[nanex]

Hi,

I am Eric Hunsader from Nanex and created this animation using our own custom software tools and our NxCore data feed.

Our position on HFT can be summed up in the first lines of text below the image: "It's not high frequency trading (HFT) that concerns us. It's high frequency quoting". Links are included for details. Our latest paper on HFT can be found here: http://www.nanex.net/aqck2/3532.html

Anyone who has taken the time to really look at the contents of the tsunami of data that some HFT creates will come to the conclusion that something very wrong and harmful going on. We've found this is nearly impossible to convey in text or graphics (with the possible exception of this animation), and sooner or later as more and more academics get up to speed, they will generally come to the same conclusions we have.

Our primary business is providing a real-time (and historic ) data service for U.S. Stocks, Options and Futures. In the course of monitoring our feed for our subscribers, we run across anomalies that we think need to be published for the public good or long term health of our markets. We have not received a dime from any of our analysis and not a week goes by that we don't regret opening that Pandora's box.

I will check back later today to answer any questions. If you don't receive a reply for a few hours, it's because we are working at our "day job".

[lrm242]

You don't like high message rates because it makes your job harder. You guys are a great data provider (I used to be a customer) and you're doing a pretty good job (if not somewhat biased, perhaps unconsciously so) of informing folks about the happenings of the market. However, message rate limits are already managed by exchanges, what more would you ask?

Theories related to quote stuffing to cause ticker plants to stall and other gaming related items just don't jive, to be honest. It's always been the responsibility of the trader to ensure they can manage the data flow. If they can't they can get a vendor who can help them.

Data rates will naturally manage themselves and will always grow towards available bandwidth. It's the nature of our market, especially as we move towards tighter spreads. The markets are becoming more and more continuous and that necessitates the need to quote at high rates.

The charts you guys put together are interesting but let's be clear: no human looks at data at these levels, only machines. And machines don't care about visual patterns in data flow. So, as a means to help illustrate how markets are evolving I'm all for the visualization. However, as a means to denigrate the very real needs of important market participants to remain competitive, I think you're doing a disservice to the uninformed reader of your reports.

[peteretep]

Your data shows the increase in HFQ relative to much lesser increase in HFT well, but neither of the links I followed to why HFQ is bad gave me much of an idea, other than "it's extra network traffic".

[lrm242]

Exactly. Nanex does not like high message rates because it increases the cost of running their service. like yummyfajitas and yourself no one can explain to me why high-rate quoting is bad. Producing pretty graphs showing quotes at regular intervals doing interesting things is not indicative of bad behavior, especially when many of those charts include after market data when the depth is extremely thin. And remember, every venue enforces message rate limits already.

[muench]

The link in the original post labeled "high frequency quoting" led to a page [1] that makes a more concrete claim. Basically they say that the NBBO (national best bid and offer) are being manipulated to be small when there is no trading and larger when there is trading.

I think that's at least a little disingenuous though... If there is no trading then it makes sense that bids will be increased and offers decreased in order to 'entice' trades. No trading means the bid/offer are too low/high - basic econ 101.

As soon as there is trading two things happen: 1) bids and offers are hit, meaning they are removed, leaving lower/higher bids/offers as the next best. 2) The HFT algorithms know that when there is a lot of trading they should lower bids and raise offers, because excess demand indicates the bid/offer are lower/higher than they need to be. Essentially, they are realizing that they are leaving money on the table.

This all might look like price manipulation to an outsider, but to anyone that knows what is going on it's just the way markets work. The difference is that it happens a lot slower in markets humans are used to.

In my mind what would indicate a problem is if bids and offers widen AHEAD of trading. This would mean the HFTs are finding out that somebody wants to trade and adjusting their quotes BEFOREHAND. That's front-running and illegal. But I don't see evidence of that here.

[1] http://www.nanex.net/aqck/2685.HTML

[yummyfajitas]

I'd be curious to know what you believe the harm is. Specifically, since you claim HFT harms long term investors, what are the mechanics by which it does so?

[_delirium]

One thing the site seems to do is keep an occasional catalog of patterns they believe to be evidence of attempts to harm price discovery in the markets through various quote-system-gaming tricks, presumably intended to set up some other strategy. Here's one, an algorithm that seems (in their opinion) designed to target a particular stock and jack up its volatility: http://www.nxcoreapi.com/aqck/3271.html

[yummyfajitas]

I've seen the graphs. But I have yet to see an explanation of how you actually make money that way.

The best I've heard are theories along the line of a DOS attack. I.e.:

1) Eve sends an order, receives an ack, and receives the quote. (The last two steps can be in any order.)

2) Alice receives the quote, and spends more time processing it than Eve spends on the order, ack and quote.

3) ???

4) Eve profits. (Perhaps because Alice and Eve are both HFT's, and this attack lowers Eve's latency relative to Alice?)

[anonDataUser]

Hi Eric - Firstly, thanks for the work that you do. I can always rely on nanex research to produce thoughtful and interesting discussions.

Many of the "bots" in your research seem to be adding quotes that are far away from NBBO. One theory is that these exist to provide market participants with more precise measures of their own latency - almost like echo location. They send out a pattern to the exchange, and then wait until they see it coming back on their market data feed. I think that its good for market participants to have an accurate means of measuring market data latency and that having that means ultimately enhances the efficiency of the market. Do you disagree with this stance? Is there some other better means of measuring latency that would be better for market participants to use?