[FoRK] Chart of the day, HFT edition

Eugen Leitl eugen at leitl.org
Wed Aug 8 03:25:49 PDT 2012


Chart of the day, HFT edition

By Felix Salmon

August 6, 2012

This astonishing GIF comes from Nanex, and shows the amount of high-frequency
trading in the stock market from January 2007 to January 2012. (Which means
that the Knightmare craziness of last week is not included.)

The various colors, as identified in the legend on the right, are all the
different US stock exchanges. You might think there are only two stock
exchanges in the US, but you’d be wrong: there are only two exchanges where
stocks are listed. There are many, many more exchanges where stocks are

What we see here is relatively low levels of high-frequency trading through
all of 2007. Then, in 2008, a pattern starts to emerge: a big spike right at
the close, at 4pm, which is soon mirrored by another spike at the open. This
is the era of traders going off to play golf in the middle of the day,
because nothing interesting happens except at the beginning and the end of
the trading day. But it doesn’t last long.

By the end of 2008, odd spikes in trading activity show up in the middle of
the day, and of course there’s a huge flurry of activity around the time of
the financial crisis. And then, after that, things just become completely
unpredictable. There’s still a morning spike for most of 2009, but even that
goes away eventually, to be replaced with sheer noise. Sometimes, like at the
end of 2010, high-frequency trading activity is very low. At other times,
like at the end of 2011, it’s incredibly high. Intraday spikes can happen at
any time of day, and volumes can surge and fall back in pretty much random

It’s certainly fair to say that if you take a long, five-year view, then you
can see a clear rise in trading activity. But it’s also fair to say that
there’s something quite literally out of control going on here. Just as the
quants at Knight found themselves unable to turn off their machines for 30
long minutes last week, the HFT world in aggregate seemingly has a mind of
its own when it comes to trading patterns. Or, to put it another way, if
there’s a pattern here, it’s one incomprehensible to human minds.

Back in 2007, I wasn’t a fan of a financial-transactions tax; today, I am.
And this chart shows better than anything why my opinion has changed. The
stock market is clearly more dangerous than it was in 2007, with much greater
tail risk; meanwhile, in return for facing that danger, society as a whole
has received precious little utility. Are spreads a tiny bit tighter than
they might be otherwise? Perhaps. But that has no effect on stock-market
returns for long-term or even medium-term investors.

The stock market today is a war zone, where algobots fight each other over
pennies, millions of times a second. Sometimes, the casualties are merely
companies like Knight, and few people have much sympathy for them. But
inevitably, at some point in the future, significant losses will end up being
borne by investors with no direct connection to the HFT world, which is so
complex that its potential systemic repercussions are literally unknowable.
The potential cost is huge; the short-term benefits are minuscule. Let’s give
HFT the funeral it deserves.

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