‘HFT is killing the emini’, says Nanex
Nanex’s Eric Scott Hunsader — the guy who likes to dig through trading data to unearth weirdly fascinating algorithmic patterns — is out with quite a chart on Monday:
And no it’s not a new design for a Missoni scarf. It’s actually a chart tracking the deteriorating market depth in the emini future contract. The red line at the bottom reflecting the most recent data.
That’s quite a large drop over the last few months.
Furthermore, Hunsader is adamant it’s nothing to do with the holiday calm period. He believes it’s actually the result of one particularly harsh algo, which he calls ‘the disruptor‘:
Take the electronic S&P 500 futures contract, known as the emini, for example. This is, or used to be, a very liquid market. The cumulative size in the 10 levels in the depth of book was often 20,000 contracts on each side. That means a trader could buy or sell 20,000 contracts “instantly” and only move the market 10 ticks or price levels.Even during the flash crash, when hot potatoes where flying everywhere, the depth would still accommodate an instant sale of 5,000 to 10,000 or more contracts. Not anymore. On Friday, 2,000 contracts would have sliced right through the entire book. Not during a quiet period, or before a news event.Pretty much any minute of trading that day after the 9:54 slide. And it wasn’t just Friday, the trend in the depth of book size has been declining rapidly over the last few week. What used to be the most liquid and active contract in the world, which served as a proxy for the true price of the US stock market for decades, is getting strangled by the speed of light, a weapon wielded by HFT.Without going into detail at this time, we think we know one cause of the drop in liquidity. A certain HFT algorithm that we affectionately refer to as The Disruptor, will sell (or buy) enough contracts to cause a market disruption. At the same exact time, this algo softens up the market in ETFs such as SPY, IWM, QQQ, DIA and other market index symbols and options on these symbols.When the disruptor strikes, many professional arbitrageurs who had placed their bids and offers in the emini suddenly find themselves long or short, and when they go to hedge with ETFs or options, find that market soft and sloppy and get poor fills. Naturally, many of these arbitrageurs realize the strategy no longer works, so they no longer post their bids and offers in the emini. Other HFT algos teach the same lesson — bids or offers resting in the book will only become liabilities to those who can’t compete on speed. Hence the reduction in liquidity.
So, because people have caught on to the antics of ‘the disruptor‘, they’re reluctant to offer any depth in their emini bids and offers.
Which presumably means ‘the disruptor‘ will be looking to move on to some other market soon enough.
In the meantime, we suggest it’s at least a good name for the world’s first high-frequency-trading inspired rollercoaster ride.