On the left is a screenshot of the MMX bid and offer at 7:02 am in the morning one day in March 2011. The moment the market opened for bids and offers (when the market went into Pre open at 7am) a computer using Direct Market Access has loaded in bids and offers of 20,000 shares at almost every possible price. They were all entered at the same time. The trading system running into the open then pulled and added orders to 'manipulate' the open price to get the price they wanted. They then continued to trade through the day on a program (an algorithm) to achieve their objective which might have been to achieve the average price on the day for a client or make money using their proprietary algorithm which they think has an edge on the market.
This is just one stock?see above for the same thing in Telstra, AWC, Fairfax on the same day?.in fact, you could pick almost stock every morning, these sorts of pre-loaded orders are now all over the market and it starts from 7am onwards.
Here are some collected comments:
? Computer trading using direct market access is prolific overseas (60% of trades in the US are done by a computer program) and it is just beginning to get a grip here. It is called high frequency trading (HFT) in the US markets and has already sparked fierce debate.
? There are two basic functions of the computer, the first is to achieve an objective for a client (get the average price for the day ? that?s what?s happening when all those 1 and 2 share orders go through in illiquid stocks) and the second is to execute an algorithm based trading system that has an ?edge? on the market and makes money. ? The advantage of the computer is that it makes the calculations much faster and can enter an order in a thousandth of a second compared to normal broking practice. So they can take advantage of situations a human can?t.
? The participants can be anyone from a broker trading principal to an institution or arbitrage desk or more recently algorithm traders with direct market access.
? A sideline - Computers can use this rapid entry and exit of orders to very quickly determine how many shares are in an undisclosed bid or offer before the market opens. You just load up until the undisclosed stock is covered and then back off ? hey presto you know the size of the undisclosed order.
? Generally speaking most of the early bids and offers entered into the screen at 7am disappear at one second to 10 before the price opens. It is like "reserving priority" on every stock at every price and then deciding later whether you want it. Much like putting out towels on sun beds before breakfast.
? During the day- the minute you hit the bid or offer in a stock involved in algo trading the computers jump all over the top of you, and if you react to the computer and jump their order, within seconds the price will generally revert back to where it started which is very frustrating to say the least.
? Computers v Computers - The Algos are increasingly trading with each other. Human bids on the screen now attract a large number of odd lots prices just above the bid, which will trigger a similar reaction on the offer. Humans can?t transact unless they swamp the offer.
? Algos exploit algos - With 60% of the trade in the US done by computers there are now algorithm trading systems that purport to detect the weight of algorithm bias in the market and then exploit their pre-programmed (predictable) trading patterns. This is having an 'edge' on programs that think they have an 'edge'. (Does the 'Flash Crash' last year seem so surprising now?).
? Fractions of the speed of light - The arms race involves not only programming, but also technology. It has now quickly reached the end-game. The speed of light is now, unbelievably, a limiting factor, and to avoid the ping delays, cabling distances have now reached zero. The HFTs are co-locating their servers inside the exchange. The exchanges love it, they get to rent out expensive space inside their server farm, and the fees from the volume of trades goes through the roof.
? The positive argument is that all this volume aids in price discovery.
? The argument against is that humans do not even see the majority of bids and offers because they are flashed for only thousandths of seconds.
? A virtual market - The market we see on our screens is the one that is provided by your information provider (in our case Iress). Iress competes with the algos for speed....the unconfirmed suspicion from some professional human traders is that the market they see seems to be able to miraculously predict the order that they are putting in an instant before they put it in. In other words they go to sell 100,000 BHP and as they hit the SELL button the 'bid' on the screen disappears as if someone knew they were about to do it. The suggestion being that the actual market (the one in the wires) is different to the one on the screen and that somehow the computer traders are getting the electronic information that an order selling 100,000 BHP has been sent and are reacting to it before the stock exchange computer can actually sell them.
? Is this legal?- You are not allowed to enter orders (as a broker?s operator) that you have no intention of trading - or more specifically the rule says that you can't enter a bid or offer with the intention of creating a false or misleading appearance with respect to price or volume. To do so is a breach of ASIC rules. But here we have a computer doing just that ? watch in the seconds before the market opens?most of these bids and offers are removed and moved. ASIC is allowing it to happen at the moment and has yet to make a ruling ? may never. Of course entering orders that don't impact on price/volume in deep/liquid stocks could be argued not to mislead. One operator also tells me that it's not true that ASIC "allows" algos (algorithm traders) to trade in a manner that it doesn't allow for human traders. Whilst there hasn't been any disciplinary action taken against algos for this type of behaviour neither has there been any action taken against human traders who do exactly the same thing (albeit much slower). ASIC won't treat computer generated trades any more lightly, and this is likely to be borne out in disciplinary proceedings in the future but the disciplinary process is very slow (the disciplinary panel may be meeting now about issues from 2 years ago), and as this type of trade is constantly evolving, they probably just haven't caught up to it yet.
? Is it annoying? ? For professional traders used to manual trading?yes?very. For retail investors?depends. For day traders?.yes it swamps you on open and you have no idea until the screen clears in the few seconds before 10am where you are in the screen.
? Getting a bit ridiculous - Here is the screen for Bandanna Energy one morning...229 bids (mostly for 1-10 shares) for just 10,665 shares almost all from computers. Its creating a lot of back office administration costs tracking all those little orders.
It is an interesting development in daily trading and its growing rapidly. Suggested improvements to market rules include imposing a minimum time frame that orders should be on the market before they can be withdrawn (ie 5-10 sec) and imposing a minimum order size, nobody has 3 shares in a company anymore, and if they do they certainly don?t have 500 orders for 3 shares
AGO Price at posting:
$3.55 Sentiment: LT Buy Disclosure: Held
