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.
On Tuesday, a high frequency trading algorithm apparently spoofed the eMini futures contract. This illegal activity can manipulate a price higher or lower without actually executing a trade, as we saw in Panther Energy’s spoofing in the oil markets. Here in the eMini, the price rose about 1 point, or $50 per contract. Also of note in the chart below is the severe reduction of liquidity around the 10:00 release of Consumer Confidence data, contrary to pro-HFT arguments that liquidity is provided by high frequency participants.
An excellent article from Fortune highlighted some recent studies exposing latency between exchanges which would allow the capture of absolutely risk-less profits through simple latency arbitrage. Professor Hendershott from UC Berkeley conducted research using access to high-speed trading technology granted by Redline Trading Solutions. Due to information delays, he was able to produce $377,000 in theoretical profits trading Apple Inc. (NASDAQ:AAPL)’s stock on May 9th. One ticker, trading for one day, produced over a quarter million dollars in free money for anyone with fast enough computers.
Redline allowed him to use its “direct market access” — cables that run directly from exchange servers to its own. Redline’s server was co-located with that of BATS Exchange so that the “latency” on information and orders coming from BATS was cut down to barely one thousandth of a second. As a result, some of the quotes on public feeds such as the crucial “national best bid and offer” feed were a few milliseconds behind those Hendershott could see on his direct link with the exchanges. With a half-decent trading algorithm, Hendershott would have had ample time to buy Apple Inc. (NASDAQ:AAPL) at a stale price with a guarantee that he could sell at a profit. Every couple of seconds. All day. Risk on the trades: zero.
On Friday the stock of The Procter & Gamble Company (NYSE:PG) took a sudden and curious 5% dip in about 100 milliseconds. The curious part of the drop is the amount. It was just within the bands set by exchanges in their Limit Up Limit Down rules to prevent “extraordinary market volatility in U.S. equity markets.” Some may consider 5% in 100 milliseconds extraordinary volatility. Previously we’ve displayed how the NYSE’s LRP program is far superior to LULD rules used by other exchanges.