Content High Frequency Trading Mini Flash Crashes References
High Frequency Trading
Anton Golub
Manchester Business School
May 5, 2011
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
High Frequency Trading Characteristics Market Microstructure High Frequency Trading Strategies Mini Flash Crashes Introduction Denition Examples Statistics References
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Characteristics Market Microstructure High Frequency Trading Strategies
Denition & Characteristics
High Frequency Trading (HFT): extremely fast, fully automated and computerized trading short trading time horizon benets from market liquidity imbalances and short-term pricing ineciencies require real-time data analysis and trading decisions do not carry overnight positions As HFT is sensitive to latency, high frequency trading rms: co-locate their computers next to exchanges buy raw data from exchanges and reconstruct the order book by them self
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Characteristics Market Microstructure High Frequency Trading Strategies
Volume & Who is trading & Annual Prots
HFT represents 70% of U.S equity volume (77% in UK) - done by only 2% of traders;
Biggest traders: Goldman Sachs, Credit Suisse, GETCO, Renaissance Technologies, Citadel. Yearly prots in U.S. are estimated to $21 billion.
Anton Golub High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Characteristics Market Microstructure High Frequency Trading Strategies
Strategies
HFT can be broadly categorized into: liquidity detection strategies: Rebate Trading, Automated Market Making pricing ineciencies strategies: Scalping, Latency Arbitrage, Statistical Arbitrage predatory strategies: Flash Trading, Quote Stung
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Characteristics Market Microstructure High Frequency Trading Strategies
What is the essence of HFT strategies?
Customer: Merchant: Customer: Merchant: Customer: Merchant: Customer: Merchant: Customer: Merchant: Customer: Merchant:
How much are those? A buck fty. Ill take some. Theyre a buck fty-one. Um, you said a buck fty. That was before I knew you wanted some. You cant do that! Its my shop. But I need to buy a hundred! A hundred? Then its buck fty-two. Youre ripping me o. Supply and demand, pal. You want em or not?
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Characteristics Market Microstructure High Frequency Trading Strategies
Rebate Trading
HFT Strategies: Rebate Trading
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Characteristics Market Microstructure High Frequency Trading Strategies
Rebate Trading
Exchanges pay HF traders that post best limit sell or best limit buy orders - Liquidity Rebate: $0,003/share. HF traders plan: place a limit buy order if his order is matched, he turns around and place a limit sell order at the same price prot from trading will be $0,00, but he will collect rebates!
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Characteristics Market Microstructure High Frequency Trading Strategies
Rebate Trading
Price 10,02 10,01 10,00 Price 10,02 10,01 10,00 Shares 600 100 100 Shares 600 100 100
best oer best bid bid
HFT buy order
oer best oer best bid
HFT sell order
Total prot = Prot from trading + Rebates = $0, 00 100 + $0, 003 200 = $0, 60.
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Characteristics Market Microstructure High Frequency Trading Strategies
Flash Trading
HFT Strategies: Flash Trading
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Characteristics Market Microstructure High Frequency Trading Strategies
Flash Trading
exchange A Price Shares 10,02 600 10,00 100 exchange B Price Shares 10,02 400 10,01 500 10,00 200
oer best oer best bid
mutual fund sends an order to buy 500 shares to exchange A exchange A does not have the best oer, so the order must be routed to exchange B instead exchange A ashes the order to privileged group of HF traders for 30 milliseconds if the order is matched it will be traded at $10,00 (superior to all sell orders)
Anton Golub High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Characteristics Market Microstructure High Frequency Trading Strategies
Flash Trading
What is the problem with Flash Trading? creating a tiered market - some traders see the incoming order, other do not gaming the exchange fee structure - orders must be routed to the venue with the best possible price allows front running - HF traders have the upper hand in knowing mutual funds intentions
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Introduction Denition Examples Statistics
Flash Crash
FLASH CRASH
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Introduction Denition Examples Statistics
May 6th Flash Crash
May 6th Flash Crash: second largest point swing of 1,010.14 points biggest one-day point decline of 998.5 points, on an intraday basis in DJIA history markets crashed in less than 5 minutes, just to soon recover
Figure: Flash Crash
Flash Crash + scaling laws/fractal nature of price mini Flash crash
Anton Golub High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Introduction Denition Examples Statistics
Denition of Mini Flash Crash
Nanex Llc. dened a up/down mini Flash Crash as: at least 10 up/down price moves before ticking down/up price change has to be greater than 0.8%, all within 1.5 seconds. 2006 2007 2008 2009 2010 Total Down Crashes 254 2,557 4,065 1,462 1,041 9,379 Up Crashes 208 2,456 4,354 1,253 777 9,048
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Introduction Denition Examples Statistics
Figure: Daily occurrences between January 1, 2006 and November 3, 2010
Anton Golub High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Introduction Denition Examples Statistics
Example of Up Crash
Figure: Goldman Sachs (GS) Up Crash
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Introduction Denition Examples Statistics
Example of Down Crash
Figure: Goldman Sachs (GS) Down Crash
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Introduction Denition Examples Statistics
Important Research Questions
How is getting hurt by mini Flash Crashes? How can we prevent mini Flash Crashes? Should we penalize the parties involved? What is the most likely time for a mini Flash Crash to occur? Which companies are most likely to get hit? Can HFT be singled out as the main source? Does the behavior of price change before/after the mini Flash Crash? Can mini Flash Crashes be predicted?
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Introduction Denition Examples Statistics
Distribution of Crashes during the day
Figure: Distribution of crashes during the day
Anton Golub High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Introduction Denition Examples Statistics
Average Price before the Crash
Figure: Average Price before the crash
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Introduction Denition Examples Statistics
Average Price vs. Intensity of the Crash
Figure: Average Price of the down-crash vs. Intensity of the down-crash
Anton Golub High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Introduction Denition Examples Statistics
Average Price vs. Intensity of the Crash
Figure: Average Price of the down-crash vs. Intensity of the down-crash
Anton Golub High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Introduction Denition Examples Statistics
Impact on Liquidity - bid/ask spread
No Impact on Bid-Ask Spread!
Figure: Average spread before vs. after the crash
Anton Golub High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
Introduction Denition Examples Statistics
How Can a mini Flash Crash Occur?
Crashes might be a result of top of the book protection that is intended to prevent trade-throughs. INET price size 32.02 500 32.01 500 32.00 500 31.99 100 ARCA price size 32.02 500
bid/ask ask ask best ask best bid
31.99
100
Table: Order book of security XYZ
Market order to buy 1000 shares is sent to ARCA; 500 shares will be routed to INET (32.00), but the remaining 500 shares will be lled on ARCA (32.02).
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
References
High Frequency Trading and its Impact on Market Quality, Jonathan A. Brogaard, November 2010 Low-Latency Trading, Joel Hasbrouck, Gideon Saar, November 2010 Does Algorithmic Trading Improve Liquidity, Terrence Hendershott, Charles M. Jones, Albert J. Menkveld, Journal of Finance, Forthcoming The Eect of High-Frequency Trading on Stock Volatility and Price Discovery, X. Frank Zhang, August 2010 Market Eciency and Microstructure Evolution in U.S. Equity Markets: A High-Frequency Perspective, Je Castura, Robert Litzenberger, Richard Gorelick, Yogesh Dwivedi, August 2010 Empirical Limitations on High Frequency Trading Protability, Michael Kerns, Alex Kulesza, Yuriy Nevmyvaka, June 2010 Nanex LLc, [Link]
Anton Golub
High Frequency Trading
Content High Frequency Trading Mini Flash Crashes References
The End
Thank you for your attention!
Anton Golub
High Frequency Trading
