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Another Example Of Rigging The Stock Market

Comments Off on Another Example Of Rigging The Stock Market

High frequency trading on steroids. Nanex spotted the trading activity when 4% of the traffic volume were for orders by a computer algorithm where none of them ended in a single trade. Quite clearly the intention was to move the market in a certain direction. It’s just another example that the whole financial system is rotten to the core.

A single mysterious computer program that placed orders — and then subsequently canceled them — made up 4 percent of all quote traffic in the U.S. stock market last week, according to the top tracker of high-frequency trading activity. The motive of the algorithm is still unclear.

The program placed orders in 25-millisecond bursts involving about 500 stocks, according to Nanex, a market data firm. The algorithm never executed a single trade, and it abruptly ended at about 10:30 a.m. ET Friday.

“Just goes to show you how just one person can have such an outsized impact on the market,” said Eric Hunsader, head of Nanex and the No. 1 detector of trading anomalies watching Wall Street today. “Exchanges are just not monitoring it.”

Hunsader’s sonar picked up that this was a single high-frequency trader after seeing the program’s pattern (200 fake quotes, then 400, then 1,000) repeated over and over. Also, it was being routed from the same place, the Nasdaq

 “My guess is that the algo was testing the market, as high-frequency frequently does,” says Jon Najarian, co-founder of TradeMonster.com. “As soon as they add bandwidth, the HFT crowd sees how quickly they can top out to create latency.” (Read More: Unclear What Caused Kraft Spike: Nanex Founder.)

Translation: The ultimate goal of many of these programs is to gum up the system so it slows down the quote feed to others and allows the computer traders (with their co-located servers at the exchanges) to gain a money-making arbitrage opportunity.

The scariest part of this single program was that its millions of quotes accounted for 10 percent of the bandwidth that is allowed for trading on any given day, according to Nanex. (The size of the bandwidth pipe is determined by a group made up of the exchanges called the Consolidated Quote System.)

Source: CNBC

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Machines Account For 84% of Stock Trades

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Most people’s confidence in the stock market has taken a hit over the last few years and more and more trades are dominated by high frequency trading (HFT). Morgan Stanley recently reported that now machines account for over 84% of the market. This accounts for the flash crashes but what would happen if the plug was pulled overnight when 84% of trades are computer programes.

Morgan Stanley has just shown (via the Financial Times) that the percentage of high frequency trading in the stock market has skyrocketed to 84%:

Trading by “real” investors is taking up the smallest share of US stock market volumes [since Morgan Stanley  started keeping track 10 years ago.]

The findings highlight how US trading activity is increasingly being fuelled by fast turnover of shares by independent firms and the market-making desks of brokerages, many using high-frequency trading engines. [actually all of the market-making desks are using it.]

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The proportion of US trading activity represented by buy and sell orders from mutual funds, hedge funds, pensions and brokerages, referred to as “real money” or institutional investors, accounted for just 16 per cent of total market volume in the form of buying, and 13 per cent via selling in the final quarter of last year, according to analysis by Morgan Stanley’s Quantitative and Derivative Strategies group.

It’s not just the U.S. High frequency trading dominates in the U.K. as well.

 

Source: Ritholtz

http://en.wikipedia.org/wiki/High-frequency_trading

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