The Underground Trader: The Employment Report, Some Stats, and High Frequency Trading

So why did the market initially take off? Obviously because the number was better than expected and far better than some worse case projections. But more importantly, it is the computer-led herd mentality and program-based news trading which feeds upon itself. I think evidence of this is the "onesidedness" of the market recently: an elevator ride down to 1040 SPX and rocket ship back up to 1100. Folks, this is just not "normal", or is the "new normal", even though I did enjoy the ride back up. Which brings me to one of Dave's favorite soapbox topics, high frequency trading (HFT). The Wall Street Journal had a little noticed article recently which made some points I had not heard before:

"One thing is clear, say traders and regulators: An eye-popping number of the stock quotes entered in the U.S. market's exchange system are canceled. For example, on Feb. 18, trading volume on the Nasdaq exchange totaled about 1.247 billion shares, according to data compiled by T3 Capital Management, a New York hedge fund. However, over the course of the same day traders submitted offers to buy or sell stock for roughly 89.704 billion shares. In other words, only 1% of the orders posted on Nasdaq actually traded.

While a portion of cancellations are part of the natural course of trading, Sean Hendelman, chief executive officer at T3, says he believes most of these canceled stock quotes are from traders loading up a stock's computerized order book with essentially fake bids and offers.

Mr. Hendelman, whose firm employs other high-frequency trading tactics, says the practice creates an inaccurate picture of the true supply and demand for a stock. "People are relying on the [stock quote data] and the data is not real," he says.

One possible solution being discussed is instituting an "order cancellation fee" which is a highly controversial topic, but one embraced by a lot of plugged-in professionals.