Another study confirms: HFT profits at everyone else’s expense

Yet another study now confirms what many of us have known for years, that high frequency traders are gleaning profits at the expense of other legitimate participants and at the expense of the systemic integrity of markets as a whole. See: High Frequency Trading Prospers at the expense of everyone

“What that data does is help explain the frenzy in today’s markets: The most aggressive firms tend to earn the biggest profits, hence the incentive to trade as quickly and as often as possible. Furthermore, these traders make their money at the expense of everyone else, including less-aggressive high- frequency traders.

The study found that the most hyperactive trading firms earned an average daily profit of $395,875 in the e-mini S&P 500 contract over the two-year period. First and foremost among those on the losing end: small retail investors. The study found that, on average, they lost $3.49 on every contract to aggressive high-frequency traders.”

Meanwhile this chart is of interest to anyone concerned with the risk to their capital invested in the HFT-dominated equity markets today. It shows that after the latest wave of speculative ramping from algo traders over the past three months, the heavily speculated S&P 500 futures market is today the most extremely net long it has been since late 2006. Here is Zerohedge:

In Late 2006, the S&P 500 futures market traded around 1435 and the commitment of traders was at an extreme net long position. The market fell shortly after only to manage a miraculous rise in the face of hedge funds going bust and an exploding and over-leveraged credit market. In mid-2008, the S&P 500 futures also traded around these levels, from where the epic collapse really began. Six years later, the S&P 500 futures traders are the most bullishly positioned they have been since those heady over-confident days. Still believe the talking heads that there is money on the sidelines waiting to be put to work? Still convinced that there will be some epic rally if the ‘fiscal cliff’ fallacy is resolved?

This entry was posted in Main Page. Bookmark the permalink.

3 Responses to Another study confirms: HFT profits at everyone else’s expense

  1. William says:

    There’s a very clear signal that the “bear market rally” has ended. The same signal emerged in 2007 signaling the end of the 2003-2007 rally.

  2. dazzo says:

    Question to Danielle then, if the market is so distorted by HFT, liquidity infusions by CBs etc then how does that jive with your investment thesis to buy when the secular bear is pretty much done and valuations are again “reasonable”?
    Seems to me the equity market will forever remain a crap shoot unless the rot in them is eliminated.

  3. the next recession and bear market will have a flushing effect as they always do. At that point we will see how far levered selling forces speculative players and prices out of the market. It is possible that it could be the final big flush out of this secular bear after which prices may trend sideways for a period of time. Altogether this could take us to the end of the secular bear that began in 2000. Or it could present just another cyclical opportunity like 2003 and 2009 in which case we may buy and have to sell again for yet another recession and bear market in the next 3 or 4 years. It is impossible to tell at this point. But it is important to keep our mind open to the possibilities. We will know when the secular bear finally ends by certain readings that have been indicative of the end of all the previous secular bears, things like single PE’s and high dividend yields etc and many other sentiment shifts. Not there yet…

Leave a Reply

Your email address will not be published.