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					                                     Modern Microstructure:
High Frequency Trading, Spread Capture, and The Flash Crash
                   Questions to think about in advance


• How should Market Quality be measured?
• What is the impact of High Frequency Trading on Market
  Quality?
• What caused the Flash Crash?
• What was the impact of the Flash Crash?
• What can/needs to be done to prevent another Flash
  Crash?
                                               Outline

1. Market Making
2. Order Placement
3. High Frequency Trading and Market Quality
4. Analytics
5. Synthesis: The Flash Crash
                                         Market Making




• Consideration            • Did market making activities
   – Spread                  contribute to the flash crash?
   – Potential rebate
• Costs
   – Adverse selection
   – Information leakage
• Strategies
   – Place
   – Revise
   – Cancel
                                                   Order Placement

• Order Placement is at the Heart of Algorithmic Trading
• Algorithmic Logic
• Algorithmic Degrees of Freedom
   – Price
   – Timing
   – Size
   – Destination
      Sofianos, Xiang, and Yousefi
      "All-in shortfall and optimal order placement", January 2011
      "Going to the races: venue toxicity comparisons", December 2010
      "'Good fills, bad fills' and venue toxicity", November 2010
• Potential Results
                                 HFT & Market Quality

Recent Research:
• "An analysis of trades by high frequency participants on
  the London Stock Exchange“ Jarnecic and Snape, 2010
• "High frequency trading and its impact on market quality“
  Brogaard, 2010
• "Low-latency trading“ Hasbrouck and Saar, 2010
• "Algorithmic trading and information“ Hendershott and
  Riordan, 2009
• "Does algorithmic trading improve liquidity?“ Hendershott,
  Jones, and Menkveld, 2010
                       Analytics

•   Watching market action in real-time
•   P&L versus various benchmarks
•   Interval volumes
•   Destination Attribution
                                               The Flash Crash

• Setting the stage                 • Who is to blame?
   – Market down ~ 2.5%                –   Waddell and Reed
   – Greek unrest                      –   Barclays
   – Bid side liquidity shrinking      –   Retail investors
• The e-mini trade                     –   Agent for retail customers
   – Only 9% of volume                 –   HF market makers
   – Created unusual flurry of HF      –   Regulation
     activity                          –   Market structure
   – Contract went limit down          –   All of the above?
• Equities and ETFs                 • Regulatory Response
   – Lots on cancelling with no        – Single Stock Circuit Breakers
     replenishment                     – Ban On Naked Access
   – Retail stop-loss market           – Consolidated Audit Trail
     orders triggered
   – Many matched with “stub”
     orders left on book

				
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posted:10/29/2012
language:English
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