Changes to High Frequency Trading Regulations
The Securities and Exchange Commission is considering a Test Pilot Program to initiate a study to determine if the High Frequency Trading “Maker-Taker” role is creating predatory and unfair trading practices. This test program was initiated by complaints from the Buy Side Institutions.
Although the Buy Side Institutions trade off the exchanges using what are called Dark Pools or Alternative Trading System venues that hide their activity from exchange trading Market Participants, there has been an increase of invasive High Frequency Trader activity that concerns the Buy Side Institutions.
The Buy Side Institutions prefer to be hidden mainly because they want to avoid the High Frequency Traders “front-running” their large lot transactions. During the years when almost all orders were executed and processed via the Stock Exchanges in the US, front-running by Professional Traders and Retail Traders became a huge annoyance for the Buy Side Institutions who were dismayed. Professional Short-Term Traders were able to front-run the large lot orders that were displayed on the Market Maker Limit Order books, which were automated even back then.
At first the Buy Side Institutions proposed a change from fractions to decimals, which was approved by the Securities and Exchange Commission and Congress in 2001-2002.
Then, when Professional Day Traders morphed into High Frequency Trading Firms, the Buy Side Institutions demanded off-exchange venues where High Frequency Traders could not front-run the penny spreads.
The Dark Pool venue industry was born and continues today. One of the things that Retail Technical Traders need to understand is front-running a Buy Side Institution’s Dark Pool Quiet Accumulation orders, which can last for weeks to months, is something that is not tolerated. These Giant Funds want to buy a stock at a specific price they deem reasonable. Front-running costs Mutual Fund Investors and the Buy Side Institutions profits.
Dark Pools are therefore not going anywhere, so the battle between High Frequency Traders and Dark Pools continues. What the Securities and Exchange Commission must consider at this time is whether or not the Maker-Taker role is indeed creating a predatory system.
The 1-minute intraday stock chart example below shows the effect of High Frequency Trading activity premarket order flow: A huge gap up at market open. The High Frequency Traders generally trade within 5 minutes of market open but are not active at all for the remainder of the day. Therefore, any liquidity they may offer as Maker-Takers is only present for a few minutes of the trading day. This may change if the Securities and Exchange Commission changes the rules governing High Frequency Trader activity.
Martha Stokes CMT
TechniTrader technical analysis using a TC2000 chart, courtesy of Worden Bros.
Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses
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