The Flash Crash, the Data and HFT.

What is HFT or High Frequency Trading?

Say my customer gives me an order to buy 1000 shares of XYZ at the best price I can (Not Held order type).

Let me make a couple of assumptions. Assume there are three exchanges I can route the orders too (A, B and C) and, right or wrong,  I determine that I  should place limit orders on each of the exchanges books for the full size of the customer order. So currently, I have three open orders for a total of 3,000 shares. I then get filled, by A,  on my buy of 1000 shares. Now I have exposure because of the orders working on B and C  for shares I don’t need. So, I rush to cancel them before they are filled.

Now enter the two players, traders and speculators. Speculators (investors) are using their own money to take positions. The hold time is not material. Could be seconds, minutes, days, years. Traders are charged with getting the best price for their customers order. To effectuate that, they need to employ deceptive practices to disguise their intent. Whether it is to buy or sell, at what price and for how much. These deceptive practices have existed for some time. On the NYSE it was paramount. Brokers had to disguise their intent. Speculators were always on the prowl to pick up information or observe behavior and take advantage of it.

So what speculators do today is try to figure out order patterns and fill the brokers, before they have time to cancel their remaining orders. Knowing they must return to flatten out their position. Apparently today, this has become illegal,  I ask why? This does not a free market make. To many times regulations are meant to entrench existing businesses with out dated models. It shouldn’t matter what my intent is when I enter the market. But somewhere it is costing a player money to have those pesky speculators around.

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