What’s become of the markets?
Nanex, the market analysis firm, has animated a half-second of trading activity in Johnson & Johnson stock, and in the video above this has been sped up by Paul Hoover.
The animation is intoxicating and mindblowing, not only because of the sheer quantity of trades, each of which is made by computer algorithms (i.e. without human intervention) in such a miniscule timespan, but also because of the tremendous scope that high-frequency trading creates for what Nanex calls “abusive behaviour” — including arbitrate and market manipulation — and systemic risk.
The illustrates an actual half second of trading in J&J stock from 2 May 2013, slowed down then sped up. In the video each box represents a stock exchange. As Time magazine explained in an article last year (“Wall Street’s Doomsday Machine“) high frequency trading has nothing to do with the efficient allocation of capital, and everything to do with socially-useless proprietary trading that runs counter to the interests of long-term investors:-
“High frequency trading is a catch-all term that describes the practice of firms using high-powered computers to execute trades at very fast speeds – sometimes thousands or millions of trades per second. These systems have developed over the past ten years, and began to really dominate Wall Street over the last five. For example, a high-frequency trader might try to take advantage of miniscule differences in prices between securities offered on different exchanges: ABC stock could be offered for one price in New York and for a slightly higher price in London. With a high-powered computer and an “algorithm,” a trader could buy the cheap stock and sell the expensive one almost simultaneously, making an almost risk-free profit for himself..”.
Nanex created the animation in order to try and explain how today’s equity markets work to US regulators, including the Securities & Exchange Commision and the Commodities Futures Trade Commission (CFTC). Here’s what Nanex said about the animation and its significance:-
“We got the idea after realizing, in face to face meetings with them, they didn’t understand market structure or the importance of latency and the consolidated feed. That was several years ago. We still aren’t sure if they get it, or are just playing dumb.
“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 behaviour.
“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…
“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.
This blog was posted on 10 May 2013
HFT is symptomatic of the problem with markets. It ignores the purpose of the markets — to raise capital and allow an efficient transfer of ownership — and is purely a moneymaking scheme. Such trading adds no value, has no social purpose, and should be banned.