Sunday, July 12, 2009

JP Morgan: "High Frequency Predator Traders Feast Upon The Signals Of Others"

When JP Morgan discusses high frequency trading, people listen. When the head of JP Morgan's algorithmic product desk Carl Carries says that high frequency trading is merely a form of parastic market making, people should run for the hills (not in the least due to JP Morgan's proficiency in transforming theory to practice especially as it pertains to various daily trading patterns in the SPY).

"The print that a Dark Pool leaves in its wake does not signal an aggressive buyer or seller as would a sweep, so the information leakage is reduced accordingly. Reduction of information leakage minimizes adverse price movement created by predators like high frequency traders who feast upon the signals of others."

And a few more questions to add to the ever increasing roster of queries for the NYSE (Mr. Pellecchia- maybe the time has come to provide at least some answers?): some dark pools have banned use of third party algorithms in accessing them in order to prevent harm to their institutional clients. Why is this good for dark pools, but not NYSE?

Trader Magazine reports Pipeline Trading banned third party algo's from accessing its dark pool. "Algorithm Switching Engine was introduced in October 2007, six months after Pipeline Trading banned third-party algorithms from accessing its own electronic block trading market.... Pipeline claims to be more effective than competitors in finding block matches because of its 50,000-share average execution size; large block orders are executed automatically without the possibility of sniffing out institutional interest with a small probing order."

Trader Magazine reports that ITG has banned third party algo's from accessing its dark pool POSIT. "Investment Technology Group, for the second time, has banned broker-dealers from accessing its POSIT crossing system via algorithms.... ITG chief executive and president Robert Gasser told analysts on the day of the decision that 'third-party dark aggregation has not been beneficial to our institutional POSIT constituency.'... Heckman told Traders Magazine that some brokers offering customers algorithmic access to POSIT appeared to give preference to their own or other liquidity through the algos. He said that adversely impacted the order flow POSIT received."

hat tip Richard

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