The book is not very clear about how HFT makes money (or rig the market). One of the theories is Front Running. The HFT trader finds out that you are going to buy 1000 shares, he buys those and sells them back to you in a higher price to be profited by the margin. However, there is no way to know the size of an order. You see trade data published by exchanges, but not the intention of buying/selling stocks and their quantities.
Market makers stick their neck out to tell the world the bid and ask prices for a certain quantity of a stock, not the average traders trading on exchanges. How HFT profits from front running?
In addition, market price is a moving thing. The price feed you see is always the price of a trade that was done in the past, no one can accurately tells you a real-time price now. Regulators are trying their best to come up with some solution such as the NMS, national market system, order protection rule and the SIP- security information processor - which takes the price quotes submitted by exchanges and comes up with the closest to real-time price of a security. This is not perfect but perhaps it is the best we can do to make sure an investor is not ripped off by his/her brokers. Because the bid/ask price should have the SIP prices as the benchmark.
NMS is working to keep the market functioning reasonably smooth. For example, after the flash crash in 2010, SEC and CFTC are contemplating the possibility of shutting down trading for 10 minutes to restore sanity. This might effectively stop HFT trading algorithm to dump shares without considering the price when volatility is high.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment