High Frequency PT: Is the Field Leveled?

Who does not want the American dream?

Get a decent job, save a few bucks, make some reasonable investments, and try to get ahead. As part of that process, there is a premise that our government officials and market regulators will keep the playing field level.

Why are an increasing number of investors in our country questioning the integrity of our markets? The perception that the playing field is not necessarily level.

Is the field level? Is that perception actually a reality?

I commend Joe Saluzzi of Themis Trading for exposing a few weeks back the questionable integrity of ’high frequency program trading.’ The nature of the trading involved in these high frequency programs is consistent with my feeling that the equity markets are following technical analysis to a much greater extent than fundamental valuations.

I commend Joe and his colleagues at Themis again today for highlighting an example of the effect of high frequency program trading on their ability to execute equity transactions on their customers’ behalf. From the Themis website today, Real Life HFT Hijinks Example:

I am trading a small cap stock for a customer today (I leave out the ticker for anonymity purposes). It has traded 4,300 shares so far today. I have 75,000 shares to buy.

The scenario: 100 shares offered at $11.16, and 400 shares offered at $11.17. I place an order to buy 1,000 shares at 11.17. You would think that I should get at least 500 shares executed (100 at $11.16 and 400 at $11.17). Sigh. I get none. As soon as I hit enter, those offers vanish. No trades on tape even. The HFT players offering the stock have convinced the market centers (ECN’s, Exchanges, and ATS’s) to cater to them and “show” them my order before they have to execute, thereby giving them the split-second option to back away from their offers without honoring them.

Market makers have to honor their quotes, and even have to do so a certain percentage of the time. The HFT’s have to honor NOTHING. In fact, they can back away and even run ahead of your orders! So much for their liquidity. Again the real danger is that fund managers assume that the markets can handle their 250,000 share small cap position, and that they can exit with a predictable minimal trade cost.

God, I hope we don’t retest.

There is nothing level about that field. This high frequency program trading is done with the blessing of the exchanges and the SEC.

It smells.

I welcome any market participants involved in high frequency program trading to make the case for the defense. Since Joe Saluzzi truly brought this issue out into the open earlier this month, I have yet to see any case, let alone a reasonable one, made in defense of this activity.

Thus, with overall liquidity in the marketplace less than what it may appear, investors should factor that into their overall risk assessment when making investment decisions in the equity and commodity markets.

Challenge your brokers and financial planners on this topic. I’d love to hear their responses. Please share this post with them. Please share their thoughts on this topic, if they are even aware of it.

I think we will all learn who is truly looking out for investors’ interests as we navigate the economic landscape.

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

Visit: Sense On Cents

Be the first to comment

Leave a Reply

Your email address will not be published.