Ed tells us what that fancy HFT trading graph means.

variedmileage:

coteindustries:

I don’t know what it means, but it looks cool (via Awesome Quant Trading Schema | The Big Picture)

Coté may not know what this means, but I do. It’s something that’s been percolating around the financial water cooler for some time. High Frequency Traders (HFT) now dominate the market. These are funds that execute transactions on a microsecond basis, and are driven by computer algorithms sitting somewhere. Because these funds react to moment-to-moment price changes they tend to issue a lot of quote requests to the exchanges to get price activity and modify their trades. Cancelled trade orders aren’t charged trading commissions, only completed ones. So, these HFTs generate a lot of incremental work with no profit. There are massive profits to be had from their huge volume of completed trades, and that’s why most of the exchanges and dark pools allow HFTs. There’s also a massive rental and service fee profit to be had by renting floor space to the HFTs, so they can locate their servers as close as possible to the exchange systems. In this game microseconds count.

Because they’re doing this strategy, transaction sizes are getting smaller, trades are getting more frequent and turnovers of investment portfolios are getting faster. In a nutshell, price movements are getting more tied to market sentiment than fundamentals

As a result, the data handling requirements of the exchanges are going up, and those costs have to be covered somewhere. I’m skeptical of the characterization that all of these transactions are necessarily spam, they could be smaller transactions, but I don’t have access to the data so I can’t verify one way or another. I will say that it’s hardly ever a good thing when a large portion of the investment community is pursuing a single asset class or investment style.

If I had to guess, what we’ve seen over the last couple of years (very rapid risk-on/risk-off trading, tight correlations, and low volatility periods punctuated with massive swings in market values) may be the new normal unless something is done to curb high frequency trading.