1/2 second of trading activity in Johnson & Johnson (symbol JNJ) on May 2, 2013


Published on May 3, 2013

Nanex explains:

“The bottom box (SIP) shows the National Best Bid and Offer. Watch how much it changes in the blink of an eye.

Watch High Frequency Traders (HFT) at the millisecond level jam thousands of quotes in the stock of Johnson and Johnson (JNJ) through our financial networks on May 2, 2013. Video shows 1/2 second of time. If any of the connections are not running perfectly, High Frequency Traders can profit from the price discrepancies that result. There is no economic justification for this abusive behavior.

Each box represents one exchange. The SIP (CQS in this case) is the box at 6 o’clock. It shows the National Best Bid/Offer. Watch how much it changes in a fraction of a second. The shapes represent quote changes which are the result of a change to the top of the book at each exchange. The time at the bottom of the screen is Eastern Time HH:MM:SS:mmm (mmm = millisecond). We slow time down so you can see what goes on at the millisecond level. A millisecond (ms) is 1/1000th of a second.

Note how every exchange must process every quote from the others — for proper trade through price protection. This complex web of technology must run flawlessly every millisecond of the trading day, or arbitrage (HFT profit) opportunities will appear. It is easy for HFTs to cause delays in one or more of the connections between each exchange.”

Source: Nanex

Category: Trading, Video

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

27 Responses to “What Happens During 1 Second of HFT?”

  1. jonas says:

    The way you describe it, it reminds me of Denial of Service Attacks, turned into a money making venture.

  2. ByteMe says:

    You’d be crazy to consider putting in any trades “at market”. Between HFT and private placement, the average Joe is out-gunned.

  3. louiswi says:

    It would seem a simple transaction tax would bring this to a halt, would it not?
    Regardless, in its present form, it is front running which is illegal.

    • Martin Barry says:

      These quotes not trades and are changes in the highest bid or lowest ask at one exchange being propagated to the other exchanges.

      There have been some regulations proposed to affect quotes, notably rate limiting and minimum life time.

      • beezle says:

        They are, in theory, an obligation to buy or sell some amount of stock at that price. They are only “quotes” to you but they are orders to the initiator and any other party who has placed an order, limit or market.

  4. [...] Ritholtz, The Big Picture, What Happens During 1 Second of HFT, here.  I like how stuff that goes faster than a “blink of the eye” makes them mad so they [...]

  5. oneloop says:

    I don’t really understand what’s going on. It seems like this is communication between exchanges. But why do exchanges need to communicate? Each exchange has its market, and for each market it only needs to communicate with its clients: receive buy/sell orders and process matching orders. Why are we seeing exchanges communicating with each other?

    • KidDynamite says:

      @oneloop – the exchanges need to communicate to make sure that your order can’t be filled at a better price somewhere else…

      • Martin Barry says:

        and I was going to suggest you read http://en.wikipedia.org/wiki/National_best_bid_and_offer but other than being acronym compliant it doesn’t really add anything.

      • oneloop says:

        Oh ok, so KidDynamite’s phrase “to make sure that your order can’t be filled at a better price somewhere else”… so it’s a legal requirement imposed on exchanges. Ok then.

        Another question. According to that wikipedia page, if I want to buy at the best, and I send an order to exchange that isn’t the one where that price was available but due to this legal requirement is required to execute it, who am I trading with then?

      • Steve Hamlin says:

        “who am I trading with then?”

        The order is routed to the seller on the other exchange. The exchanges and the broker-dealers are middleman, not ultimate parties to the trade (excepting when a dealer is acting as a market maker).

      • oneloop says:

        Steve I don’t see the Reply button to your remark, for some reason.

        Ok, but if you what say is true, then why have several exchanges in the first places? Why isn’t there just a single exchange where everyone trades? This would eliminate the issue discussed in this article.

      • DrWex says:

        What you’re looking for is more here: https://en.wikipedia.org/wiki/Regulation_NMS
        or here: http://www.investopedia.com/terms/r/regulation-nms.asp

        Basically, what Reg NMS says is that a market can’t fill your order at its own (locally posted) price if it’s aware of a better price elsewhere. There are exceptions, but that’s the basics. To be “Reg NMS-compliant” a market must absorb data from all other Reg NMS-compliant markets and determine the NBBO (National Best Bid/Offer). If my market is at or better than the NBBO then I can fill you (and make money on the transaction). If not, I must route your order to someone else who can fill it, or cancel it if you’ve specified that your order is non-routable.

        The idea of Reg NMS is that all markets should be fair and equivalent-priced. Buying a share of JNJ should cost you “the same” at all Reg NMS markets. In fact, though, communication has latency and as noted you can exploit this latency to beat the NBBO, or arbitrage it. Markets attract volume by having better technology and faster communication because people will go where they think they can get the best prices. Since markets are not allowed to compete on the prices of shares they have to come up with other ways to compete (fees/rebates are another).

        Arbitrage annoys people, but it’s a fundamental feature of all kinds of markets. For example, if I know an item is on sale at one place I can go there and buy it, then turn around and sell it elsewhere at a higher price. Arbitrage is just a form of mark-up; for example I can go to BJ’s and buy, say, a 12-carton of cigarette packs for a certain price. I then open that carton and re-sell those packs individually at my local gas station at a higher price. You, the cigarette buyer, pay a higher price to buy one pack from me – you could go to BJs yourself and get that same 12-at-a-time I got. I am arbitraging the cigarette market, but nobody gets upset about it. Controlling arbitrage only in financial markets is very tricky because it’s such a fundamental market behavior. HFTs just do it faster than other people.

        (For the record, I worked in the HFT field for 5+ years though I’ve recently changed jobs.)

  6. libertarian says:

    an SEC tax already exists on exited trades. So no, taxes will just make our trades even more expensive. Naive response to a market problem that will innovate itself away. Just like hedge funds no longer profit 40% a year like they did over a decade ago, HFT will soon be too crowded and price themselves out of the market. It’s a joke to me when people think the government will magically fix it by taxing it and getting fatter. Thank louiswi for your naive understanding of the markets.

    • louiswi says:

      I’m pretty okay with your impression of being naive. FYI, we weren’t suggesting a tax on “exited trades”. Perhaps you could address front running. I enjoy your amusing musings. Thanks.

      • DrWex says:

        You didn’t ask me, but I’ll jump in anyway…

        Front-running is a different thing. Front running is trading on knowledge of what trades are about to hit the market, usually from one’s own customers. Large banks/investment houses that also do prop (proprietary) trading are often accused of front-running their own customers. Since the investment house controls both trades (its own and the customers) HFT is irrelevant to the picture. The house can simply hold the second trade for as long as it takes to get the front trade done.

        As to libertarian’s assertion that HFTs are going to be out of the business soon, I’m less sure. It’s definitely the case that it’s harder to make money in HFT now than a few years ago. Many people who weren’t very smart and saw it as easy money are out now, often having lost a lot of money to other HFTs who were smarter. The smart guys are still in, and still making (some) money.

        The reason that smart guys are losing money is because there has been MASSIVE capital flight from the equity markets. Estimates I’ve seen put it north of $3 trillion that has left the market. Some of that went into bonds, but most of it is just sitting idle. If you look at the cash reserves held by Fortune 2000 companies today compared to, say, 5 years ago, it’s astronomical. Most pension funds and other big investors are required to keep most of their capital invested, but even the very large funds such as Calpers have moved as much of their assets into cash as they are allowed to do. The result is also historic lows in market volatility, and that leaves the HFTs trading against each other for the most part. This is a nasty dog-eat-dog arms race that will force even very smart guys out of the business but that just leaves the largest, fastest, meanest, and best-capitalized HFTs still in the game.

    • sparta47 says:

      Yes the free market system is a superior economic system to a controlled one. But blind faith in the market is also Naïve. The Crown Prince of Libertarianism, Alan Greenspan, believed in the market. Rather than address the Fraud in the mortgage market he believed the market would take of it.
      It took awhile but the market finally did address it & the “financial crisis” began.

      However, Cronyism, Collusion & Corruption won out, pushed the market aside & gave the Kings of Capitalism a “Bailout”. Several years later our government is still afraid to prosecute the fraud for fear of the consequences. As a solution the Princes of Libertarianism give us below market rates as means to transfer wealth from savers to spender/speculators.

      Who is Naïve? The economy continues to struggle with slow growth. Where are the champions of the market?

      • Greenspan was the single biggest interventionist in the free market system since FDR. Look at how he reused to allow markets to operate independently of the Fed.

        I advise you to check out Fleckenstein’s Greenspan’s bubbles.

      • sparta47 says:

        I apologize for being sarcastic.
        Greenspan was an Ayn Rand disciple when he wanted to be. When he blocked Brooksley Born’s attempt to rein in derivatives. When he helped Wall Street break down the Glass-Steagall wall brick by brick until it only took a little push to make it fall completely down.
        When it came to regulation he was a libertarian.

        Yes he was an ardent interventionist when he kept rates artificially low. When he bailed out capitalist mistakes such as LTCM. He was the Maestro of kicking the can down the road at any sign of a stumble although he seldom saw them coming, he had to act after the fact. He was the Maestro when he spoke in explaining why things happened to those who weren’t as smart as he was.(sarcasm).

        Greenspan was First Rate Crony Capitalist.

    • Frilton Miedman says:

      A 0.1% tax on Joe sixpack buying $1K worth of GE for his 401K is nothing, the same tax is daunting if applied to all quotes for an HFT attempting to congest exchanges to enhance latency arbitrage between them at the expense of Joe.

      .

  7. scott94558 says:

    This may be a too simple a question for this board…How does my son’s 529 college savings account have any place in all of this? All I see is a casino, where what is marketed to me is a “long term” strategy.

    • Hah! Don’t forget – that 529 “long term” strategy only allows you to change your mind about your portfolio balance once a year. And typically comes with much higher fees than you could obtain with your own portfolio. And offers a much narrower selection of “investment options”…

    • Martin Barry says:

      The best way to win the HFT game is to not play. Choose long term investments with no or low fixed overheads. If it’s a portfolio managed on your behalf, ensure there is no perverse incentive for the manager to churn you in and out of products just so they can earn additional fees.

  8. [...] Alpha What happens during one second of high-frequency trading? – Barry Ritholtz [...]

  9. Frilton Miedman says:

    The day the AP was hacked, I made out well, I usually set limit orders on the long side when I add to my hedges (short), an inverse stop loss of sorts to protect myself from the practice of futures manipulation intended to trigger stop losses overnight. (Credit to Cramer for shedding light on this practice years ago)

    When the plummet occurred, it triggered a preset limit buy order on the long side and I wound up again adding the short counter-positions later that afternoon for a net positive day. despite the SPX being down..

    With the increasing regularity of these “flash” events on individual stocks, I can’t imagine it’s difficult to program blackbox trading at the retail level to scan and find those signature mini-crashes – almost any stock with a reasonable market cap that plummets 5% within seconds seems to be that “signature” and has a strong likelihood of at least a mini-dead cat bounce.

    I hate that I have to waste time and effort to protect myself from these parasites, there was a time when stocks & commodities were traded based on actual supply & demand fundamentals, now that trading revolves around not getting scalped by sleazebags that claim to “provide liquidity”.

  10. [...] but now it looks like the worm is turning. The scale of HFT is stunning – see, for instance, what happens in a half second of trading in Johnson & Johnson.. While profits are evaporating, serious concerns remain about systemic risk. Posted in [...]