financial times article on hft, page-3

ty dandman
i picked out the bones of the article that twas of interest.

retail investors - would look at this and say:

' this whole Wall Street thing is just rigged against me ' by Jeremy Grant, 02 September 2010.

Data centres where traders of stocks, futures, options and currencies will place their computers next to Exchanges own systems.

The idea is by having their equipment only metres away from where the operator of the territory's securities markets handles the trades, those for whom speed is everything can shave milliseconds off the time it takes for a transaction to be completed. It is a far cry from the days when shares were bought and sold by humans on a trading floor.

The concept - known as co-location - is growing fast.

In Australia, ASX plans a centre offering co-location by next August.

The speed with which exchanges are building such facilities is a sign of the global spread of a phenomenon gripping the markets: "high-frequency trading" (HFT). The phrase describes a style of electronic dealing that uses algorithms to dip automatically in and out of markets hundreds of times faster than the blink of a human eye.

Christian Thwaites, chief executive of Sentinel Investment Companies, a US asset manager, says:

"The mystery and mystique of HFT, the lack of clarity and therefore opacity has meant that

retail investors -

who have obviously been terribly burned over the last few years -

look at this and say:

'this whole Wall Street thing is just rigged against me'."

Established market users - such as the asset managers that take care of pension funds - say HFT, coupled with the fragmentation of trading across venues, makes it harder to rely on one of the most basic functions of the markets: orderly and fair price formation.

Analysts at Nanex, a Chicago market data company, say high-frequency traders may be using algorithms to send unusually heavy traffic to exchanges and other platforms in a deliberate attempt to slow down their data systems.

Knowing that a certain exchanges system is about to run more slowly gives a trader an opportunity to set up a buy or sell order in advance. The process is called 'quote stuffing' and is used in a strategy known as 'latency arbitrage' latency referring to the speed at which message traffic moves through a system.

Moments in time: trading patterns such as 'Bandsaw II' are among those that can signal unusual activity by high-frequency dealers.

In its analysis of the flash crash, Nanex managed to plot how the bursts of traffic looked visually on graphs. Many appeared as distinct geometric patterns, such as jagged shapes that Nanex dubbed 'Bandsaw II', and another pattern called the 'Boston Zapper'. "There is no economic justification for it," says Eric Scott Hunsader, founder of Nanex. "If this is OK by everybody, the market is not going to function in a very short period of time."

http://www.ft.com/cms/s/0/b2373a36-b6c2-11df-b3dd-00144feabdc0.html