Sharing some of my thoughts and summary links of HFT documents, strategies, self regulation - a lot to digest. Research subjects "inside quotes" nearer the bottom.
HFT now occurs at sub millisecond speeds - watch this recent release from Nanex - the timeline is milliseconds (1/1000th of a second). Increments are not 1 seconds, the whole thing is 1/2 of 1 second.
"This 0.5 seconds of trading in $JNJ can't be audited by the regulator. Just how #HFT likes it" @nanexllc Link: http://t.co/ciuWvMMGwU (youtube)
It describes also a spoke and hub market structure, that resides external to the DTCC - the clearing house for the majority of settled trades. DTCC has a subsidiary CEDE and Co. (e.g. asx.NWS sh/hldr) that is custodian to all "street name" share certificates for US traders/dealers. Over $23trillion in global equity holdings are held by the DTCC as legal custodian. They are the record keepers - hence the inventory integrity should be maintained by them (for US listed equities).
http://www.dtcc.com/about/business/index.php DTCC website, note comments on naked selling: http://www.dtcc.com/leadership/issues/nss/ "Naked short selling is selling stock you don't own, but not borrowing it and making no attempt to do so. While naked short selling occurs, the extent to which it occurs is in dispute. "
SEC introduced "Reg SHO" in 2004 to report stocks subject to rampant naked selling and FTD "failure to deliver" - predominantly due to naked short selling. Report it, not stop it. So now NASDAQ and NYSE (among others) report daily on Reg SHO lists.
NYSE has similar. I don't think Australia has anything similar, but if you hear of "limit borrow" this is what is inferred. ASIC reports short positions that are typically 3 days delayed.
A stocks listed inventory determines price coupled with demand. Oversupply (naked selling) creates non-existent supply, increases inventory and drives the price down (by design and intent). Stocks can be subjected to naked selling for hundreds of days, and inside of T+3 would be impossible to detect.
Clearly shown in this excellent multipart series of explanatory videos (youtube) - Part 1: http://www.youtube.com/watch?v=gpWzOjB8qtU Part 2: http://www.youtube.com/watch?v=k1G-FW8_vn8 (note: at least watch all of part 2)
Importantly - find and read the documents referenced in the multipart vids. They demonstrate what you are up against as a trader. Recently Overstock and Dendreon (both US) have been subject to examination of predatory selling and miscreant broker/dealers. The same actors are world wide, and it is business as usual.
This would still occur to the present day. Dark pools are further removed from whatever pathetic self regulation you think exists. Be aware of that - it derides/overrides fundamentals and is predatory by design. You will chase a stock lower in disbelief, costing you a lot of money.
UBS is well known (amongst many others) for flipping trades in high frequency trading strategies, asx is no exception. Top 3 highest frequency traders in the asx Jan-May2013 are Citi global, Deutsche Sec and UBS, with low net position change against very high trade volume and frequency.
UBS was recently fined for naked selling breaches, so the practices remains well and truly alive despite whatever regulation is in place. http://www.deepcapture.com/wp-content/uploads/FINRA-v-UBS-Settlement-Letter1.pdf
What to do? The 3 firms above show (in data) a practice of flipping which can often be detrimental to share price. This is by no means isolated to them alone, as asx.BBG (Billabong) shows recently having capitulated due to what is obvious (to me) predatory selling by other well know actors. Aside from the sales process being an unmitigated disaster, the share price is a result of participants that started 12 months prior to the first offer.
I've formed the opinion that the US and UK markets are joined at the hip in playing tag team, and Swiss firms are happy to oblige in participation. The size of the ASX is tiny, and fundamentals are very secondary. So trade the trend, and do as they do - derisk at regular periods.
Credit Suisse released a paper recently on "momentum ignition" strategies (detecting and trading) which is used to ignite fast and rapid price movements in markets. Designed to maximise returns (long or short or both) in the shortest timeframe
"Market impact model" is the strategy to minimise the impact of large purchases by splitting it into smaller orders while monitoring depth of bid/offer.
The "time value of money" is the holy grail of any mathematical strategy, and responding to "diminishing utility (return)" explains price cycles. "Game theory" is a global strategy, and thinking of the markets more as a game is less stressful and more rewarding financially (and strategically). Opportunities are sometimes fleeting, and maximising returns is a game of wits and wallets.
In short, if you are near a clear and present trend/turn point on a well researched stock you intend to buy (or sell), one strategy would be to split your parcel in half. Trade the first as you would, trade the second in response to HFT ignition events that better places your entry.
asx.LYC was one such instance recently where it dropped through to sub 50c. asx.BBG is likewise trading for scalp trades. All set up by major market participants much larger than thee.
Buy and hold is dead, averaging down is dangerous. Get to know the market structure and be comfortable in forming your own opinions. The activity of "market makers" is not as well intended as you (or ASIC) might think.
Just my 20c. Trade carefully, and pick your marks.
(There are gigabytes of data in the public domain to support a better understanding of market structure. Don't trade blind folded, and don't soak up too much rhetoric. Be an informed critic.)
