Wednesday, April 24, 2013
High frequency trading makes liquidity "fickle"
The fake AP story caused the Dow to drop 100 points and rebound that amount in 90 seconds. There are no more human market makers so when an event like this happens only the computers are reacting and they act very quickly, without thought, and that creates these mini-crashes. The danger is that this will cascade and bring the market down when it is already in a bear market. The will crash because of an event like this and then people, real humans, will reinforce the fall by selling themselves. We have been in a bull market since 2009 but that will end some day. Then we will find out how dangerous HFT is.
Traders and analysts say that at the first sign of crisis (and sometimes in the absence of a crisis), high-frequency traders pull out of the market, leaving a void of buyers and sellers.
In fact, liquidity dried up even faster after the false tweet Tuesday than it had during the infamous Flash Crash of 2010.
Eric Hunsader, the founder of Nanex, a firm that tracks trading behavior. said Tuesday's market reaction shows that trading has become even faster in recent years.
"One tweet can do more damage to our market's liquidity than the flash crash," said Hunsader. Certain trading pools were overloaded, and trades weren't reported for four minutes, he added.
Within the past year and a half, disruptions in the market marred the IPOs of the BATS exchange and Facebook.
Just Monday, Google (GOOG, Fortune 500) had an inexplicable flash crash. It only lasted a few seconds but still signals the fragility of markets in a high-speed trading world.
Labels: High Frequency Trading