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How HFT trading contributes to stock market crashes



Stock markets can be very volatile. HFT trading makes a big contribution to this. The market situation was not always stable until the emergence of high-frequency trading. For example, Black Monday, 1987, when stock indexes around the world have seriously collapsed, still remains the largest collapse in history.

However, since then there have been major changes, and now experts and analysts call high-frequency traders one of the main factors contributing to the collapses on the stock exchanges. For example, in early February 2018, the S & P 500 index dropped 70 points during the trading day, and then fell 40 points in 10 minutes. According to some experts, this happened due to the fact that part of the deals were made by trading robots. The Marketwatch publication understood exactly how HFT merchants contribute to the repetition of similar collapses - we have prepared an adapted version of this material.
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Problem # 1: HFT supplants market makers


The collapses on exchanges in recent years, triggered by the actions of high-frequency traders, are attributed by some experts to the changes taking place in the markets. So Joe Saluzzi, co-founder of Themis Trading, compares the February crash of Flash Crash - the instantaneous collapse of the market that occurred in 2010. Then the Dow Jones index fell during one trading session by 1000 points. Explaining the reasons for the incident, the expert draws attention to the fact that in the current market structure the role of traditional market makers, which maintain the balance of trading in one security, is declining.

Traditionally, on the exchanges around the world there was an institute of market makers, who, to put it simply, were responsible for the situation on the market and the prices of specific stocks and were obliged to maintain it in a stable condition. In exchange, they could buy stock at a lower price. Now, the role of these market participants is increasingly being assumed by high-frequency traders who work on several exchanges at once and, at the moments of failure, abruptly curtail their activities, which exacerbates the negative developments.

Problem # 2: Less Responsibility and Liquidity


Large brokers and dealers, such as Morgan Stanley and Goldman Sachs, after the financial crisis of 2008 and increased attention to their activities by regulators, reduced their traders, and their place was taken by private HFT companies, who have no obligations to anyone and they only strive for maximum earnings. For such companies, the higher the volatility, the better. As a result, high-frequency investors provide liquidity only when the market grows, otherwise they only aggravate the situation.

In addition, despite the fact that high-frequency traders generate a large number of applications for the purchase and sale of financial instruments, in reality, not all of them lead to an increase in liquidity. Trading robots generate a large number of orders that, in reality, do not lead to the execution of transactions, or the operations are performed not with real shares, but with ETF exchange funds.

As a result, there are situations of disproportion in the market, when, with an apparent large volume of trading, real liquidity is small. For example, on the day of the February fall of the market, the main American exchanges performed operations with 10–12 billion shares - this is the highest trading volume since November 2016.

Other materials on finance and stock market from ITI Capital :


Source: https://habr.com/ru/post/352670/

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