This past week in the markets may have been lower on volume towards the end, but one thing that wasn’t lacking was high frequency trading running amok. With the help of the folks over at Nanex, we’ve compiled the instances in which HFT computers have caused obscene gyrations in either a stock price, its quotes, or sometimes both and have highlighted a few that are the most interesting.
The chart above shows the most egregious price swing found this week when NextEra Energy (ticker symbol: NEE) with a market capitalization north of $30 billion, took 2.65 seconds to lose over 60% of its value. During this period, NEE saw 616 quotes and 382 trades while the price dipped from a little below $80 per share to about $30. As the chart shows, the ridiculous trades were the responsibility of only one exchange, the beloved New York Stock Exchange. Taking a look at the other mini flash crashes in individual names from that same morning, you can see that the NYSE is again the host of the HFT party.
The other glaring example of HFT malfeasance occurred in the stock of Microsoft. Much like hackers launch denial of service attacks on websites by overloading host servers with information, high frequency trading machines can do the same by placing and canceling large numbers of orders, thereby gumming up the pipes of the market’s plumbing. The machines can then take advantage of other participants that are unaware of the slowdown.
On May 21, 2013, there were 3 separate instances of a Denial of Service attack (DoS – not the Disk Operating System from the 80s) in the stock of Microsoft (symbol: MSFT, market cap $290 billion): at 13:01:18, 15:47:48 and 15:51:42.
It appears some high frequency trader (HFT) placed and canceled 324,507 orders in MSFT at very high rates over 21 seconds of time as shown in the table below. Note, the total number of quotes during regular trading hours in MSFT on the same day was 1,672,336 – which means this one HFT was responsible for at least 19.4% of all quotes in MSFT for that day. Note: no trades were executed from these orders. These HFT quotes all came from the NQ-Phil exchange.
As we know, speed is the name of the game and latency arbitrage is the road to riskless profits, albeit littered with unethical and illegal decisions. What will the world of high frequency trading bring this week?