More than one trading desk has adjusted their overall focus away from day trading and towards longer held trades around the world. Why? High Frequency Trading programs are a main culprit.
I’ve chatted to a bunch of traders (employed by the big banks and/or trading on their own or through boutique shops) and many of them feel like the game has significantly changed. Many have indicated that until recently, it wasn’t uncommon to find orders for stocks that were placed by rookie/novice traders that unknowingly showed their hands, ready to be pounced upon by seasoned vets. The problem is that, these days, the automated HFT programs sniff these opportunities out before a human can.
Programmers are developing formulas that ultimately drive the HFT programs, and these programs only care about fast execution to extract any and all profits available. When multiple HFT centres are operating in the same stocks – it’s almost a sure bet that something akin to the “flash crash” will happen again, perhaps owing to a positive feedback cycle (with negative outcomes to market integrity).
So my question is, when will that “Judgment Day” rear its head? When will “Skynet” become self-aware, forcing regulators to try to pull the plug (substantially regulate HFT)? I think we only saw a glimpse of what could happen (see this article on ETFs that momentarily lost over 90% of their value in minutes – tip of the hat to The Canadian Capitalist for the link.)
If the May 6th Flash Crash wasn’t the tipping point, what will be? Scary.