By Irene Aldridge What is the quantitative evidence regarding the presence of aggressive high-frequency traders (HFTs) in today’s markets? Our firm’s AbleMarkets Aggressive HFT Index tracks the participation of aggressive HFTs in real-time and offers some interesting observations. As 2014 rolls to a close, we are able to offer comprehensive statistics on tick-by-tick, minute-by-minute and hour-by-hour evolution of aggressive HFT participation during this past year, as well as daily statistics presented in this article. Why does aggressive HFT participation matter? Multiple academic studies have confirmed that aggressive HFTs worsen market conditions for institutional investors. The aggressive HFTs are not to be confused with the passiveRead More →

By Irene Aldridge With the advent of high-frequency trading, measuring microstructure risk has not only become easier due to the availability of data, it has also become mandatory. Over the past several years, so-called flash crashes have triggered stop losses and caused numerous investors to liquidate positions early or forced investors out on the sidelines of the market altogether. Aggressive high-frequency traders have been shown to worsen market conditions and instilled dread, anger and a feeling of hopelessness in many market participants. Runaway algorithms sank ships like Knight Capital Group, dealing multi-million dollar losses in a matter of minutes. While the academics have worked onRead More →

By Irene Aldridge As a high-frequency trader I often weigh the risks of HFT. Some of these considerations are generated by the obvious desire to contain the risks of my operation and thereby enhance profitability and attractiveness to prospective partners and investors. Alternative concepts are driven by the proposals of third-parties, who are often individuals that view HFT as a threat. In this note I explore the real and the imagined risks from the impact of HFT — specifically and externally. As I discuss in my new book, High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems, 2nd Edition (Wiley, ISBN: 978-1118343500), mostRead More →

By Irene Aldridge It’s not a secret that many pension fund, mutual fund and hedge fund managers are concerned about high-frequency traders (HFTs). While their concerns are many, perhaps the biggest uncertainty involves the actual extent of HFT participation in the markets, their identities and their intent. While some claim that HFTs comprise 60-70% of all market participants, such numbers are seldom reached in reality. Scientific examinations find that HFTs still account for as little as 25% of all market activity in such frequently traded instruments as the S&P 500 E-mini futures (see Kirilenko et al., 2011). As Figure 1 shows, even in the veryRead More →

By Irene Aldridge Opinions on high-frequency trading still run the gamut. On one end of the spectrum we find individuals such as Mark Cuban, a successful Dallas-based businessman, who recently proclaimed that he is afraid of high-frequency traders. Mr. Cuban’s fears are based on his belief that high-frequency traders are nothing more than “hackers,” seeking to game the markets and take unfair advantage of systems and investors. On the other extreme are employers in the financial services industry. Just open the “Jobs” page in “Money and Investment” section in the Wall Street Journal, and all you will find are job postings seeking talent for high-frequencyRead More →

By Irene Aldridge Recent arguments accuse high-frequency traders (HFTs) of a specific market distortion scheme. The HFTs, the argument goes, use their soon-to-be-cancelled limit orders to mislead large investors about the shape of the supply and demand curve. This HFT strategy is purported to work as follows: 1) an HFT posts lots of limit orders on both the bid and the ask sides of the trades; 2) once the large trader’s market order hits the bid (or lifts the offer), the HFT now knows that the large trader is now selling (or buying); 3) the HFT cancels all other limit orders and starts aggressively tradingRead More →

By Irene Aldridge Many high-profile long-term investors have publicly expressed their frustration with the tactics of some high frequency traders (HFTs). While much of the criticism leveled against high-frequency traders does not hold water (research has shown that HFTs drive down transaction costs incurred by all investors, for example), certain tactics should give investors pause. This article gives a brief overview of the HFT activity that pundits describe as troublesome and the actions investors can take to immunize their trading. I am scheduled to offer a detailed examination of these HFT activities, means to prevent it and approaches to minimize their impact in my newRead More →