Stocks & Commodities V. 31:2 (56): Q&A by Don Bright

Stocks & Commodities V. 31:2 (56): Q&A by Don Bright
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Q&A by Don Bright


Recently, the Stocks & Commodities “Opening Position” referred to the domination of the markets by highfrequency trades (HFTs) (S&C, July 2012). I have heard that many times and many places, but I have never heard any actual statistics on the subject. I realize it is in the HFTs’ interest to remain out of sight, hidden in dark pools and other not easily defined spooky places. Any examples of HFT trading seem to suggest they trade large volumes of equities, futures, options, and the like for small amounts of price movement — maybe two-tenths of a cent. Liquidity is always necessary, as is exchange help for volume. Large volume with large bid/ask ranges are obvious price movers. How do large volumes of small spreads have much effect on pricing? I’ve never been able to understand that. Thank you.

—Robert B. Millar

First off, let me say that you can see the volume of HFT trades on most datafeeds. If you set your price ticker or last-sale price to four decimal places, you’ll see hundreds or thousands of orders go through between the whole-penny numbers. And if you buy at $25.001 and sell at $25.009, then you’ve made eight-tenths of a penny maybe a million times. Nice money. Since these firms pay nearly nothing to clear these trades, they do well.

Bright Trader Dennis Dick has written extensively on this subject: “Imagine being in a traffic jam. There are always cars trying to speed past you in the fast lane, trying to merge in at the last second, skipping ahead of the line. This slows down the line for everyone else. This is what high-frequency traders specialize in, jumping the order queue. Except instead of cutting in front of you once, they do it again and again. The highfrequency trader is always at the front of the line, which means the retail investor is always at the back.”

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