HFT Shenanigans: Data Leak, AstraZeneca plc (ADR) (AZN), Illiquid Crude, And Dark Pools Keep Rising

Every week Floating Path looks to highlight some of the crazier examples of HFT running amok in the markets. We typically do so with the help of Nanex which monitors, analyzes, and visualizes high-frequency trading market data.

Consumer Sentiment Data Leak

On Friday morning Consumer Sentiment data was released at 9:55, however it is quite apparent that the information was again given to plenty of market participants early. The chart below shows trading in all National Market System stocks (about 8,000 in all) and as you can see there is a gigantic spike of activity at 9:53:28. In comparison to the actual release time, the activity 32 seconds prior saw heavier volume as high frequency traders apparently made their money long before the rest of the market even knew what the data would show.

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On Wednesday the stock of AstraZeneca plc (ADR) (NYSE:AZN) succumbed to a flash-rise, taking off for a 4% gain before returning slightly above where it started. The entire event lasted about 5 seconds and saw heavy volumes with many exchanges and dark pools participating.

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A study published the same day by Neil Johnson, professor of physics in the College of Arts and Sciences at the University of Miami, sheds some light on how predatory algorithms employed by HFT are dominating trading in sub-second intervals. While it takes the fastest humans 650 milliseconds to react, HFT algos can do so in a fraction of a millisecond, thus being able to complete round-trip trades hundreds of times before any human realizes what is happening. While that’s not necessarily bad, Professor Johnson found that action within one second time-frames is heavily weighted towards “predator” algorithms which severely distorts the “ecology” of the market.

“As long as you have the normal combination of prey and predators, everything is in balance, but if you introduce predators that are too fast, they create extreme events,” Johnson says. “What we see with the new ultrafast computer algorithms is predatory trading. In this case, the predator acts before the prey even knows it’s there.”

Illiquid Crude

The Wednesday release of the EIA Petroleum Inventory numbers brought the exact same lack of liquidity that pro-HFT folks swear doesn’t exist. While we’ve become accustomed to this happening, we will continue to highlight how, precisely to the contrary of HFT’s argument of liquidity provision, they only provide it when it’s beneficial and simply refuse to trade when variables are too great. A look at the “size map” portion of the chart below clearly shows that approximately zero contracts of crude were available to buy or sell at exactly 10:30.

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Dark Pools Keep Rising

Stock exchanges have been through some rough times of late with declarations of self help becoming an almost daily occurrence, entire markets going for flash rises, and all of malfunctions culminating in the three hour Nasdaq outage. As such, it may be expected that more and more volume will be leaving lit exchanges in favor of dark pools. With nearly 40 dark pools in existence and plans for more, combined with constant exchange glitches, the trend seen in the chart below should only continue. Volume of all stocks traded in the dark is back near 40%. This trend isn’t due to bigger trades being executed in dark pools, as the number of trades seen in the second chart is increasing right along with overall volume. If the consistent trend of market malfunctions doesn’t soon abate, will we have a stock market that largely gets executed in the dark?

HFT Shenanigans Dark Pools Keep Rising HFT Shenanigans: Data Leak, AZN, Illiquid Crude, And Dark Pools Keep Rising

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Floating Path explores economic and cultural phenomena, and hopes to educate, inspire and provoke. Discover their wide range of daily content here.