Here we are talking about high frequency trading chapter 3.
To see the other two chapters and understand the path I am taking with the reader, I recommend reading chapters 1 and 2 as well.
I haven’t written for a long time and today I want to take up an interesting topic to understand the mechanics of the financial markets and why there are increasingly violent and sudden movements.
High-frequency trading is based on the programming of algorithms, in practice the most important banks such as Goldman Sachs, Jp. Morgan etc … they create their “super soldier” (some names really existed as Ninja, Sniffer, Iceberg), the peculiarity of these algorithms is the ability to self-learn according to the market context.
Ladies and gentlemen we are talking about thousands of algorithms that collide daily, as I wrote in the previous chapter between 80 and 90% of the trades of the world stock exchanges is performed by “robot traders”, trying to understand this phenomenon is very difficult especially for those who today rely exclusively on technical and fundamental analysis.
I personally use technical analysis in my trading but to “read” the market I base my trading on the options market, to understand the market it is essential to know the options to see how institutional investors are positioned in the market.
Returning to high-frequency trading there is a person who lives in Illinois is called Eric Hunsander computer engineer and founder of Nanex company, his job is to study and follow the movements of algorithms, according to his point of view on financial markets there is no police that really controls high-frequency traders. Its computer programs and servers follow all the financial transactions of the American market to find anomalies.
Nanex sells proprietary technology to all those investors who do not trust the financial markets, Eric Hunsander is a problem for high-frequency trading companies because he is one of the few people along with Michael Lewis to have denounced this unfair phenomenon.
World finance should be very careful and limit the use of algorithms capable of creating “flash crashes” on the financial markets as happened on May 6, 2010 when in a few minutes the Dow Jones lost 100 points in 1 minute and then 200 points in 2 minutes, in 2 seconds Walmart lost 5% in practice the financial markets have literally gone crazy.
Many investment funds lost billions in 5 minutes so the Chicago stock exchange decided to suspend trading to avoid the total collapse of the market, the stock exchange was closed for exactly 5 seconds allowing to resume “normal” trading on world stock exchanges.
But what really happened?
Media said there was a mistake on the part of a trader but I think the truth was another, the SEC then reported after an investigation that the fault was a Mid West fund.
Do you think any of the high-frequency traders have been punished?
The answer is no, how is it possible that world finance is not controlled? What do SEC members do? Where is the transparency on the financial markets?
Why do so many words are made but no one does anything? What are the interests behind high-frequency trading?
High-frequency traders earn money without taking any risk but through a very fast infrastructure capable of preceding normal investors, at each transaction they manage to earn very small sums of money that multiplied by the minutes and hours of trading lead to important gains.
A friend of mine who works in the United States for an investment fund told me that frequent traders earn 30 billion a year on the market (2010 data), think now in 2022 how much higher the number will be.
12 years ago a software called Midas (https://www.sec.gov/marketstructure/midas-system) was created with the aim of analyzing millions of transactions per minute but even there there is a conflict of interest because the same manufacturing company belongs to the category of high-frequency traders, isn’t it strange?
Midas only deals with analyzing the stock market but not options and commodities for example so it means that the controls are practically unsatisfactory.
Financial markets are manipulated, the only way to try to survive in this world is to know the options market where large institutional investors operate, if you know the strategies in options you have a 2/3 chance of saving yourself in case the markets should have violent movements.
If you are interested in better understanding this phenomenon I suggest you read Michael Lewis’ book “Flash Boys” where many passages involving computer engineering applied to finance are explained.