Check out the tape:
We need to incentivize other participants to provide liquidity during times of uncertainty, because HFT participants do not provide liquidity during these times.
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What a fragmented mess in Kraft (NYSE: KRFT) this morning. The stock opened for trading at $45.55, but then 18 seconds after the open, the stock starts to run up. It trades sporadically between $48 and $58.54 for the next 12 seconds, and then comes right back down.
Look at the size of the trades. It is all 100-500 share lots (note trade size is quoted in hundreds in the pic above). This was not a fat finger. There was not a huge buyer in the market. This was simply a lack of liquidity.
This is a stock that normally trades in a one point daily range. We have been saying this for the past year, there is very little liquidity in the first 2-3 minutes of trade. HFT participants do not provide liquidity when there is risk and uncertainty, and there is always uncertainty in the first 2-3 minutes, especially on issues with recent restructuring. Traditional market makers no longer exist. We are dependant on HFT liquidity, and that type of liquidity is unstable.
