As the debate on benefits and ills of high-frequency trading continues (HFT), the US market infrastructure prepares to manage a capacity of three million quotes a second, one HFT watcher believes the growing disparity between quotes and filled orders will weaken the market.
Eric Scott Hunsader, CEO of market data solutions provider Nanex, has watched US equity markets for years, compiling detailed data from US markets’ consolidated tapes to reach informed conclusions about the effects of massively increased quote traffic.
Hunsader sees the increase in quote message traffic – which NYSE subsidiary the Securities Industry Automation Corporation has predicted will jump to three million quotes per second in October – is undermining the market.
Hunsader labels this phenomenon ‘high-frequency quote spamming’ and figures from 2008 to 2012 Consolidated Quotation System and Consolidated Tape Association trade figures have shown a significant divergence in the growth of quotes compared with that of trades.
Comparing two average trading days on lit venues NYSE, NYSE’s American Stock Exchange (known as AMEX) and NYSE Arca four years apart, Hunsader has identified this alarming trend. On 15 February 2012, per-second message traffic remained between 1-1.3 million resulting in 150,000-200,000 filled trades throughout the day. This compares to 12 February 2008, when per-second message traffic was concentrated between 80,000-400,000, with filled trades between 50,000 and 200,000.
“Reg NMS has fragmented liquidity and created latency arbitrage opportunities across more than a dozen venues,” Hunsader told theTRADEnews.com. “Meanwhile, the computing technology underpinning trading infrastructure has become faster, leading to exchanges building new trading facilities that offered co-location, favoured by many HFT firms.”
Due to the volume of quotes, Hunsader fears academia and traders looking to analyse quotes will need prohibitively expensive hardware and access to trade and quote data. He adds that HFT generated such a volume of quotes during the May 2010 flash crash, and the SEC took five months to assemble the data.
“HFT has already proved to harm long-term investors, with wider and less stable spreads during market open, which causes micro flash crashes in individual stocks and misleading price quotes that interferes with price discovery – an essential element of a stock exchange,” Hunsader said.