The Problem of HFT - Collected Writings on High Frequency Trading & Stock Market Structure Reform

The Problem of HFT - Collected Writings on High Frequency Trading & Stock Market Structure Reform

Haim Bodek

Language: English

Pages: 112

ISBN: 1481978357

Format: PDF / Kindle (mobi) / ePub

This book explores the problem of high frequency trading (HFT) as well as the need for US stock market reform. This collection of previously published and unpublished materials includes the following articles and white papers:

1. The Problem of HFT - explains how HFTs came to dominate US equity markets by exploiting artificial advantages introduced by electronic exchanges that catered to HFT strategies

2. HFT Scalping Strategies - describes the primary features of modern HFT strategies currently active in US equities as well as the benefits these strategies extract from the maker-taker market model and the regulatory framework of the national market system

3. Why HFTs Have an Advantage - explains the critical importance of HFT-oriented special order types and exchange order matching engine practices in the operation of modern HFT strategies

4. HFT - A Systemic Issue - a discussion of the latest industry and regulatory developments with regard to exchange order matching practices that serve to advantage HFTs over the public customer

5. Electronic Liquidity Strategy - proposes a conceptual framework for institutional traders to achieve superior execution performance in HFT-oriented electronic market venues

6. Reforming the National Market System - proposes a 10-step plan for strengthening the operation of the US equities marketplace in order to serve the needs of long-term investors

7. NZZ Interview with Haim Bodek - addresses current topics and proposals for US equities market structure reforms

8. TradeTech Interview with Haim Bodek - addresses the current status of the HFT special order type debate












must reignite the discussion, purpose and intent of Rule 610 and the ban on locked markets. In other words, solving the problem of locked markets in a manner that is fair and non-discriminatory for all market participants will also tame the HFT problem. HFT is about being first in the queue, period. That is an HFT’s primary alpha. The implementation of REG NMS in 2007 changed the mechanisms for achieving queue position in a price-time priority market. This fundamentally changed trading

move. Such strategies would attempt to “step in the middle” to set a new aggressive price. This invariably locked away markets. Rule 610 demanded that such orders not be accepted at the entered price. This activity caused immense load on exchanges, but in no way did exchanges want to discourage high-volume HFT order flow. To court HFTs, exchanges provided a number of specialized features to assist “spam and cancel” strategies, many of which are still operational today. A common order matching

impact. Furthermore, two-sided strategies are often important tools in eliminating adverse selection bias from the distribution of executed transactions as measured on a post-trade metric, in effect subsidizing the reduction of transaction costs through edge capture. ELS does not provide two-side liquidity by scalping a traditional market making spread, but instead responds to adverse order flows by exiting inventory opportunistically. In such conditions, ELS will aim to exit inventory for a

30.00 bid for 1000 1.3. HFT resting order at top-of-queue top-of-book 30.00 bid for 100 on Exchange A. One method of achieving this superior queue position is through special order types combined with spamming. Note that such spamming is designed to achieve queue position, not to impact the network or spoof pricing. 2. Incoming sell 1000 at 30.00 order on Exchange A hits bid, clearing Exchange A’s book @ 30.00; HFT resting 30.00 bid for 100 is taken out. HFT collects rebate on this first leg

Haim. “Locked Markets, Priority and Why HFTs Have an Advantage: Part II: Hide & Light.” Decimus Capital Markets, LLC. Tabb Forum, 16 Oct 2012. [32] For another example of price-time priority corruption, where orders that “hide and light” are permitted to queue jump orders commonly used by institutional investors, see “For Superfast Stock Traders, a Way to Jump Ahead in Line.”

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