line.
They have no affirmative or negative obligations and they are not required to commit capital. Their average holding period is 2 seconds… when they execute, which is 5% of the time. The other 95% of the orders you see stuffing the exchanges are cancelled before you can interact with them, and worse, as by the time the slower public quote feed shows their quote, they are already cancelled, kind of like looking at a star in the night sky that has burned out millions of years ago.
A substantial amount of trading that goes on in the markets is high frequency in nature. Much of that is the “market-maker” rebate-arbitrage that goes on in the largest 150-200 liquid names/ETF’s (think BAC, WMT, XLF). Another large chunk of the HFT you see going on is statistical arbitrage.
Certainly though, and Fred sees this, there is much HFT that is predatory in nature. These bandits try to ascertain the strategies of long term investors, whether it’s Fred’s $10 limit order, or a mutual fund’s 800,000-share buy order in a mid-cap stock, being executed through some broker-algo.
These bandit traders use dark pools, odd-lots, rapid flickering and stuffing of quotes, and most importantly, enriched data feeds provided/sold to them by the stock exchanges to keep ascertaining the intentions of the owners of the market, front-run them, and sell it back to them later.
This type of trading does not cost investors a penny or two; it costs them quarters and more. We can’t tell you how many times each day we see thousands of quote changes in a stock that is barely trading, with the intention of igniting some institutional order to start trading up (they know that many institutional buyers try to be a set % of volume for instance).
These HFT bandits flicker quotes, take an offer ahead of your bid, start buying and cancelling orders, attempting the creation of momentum. They see on their data feeds every bid, revision, and cancellation THAT YOU HAVE MADE, and they have modeled when and how you will get frustrated, throw in the towel, and pay up.
Of course, the saddest part of this is that exchanges in past times were more neutral, not for-profit public entities, while today they cater to these bandits because they are their high volume customers.
The hardest hit sector of the stock market is the small to mid-cap space. This space has been “orphaned”. Small to mid sized broker dealers who used to support this space with research and capital have been driven out of the market due to the lack of economics. All that is left is the fleeting “liquidity” of HFT market makers and the amplifying effect of the predatory traders. These predators are constantly on the prowl for real orders that they can take advantage of. They hide in “dark pools” and receive indications of interests from smart order routers. It’s really is a shame that something as simple as buying or selling a stock has turned into a minefield filled with traps.
There are a few things that we would recommend: 1) Never use a market order 2) Ask your broker when you enter an order, how does it get routed? You need to see if your broker is sending your order through a smart router that is sending IOI’s (indications of interest) to other destinations. While this activity may be good for your broker, it will be harmful to your order 3) If you see stock offered at $10, direct your order to the exchange that is displaying the liquidity (some brokers offer this ability but many do not since it raises their cost).
When trading small to mid-caps, you need to minimize information leakage. The minute that a predatory HFT spots your order, you are basically at their mercy.
We know this is not the answer that you want to hear, but until we can get our regulators to fix what they created, then we just have to be extra careful with our order flow.
By the way, head of trading at TRowe Price, Andy Brooks, touches on this subject while being interviewed by the Baltimore Sun, T. Rowe Price Fears High-Frequency Computer Trading,
“The idea is not to own a piece of corporate America. It’s to flood the system with orders that are quickly reversed – or never fulfilled. Like a shill working for an auctioneer, quickly canceled offers to buy or sell create a bogus impression of demand. A study published last fall by researchers at the University of Mississippi found such “quote stuffing” to be “pervasive” among U.S. stock exchanges.
“We know that some high-frequency trading strategies have cancellation rates in the 95 percent range,” Brooks said. “So that means that 95 percent of the time that you say you want to buy 100 shares of IBM, you don’t really buy it. And that begs the question: Why have you said you want to buy? Are you trying to influence someone to do something else? And is that manipulative?”
As usual, the people who are supposed to regulate this stuff are outgunned, outmanned and besieged by lobbyists who claim high-frequency traders add liquidity and choice to the system. Kaufman, an early critic of high-frequency trading, left the Senate in 2010. But the agency is taking its time in ordering a centralized database that would let regulators see what rapid traders are really up to.
Brooks believes the SEC should consider charging fees to traders who cancel unfulfilled orders – an idea that’s even further from realization. T. Rowe Price suggests that regulators experiment with other rule changes to gauge how pointless trading could be reduced without harming liquidity.