[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