More HFT developments ...
HFT in the dock as another trading error hits exchanges
'Shares in Peet's Coffee and Tea soared nearly five per cent - from $73.89 to as high as $77.47 - on unusually high volume in the opening two minutes of trading on Nasdaq in New York yesterday morning. Nasdaq quickly sent out an alert confirming that it would cancel all trades in the company at or above $76.11 executed between 9.31 am and 9.32 am.
The error comes on the heels of the Facebook IPO fiasco and Knight Capital disaster, when a software glitch caused chaos in the markets, costing the firm $440 million and nearly sending it into bankruptcy.
This event prompted SEC chief Mary Schapiro to set up a roundtable, to be held next month, to look at how better rules and technology can be used to help combat the risks posed by high-frequency trading."
finextra.com
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On that roundtable ...
'Listen carefully and you can hear the industry spinning the Knight algo situation not as a market structure problem but as a risk management issue. Since the August 1st “Knightmare”, we have seen numerous industry insiders speaking out that risk needs to be better managed. They have been advocating adding new Risk Officers and even adding more software to detect problems. An August 22nd interview with the Direct Edge stock exchange CEO, Bill O’Brien, is a perfect example of what the industry has been spinning:
“Now that automation is such an essential part and change of pace is so dynamic, we really need to make sure the risk management and control systems are in place… Technology has permeated the stock market. We need to control that risk more effectively with any firm but we also have to be more constructive working together cooperatively…I think you are going to see a lot more focus and cooperation among exchange to control the incremental risks that technology has brought to the system and I feel pretty good about that.”
Well, we are glad to hear the exchange executives finally think it is time to work on risk management. Considering that the stock market produces millions of messages per minute and trades in microseconds, this is probably a good idea. But we say, what took you so long? And is risk management really the issue or is that just something to deflect the regulators and the public from the real issue which is our fragmented market structure and the embedded conflicts of interests that exist in it?
We saw something very similar to this happen right after the Flash Crash. Almost every industry insider was immediately advocating the same remedy: circuit breakers. If we only had single stock circuit breakers, then the Flash Crash would have never happened, they said. The SEC was convinced and spent the next two years applying small band aid fixes but neglecting to look at the bigger picture problems. The industry insiders were successful and deflected the SEC two years ago from the real issues and they are trying the same stunt right now.
And it appears to be working again. The SEC has latched onto the bait and will be holding a market technology roundtable on September 14. Here is what their press release signals about the roundtable:
“While the SEC recognizes the central role that technology plays in different aspects of our market structure, the agenda set forth below is intended to focus on how appropriate controls or processes for the implementation of technology can support a robust and reliable market.”
The participants have yet to be announced but we expect the same folks that we always see at these events to show up. They will claim that they have better risk management controls and that they are going to work together to make sure that another Knight algo situation never happens again.
If the SEC was really serious about reform, they would be looking at bigger picture items like the elimination of the maker taker model. They would dust off their 3 year old dark pool regulation proposal. They would look at the exchange data feeds and eliminate the excessive information in them that is hurting institutional investors. They would stop approving conflicting order types.'
ritholtz.com
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NYT
On Wall Street, the Rising Cost of Faster Trades
'There have been obvious beneficiaries of these developments. There are the high-speed trading firms, which use fast data connections to detect tiny differences between stocks on different exchanges and can act much faster than long-term investors on market-moving news.
The companies producing the cables and computers have also made profits, and the traditional exchanges have made more money by selling their own trading technology.
But the risks of making such frequent changes have become increasingly evident. Before Knight’s problem, the third-largest exchange, BATS Global Markets, gave investors a jolt in March when new software for bringing companies public failed on the day BATS took its own stock public. When problems do occur they can spread more quickly, as they did during the so-called flash crash of 2010.
These perils have been one factor scaring investors away from American stocks. They have also been put off by a market that has delivered almost no returns over the last decade because of asset bubbles and instability in the global economy.
When attention has turned to the risks of the computerized market, the new trading sites and high-speed trading firms have managed to fend off critics by pointing to benefits that long-term investors have derived from the sophisticated markets. One of the most popular ways to gauge how investors are doing is the difference between the price at which a stock can be bought and sold at a given moment — the so-called bid-ask spread. When this goes down, day traders, mutual funds and other institutional investors pay less to move in and out of stocks.
Credit Suisse Trading Strategy has tracked a long decline in the spreads paid on American stocks, except in periods of volatile trading, when spreads tend to temporarily rise. Several reasons have been given for the declining spreads, but much of the credit has been given to the competition between exchanges for customers, and the competition between high-speed trading firms to offer the best price.
In recent months, however, Credit Suisse has found that spreads have been rising even under calm trading conditions.
Studies of transaction costs, like the one conducted by Abel/Noser, incorporate both the bid-ask spread and the commission charged by brokers. Over time, these have generally moved down in tandem but they have leveled off recently. Analysts have only just begun to consider why these costs to investors have stopped going down, and do not have clear answers. Terrence Hendershott, a professor at the University of California, Berkeley, said he had been an advocate for technological innovation in the past, but had begun to wonder if the continuing battle for technological superiority had become too much.'
nytimes.com
Jim |
