Guest Post: A Five Minute Example of HFT Shenanigans

Via Dennis Dick of PreMarketInfo.com,

I was trying to buy 500 shares of a preferred stock this morning, Principal Financial Group Inc. series B (NYSE:PFG-B).  It is such a challenge to trade any type of illiquid issue as the execution of orders is nearly impossible in this HFT world.  Here is the sequence of events.

At 09:39:08, the stock is offered on EDGX at $26.29.

I place an order to lift the offer.  The shares trade but I get filled on zero shares.  Knowing that my bid will cause a bunch of HFT programs to penny-jump me (step ahead of my order by a penny –  which they immediately do), I cancel the order. The HFT penny jumper cancels their order as well.

At 09:39:29, the stock is offered on EDGX again at $26.32.  I place an order to lift the offer.  The stock trades at the exact same second.  Again, I get filled on zero shares.  I cancel the order.

At 09:39:41, the stock is offered on PCSE at $26.29.  I place an order to lift the offer.  The stock trades at the exact same second again, but I get filled on zero shares.  I cancel the order.

At 09:39:50, I place a hidden order to buy the stock at $26.32.  Five second later the stock prints in front of me at $26.33 (Obviously these hidden orders aren’t as hidden as they should be).  I leave the hidden order to buy at $26.32.

At 09:40:05, the stock prints right through my hidden order on another exchange at $26.30.  So despite my bid being higher at $26.32, thanks to the fragmentation in the market, I get filled on zero shares again (and the seller gets a worse price!)

At 09:40:20, the stock prints through my hidden order again at $26.30.  Again, no execution for me.  Frustrated, I cancel my order.

A few seconds later, at 09:40:36 a couple of HFT programs battle out for the top of the order queue, and the bid changes rapidly, as you can see below:

At 09:40:40, the HFT programs go to battle again fighting for the best bid.

This battle continues for the next few minutes.  In fact, during one period of time from 09:44:53 – 09:46:35 (a total of just over a minute and a half), the best bid changes over 800 times, as these two HFT algorithms battle to be at the top of the queue.

At 10:07:14, I finally lift an offer and pay up to $26.35.  The HFT firms scalps their few cents from me, and all the games are over.

Some serious issues are highlighted in these few minutes of activity:

1) Inability for market participants to access a quote.

2) Excessive quote pollution as HFT algorithms battle each other.

3) Market fragmentation can lead to inferior execution.

4) HFT penny jumping can discourage market liquidity.

The bottom line is that all of these issues discourage participants from trading illiquid securities – making these securities even more illiquid.

DoubleLine's Gundlach Shorts JPY And Prefers Gold To Stocks – Full SlideShow

Jeff Gundlach presents his latest thoughts in the following 75-slide presentation and webcast. Briefly summing it up, he expects considerably more volatility to re-appear in Europe, thinks JPY is a short (and NKY a buy) and Japan is to be closely watched, prefers Gold to stocks as a vehicle to play more quantitative easing, and is anxious of the fiscal cliff – noting that the problem was created from years of budget deficits. Some notable quotes include: “A lot of that GDP is phony”; “Japan is really out of policy tools”; “Many countries can be net debtors if central banks are monetizing debt.”

Live webcast link here.

 

Two of his favorite charts for the year (somewhat sadly) are:

 

Student debt, which is exploding, is a real problem…

 

 

And the mega chart-pack is here:

12-11-12 To Catch A Thief webcast Slides – FINAL

The 'Other' Confidence Indicator

Presented with little comment, but as we head into another FOMC meeting, we remind all those ‘recovery is just around the corner’-ites that the market’s expectations for how long the Fed will be on hold has never been higher at around 35 months – certainly doesn’t suggest an expectation of things getting better in reality any time soon.

 

 

Chart: BofAML

Dare To Balance The Budget? An Interactive Guide To Washington's Biggest Nightmare

The CBO has outlined a number of options for balancing the budget (full paper below). From ‘Increases In Tax Revenue’ to ‘Cuts to Annually Appropriated Spending’ and ‘Cuts to Benefits or Entitlements’, it’s all here in a handy Do-It-Yourself Interactive Deficit-Reduction Plan tool from WSJ. All ‘compromises’ welcome…

 

Click on the images to link to the WSJ site and try your hand a fixing the $1.1 trillion deficit projected for 2020…

Increases In Tax Revenues

 

Cuts To Annually Appropriated Spending

 

Cuts To Benefits or Entitlements

 

 

43692 DeficitReduction Screen

Steve Keen – Lessons On The Fiscal Cliff From The 1930s

The infamous debunker of most-things-classically-economic was recently asked to brief Congress on the fiscal cliff, and how the downturn of 1937 could be a foretaste of what will happen if the Cliff comes to pass. The paper, slides, and presentation – designed to be simple enough for Dennis Kucinich and his colleagues in Congress to comprehend – provide another glimpse as Steve Keen argues that an attempt by the government to reduce its debt now may trigger a renewed bout of deleveraging by the private sector – and this is what appeared to happen in 1937, when confidence that the worst of the Depression was over led to the government reducing its deficit.


Private sector deleveraging, which had stopped in 1934-35, began once more and unemployment rapidly rose from about 10 to almost 20 percent. The main danger with the Fiscal Cliff is therefore not what the reduction of government spending will do on its own, but that it might trigger a renewed bout of deleveraging from the $40 trillion overhang of private debt that Keen calls the “Rock of Damocles”.

 

Full briefing here:

 

Steve’s Takeaway Points:

  • Private debt and government debt are independent, but affect each other.
  • Both boost demand in the economy when they rise, and reduce it when they fall.
  • Private debt is more important than public debt because it is so much larger, and it drives the economy whereas government debt reacts to it
  • The crisis was caused by the growth of private debt collapsing.
  • Government debt rose because the economy collapsed, and it reduced the severity of the crisis.
  • A premature attempt to reduce government debt through the fiscal cliff could trigger a renewed bout of deleveraging by the private sector, which could push the economy back into a recession.
  • For the foreseeable future, the main challenge of public policy will be not reducing government debt, but managing the impact of the much larger “Rock of Damocles” of private debt that hangs over the economy. 

 

Keen’s paper here:

Keen 2012 Fiscal Cliff Lessons From 1930 s

 

The slides can be access here.

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