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Related Topics: CEP on Ulitzer

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Let’s Blame Everything on CEP & HFT

In a recent blog post, Tim Bass blames CEP for much of the world’s problems.  You can read his post here.

You can read my response here:

Tim,

Lot’s of misinformation and knee jerk reactions are out there regarding HFT. Unfortunately, this is another one of them. Your posts are usually a bit inflammatory; that’s why I like reading your blog. But you usually provide at least a shred or two of evidence to support your thesis.

I’d really like to see some examples of how HFT is damaging individual investors – I’m personally not aware of any and I’ve spent the last 20+ years in the field – even before CEP became a popular buzz word. If you’ve got some examples, I’d love to see them.

We went though this same controversy back in 1987 and many people blamed that crash on portfolio insurance and automated trading then – but they were wrong then, as they are now in blaming the recent flash crash on HFT. When there are no buyers, prices plunge. When there are no buyers, HFT stops – HFT firms aren’t usually sending market orders blindly in a falling market. It’s just stupid to do so.

The recent flash crash has to do more with market structure and too much global debt – NYSE halted (temporarily, I know they don’t like that term) for what’s referred to as a LRP, or liquidity replenishment point. The goal of an LRP is to put a symbol into auction mode when a bunch of orders come in on one side, resulting in an imbalance. When those symbols were halted, orders for those symbols went to other exchanges. Where there was no liquidity and those orders ended up crossing at what are referred to as stub quotes. Stub quotes are required by some crossing engines to open the symbol for trading. No one is putting real bids in at a penny. When those orders crossed at a penny, the index calculations picked up the crosses and the ‘market’ plunged when the index re-priced. If those sell orders that went off at a penny had been limit orders, this probably wouldn’t have happened. This may be an example of SOR – Stupid Order Routing.

When NYSE re-opened those symbols, trading resumed and, magically, at the prices they were at before the LRP was activated. So that worked for NYSE. What didn’t work was other exchanges not honoring NYSE’s action. Knowing the rules is important; sending orders to off-primary exchanges can incur additional risk. We saw that during the flash crash.

So, this would have happened with or without HFT; with or without CEP; and with or without the vendors that sell all the hardware and software to make HFT possible. In fact, it could have happened with even 1 large sell order in an affected symbol. And HFT doesn’t usually involved large orders.

In fact, in this day of lessened or no return for those who use to act as intermediaries in the market (specialists or market makers), it could be argued that those engaging in HFT are actually helping the individual trader (or investor) by providing more liquidity.

It’s easy to blame HFT for the machinations we see in the market today – it’s harder to blame your neighbor for taking on more debt than they can afford to buy more and more goods than they can afford. And, as we saw during the flash crash, consumerism and greed is no longer an American only obsession.

Some day, you’ve got to pay.  And thanks for reading.

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Colin Clark is the CTO for Cloud Event Processing, Inc. and is widely regarded as a thought leader and pioneer in both Complex Event Processing and its application within Capital Markets.

Follow Colin on Twitter at http:\\twitter.com\EventCloudPro to learn more about cloud based event processing using map/reduce, complex event processing, and event driven pattern matching agents. You can also send topic suggestions or questions to colin@cloudeventprocessing.com