Market Overview

High Frequency Trading Strikes Again: QUALCOMM Gets Hit

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Add another victim to the long list of high frequency trading (HFT) raids.

Earlier in today's session, shares of QUALCOMM (NASDAQ: QCOM) got crushed, as computer programs loaded up the sell side and took out a huge number of bids, wreaking havoc on the stock in the process.

At 9:54am, shares went from $50.75 to $49 (nice round number) in about 1.5 seconds – a two second, 3.4% plunge for a company with a market cap of $86.7 billion. 120,297 shares changed hands in that one minute period.

For those of you that do not know how it works, computer programs/HFT's, will, simply put, load up on a particular side of a trade and take out bids or asks on the secondary exchanges (yes it can work both ways) where there is not as much liquidity. The lack of liquidity on the secondary exchanges combined with the high number of sell/buy orders can have drastic effects on underlying prices.

The goal of such programs is to essentially find and trigger sell/ buy stops. The action can best be described as a row of dominos falling – one triggers another, and another, then another, and so on.

The price, more often than not, recovers to pre-crash levels, leaving investors dazed, and more importantly, without their previously held positions.

The phenomenon known as “flash crashes” should no longer be referred to as such. They are price raids, plain and simple – legal theft in the market.

High Frequency trading is not really trading at all. It is essentially a program that finds and benefits from tiny price differentials in the market. The differentials are so low that a normal (human) trader could never execute them fast enough, or often enough to be profitable.

The computers need to execute the trades at tremendous speeds and in extremely high volume to generate income - hence the constant “need for speed” in the HFT world. If you have not been fortunate enough to be inside the server room at an HFT firm, it is akin to being inside the command room at NASA – entire building floors filled with six foot high servers manned by round-the-clock technicians and programmers.

In addition to all of the action during the major Flash Crash on May 6, 2010, here are a few others that have occurred since:

1) Oil Futures - May 5, 2011: On the eve of the first anniversary of the “Flash Crash” oil futures (/QM) plunged by as much as $13 per barrel as a wave of electronic selling hit the market. The New York Stock Exchange (NYSE) has an intraday fluctuation limit of $10, which, if hit, causes a temporary halt in trading. No limits exist for the last hour, however, which conveniently enough, is when the freefall took place.

2) Natural Gas - June 9, 2011: The price of natural gas futures (/NG) fell 8% in 15 seconds – from $4.916 to $4.513. The contract price quickly recovered to pre-cash levels shortly thereafter.

It is estimated that as much as 70% of all U.S. equity trades are a result of high frequency trading.

Is this what the stock market has been reduced to? Waiting for computer-driven models to make their next move? It is actually quite sad.

Proponents for HFT will tell you that they provide a valuable service to the market by providing the liquidity necessary for operation. That is, quite simply put, garbage. They are there to print money and take advantage of a weakly regulated market.

The market existed and operated just fine before the presence of HFT trading, and would operate just fine without it.

Until next crash……..

Interesting articles on HFT trading can be found here, here, and here.

 

Related Articles (QCOM)

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