Mysterious high-frequency market moves


High-frequency trading has come full circle to being a front-burner issue, as calls for more regulation spread around the globe.

In the U.S., of course, this is an old issue that seems to have quieted along with the decline in trading volume over the past two years. But the issue cropped up again this month, when Nanex noticed two aberrations for which there exist no easy explanation.

First, the company noticed a $13 dollar spike in the price of Kraft.

"When the market opened, Kraft shares went from $45.55 to a high of $58.54 before the Nasdaq canceled trades above $47.82," according to CNBC.

Nanex founder Eric Hunsader told the network that one solution should be to allow the trades to go through and "make the bidder pay the inflated price. "I think let the market sort it out," he said. "I wouldn't cancel the trade."

At about the same time, Nanex said that a single high-frequency trader ended up flooding the market with quotes, accounting for about 4 percent of all quote traffic in a single week.

"The program placed orders in 25-millisecond bursts involving about 500 stocks, according to Nanex, a market data firm. The algorithm never executed a single trade, and it abruptly ended at about 10:30 a.m. ET Friday," according to CNBC.

One explanation is that the firm was essentially testing a new algo to see how robust it was, and it could cause any "latency effects" for the entire market.

"The ultimate goal of many of these programs is to gum up the system so it slows down the quote feed to others and allows the computer traders (with their co-located servers at the exchanges) to gain a money-making arbitrage opportunity," notes CNBC.

It goes to show that quote traffic is little understood and little monitored. You do get the feeling that we're on borrowed time in terms of the next Flash Crash.

For more:
- here's the article on Kraft
- here's the article on the market