HFT charts of the day, trading-cost edition
The Nanex HFT chart I posted last week went viral, becoming by far my most popular post of the year; I even did a version of it for Buzzfeed. In the comments to that post, Kid Dynamite defended high-frequency trading by saying that spreads have tightened in substantially for everyone as a result of HFT. But neither of us really had the numbers — until now.
The NYT’s Nathaniel Popper, today, runs this pair of charts, which basically tells us everything we need to know. The main thing you need to notice is that the x-axis is the same on both charts, running from 2000 to the present day; my HFT chart from Nanex ran from 2007 to the beginning of 2012.
What’s clear from the top chart in the NYT (and from my Nanex chart) is that the explosion in HFT took place from 2007 onwards. And what’s clear from the bottom chart in the NYT is that benefits to small investors more or less stopped at that point.
First, let’s be clear about what these charts are showing. HFT is maybe a bit misnamed, since what we’re seeing here is two separate eras. From 2000 to 2006, trading got faster and cheaper. From 2007 to date, trading itself hasn’t actually risen much, or got faster. the huge spikes are in quotes, rather than trades, and it’s not uncommon for certain stocks to see more than a million quotes over the course of a single day, even when they are only traded a couple of dozen times.
You know the track cycling at the Olympics, where the beginning of the race is entirely tactical, and the trick is not to go fast but to actually position yourself behind the other person? HFT is a bit like that: the algorithms are constantly putting up quotes and then pulling them down again, in the knowledge that there’s very little chance they will be hit and traded on. The quotes aren’t genuine attempts to trade: instead, they’re an attempt to distract the rest of the market while the algo quietly trades elsewhere.
As such, the vast number of quotes in the market is not a genuine sign of liquidity, since there really isn’t money to back them all up. Instead, it’s just noise. But don’t take my word for it. Here’s Larry Tabb, the CEO of Tabb Group, and a man who knows vastly more about HFT than just about anybody else:
Given the events of the past six months, the SEC should think hard about the market structure it has created, and do its utmost to rein it in. While the SEC can’t stop computers from getting faster, there is no reason it can’t reduce price and venue fragmentation, which should slow the market down, reduce message traffic and lower technology burdens.
Until we can safely manage complex and massive message streams in microseconds, fragmentation is making one of the greatest financial markets of all time about as stable as a McLaren with its RPMs buried in the red.
HFT causes stock-market instability, and stock-market instability is a major systemic risk. No one’s benefitting from the fact that the entire market could blow up at any second. So why isn’t anybody putting a stop to it?