Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21
Why Tether USDT, Stable Scam Coins Could COLLAPSE the Crypto Markets - Black Swan 2021 - 6th Jun 21
Stock Market: 4 Tips for Investing in Gold - 6th Jun 21
Apple (AAPL) Summer Correction Stock Trend Analysis - 5th Jun 21
Stock Market Sentiment Speaks: I 'Believe' We Rally Into A June Swoon - 5th Jun 21
Stock Market Russell 2000 After Reaching A Trend Channel High Flags Out - 5th Jun 21
Money Is Cheap, Own Gold - 5th Jun 21
Bitcoin and Ravencoin Cryptos CRASH Bear Market Buying Levels Price Targets - 4th Jun 21
Scan Computers - How to Test New Systems CPU, GPU and Hard Drive Stability With Free Software - 4th Jun 21
Hedge Funds Getting Bullish on Gold - 4th Jun 21
THERE ARE NO SOLUTIONS When the Media is the VIRUS - 4th Jun 21
Investors Who Blindly Trust the ‘Experts’ Will Get Left Behind - 4th Jun 21
US Stock Market Indexes Consolidate Into Flagging Pattern – Watch For Aggressive Trending Soon - 4th Jun 21
Microsoft (MSFT) Stock Trend Analysis - 3rd Jun 21
No More Market Bloodbath – Beyond Cryptos - 3rd Jun 21
Bank run, or run from the banks? - 3rd Jun 21
This Chart Shows When Gold Stocks Will Explode - 3rd Jun 21
The Meaning Behind Gold’s Triple Top - 2nd Jun 21
Stock Market Breakout Or Breakdown – What Does The Next Big Trend Look Like? - 2nd Jun 21
Biden’s Alternate Inflation Universe - 2nd Jun 21
What You Should Know Before Buying Car Insurance - 2nd Jun 21
Amazon (AMZN) Stock Summer Prime Day Discount Sale - 1st Jun 21
Gold Investor's Survival Guide - 1st Jun 21
Silver and Copper to Benefit from Global Electrification Push - 1st Jun 21
Will Gold Shine Under Bidenomics? - 1st Jun 21
Stock Market Buy the Dip, Again?! - 1st Jun 21
Stock Market Consolidation Ahead - 1st Jun 21
Stock Market Summer Correction Review, Crypto CRASH, Bitcoin Bear Market Initial Targets - 31st May 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Is High-Frequency Trading Causing Higher Stock Market Volatility?

Stock-Markets / Stock Markets 2011 Aug 21, 2011 - 01:59 PM GMT

By: Investment_U

Stock-Markets

Best Financial Markets Analysis ArticleJustin Dove writes: Where were you on August 9, 2011?

Alright, it wasn’t some landmark event like Black Monday. Heck, it wasn’t even the 2010 Flash Crash. But to Art Cashin, it was one of the wildest days for the stock markets in 50-plus years.


“I’ve been lucky enough to be in this business over 50 years and have seen lots of things, from the Cuban Missile Crisis and the Kennedy Assassination to the Crash of ’87 and the 2008 meltdown,” wrote Cashin, Director of Floor Operations at UBS Financial Services (NYSE: UBS). “Still, (August 9) was rather special… One of the most frenetic and bizarre trading sessions that I can recall.”

Stocks were enjoying quite a rally on August 9 after days of sharp losses due to debt concerns and the U.S. downgrade. Then, around 2 p.m., the Fed released a statement that sent the markets into free-fall. By 3 p.m., the markets began to rally again and the Dow gained 500 points in an hour!

As The Wall Street Journal reported last Wednesday, veterans of The Street were befuddled by the volatility. Can this type of volatility be explained by the rise in high-frequency trading?

High-Frequency Trading by Volume and Volatility

The Aite Group, LLC claims that high-frequency trading (HFT) accounts for 73 percent of U.S. equity trading, despite making up just two percent of trading firms. The TABB Group has a slightly lower number. TABB claims that between January and July, high-speed trades accounted for 53 percent of U.S. equity trades.

But you get the point. Despite which numbers are correct, HFT is making up the majority of stock market transactions in the United States.

According to TABB, HFT volume increased to an average of 65 percent in the first 11 days of August, and hit a peak of 70 percent on August 10, when the Dow fell almost 520 points.

On August 8, the Monday after the U.S. downgrade, the Dow plummeted 635 points. Volume on the New York Stock Exchange was fourth highest on record. High-speed traders profited as many investors lost big.

TABB estimates record profits of $60 million on August 8. The profits for the rest of the week ranged from $40 million to $56 million. High-speed traders were said to have profited on the market’s high volatility and volume by moving in and out of positions in a matter of milliseconds.

Is High-Frequency Trading to Blame?

Anytime trading firms are making millions while the majority of investors are stomaching losses, it’s going to generate attention.

People are also naturally scared of new technology.

Some blamed those new-fangled computers for exacerbating Black Monday in 1987. Back then, algorithms were as simple as, “If the stock price drops to $50, sell.” In theory, this certainly could have exaggerated massive sell-offs that may not have been possible before.

But proponents for high-speed trading claim that it brings more liquidity to the market while keeping transaction costs low. A study released on Monday by the Capital Markets Cooperative Research Centre of Australia suggests that HFT does indeed bring these qualities to the markets.

But a study last November by Yale Professor X. Frank Zhang found contrary evidence. According to Zhang, “HFT is positively correlated with stock price volatility.” He also found that the positive correlation is “especially strong for the top 3,000 stocks in market capitalization and stocks with high institutional holdings.”

Zhang’s most condemning find is that “the positive correlation between HFT and volatility is also stronger during periods of high market uncertainty.”

This would seem to fit with intuition. But nothing is known for sure. That’s why the SEC has subpoenaed many HFT firms about the 2010 Flash Crash and will investigate the matter more intensely in the coming months.

Protecting Yourself From High-Frequency Trading

Is this a case of unwarranted fear of technology? Are regular investors just jealous of the technological advantage that high-speed traders have?

We don’t really know. But something doesn’t seem to jive right when high-speed traders are reaping record profits as investors are stomaching losses.

The most likely answer is that HFTs in general are good for the market, providing the liquidity and stability they claim. But there are sure to be firms that abuse the power of their technology and the lack of oversight and understanding.

Black Monday didn’t lead to computers being banned from the market though, and HFTs aren’t likely to go anywhere, either. Regulators and investors will just have to improve their understanding of the phenomena.

There’s no reason to stay out of the market because of HFTs. However, it may be unwise to tread these volatile waters without trailing stops to protect gains.

Good investing,

by Justin Dove, Investment U Research

Source: http://www.investmentu.com/2011/August/high-frequency-trading-causing-volatility.html

http://www.investmentu.com

Copyright © 1999 - 2008 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in