Eric Scott Hunsader has gone completely down the rabbit hole, and he doesnât like what heâs finding there.
Hunsader is the CEO of a Chicago-based market analytics firm that specializes in high-frequency tradingâsuper fast trades executed at the speed of light that can alter asset prices faster than human beings can react to the changes.
Based on his own analysis, Hunsader has come to a startling conclusion: Markets today are even more susceptible to sudden failure than they were two years ago during the âflash crash,â which brought the stock market down by about 1,000 points in mere minutes.
Thatâs because a new breed of trader armed with hundreds of millions of dollars to deploy is trading so fastâand with such spikes in volumeâthat he can dry up liquidity in an instant, causing severe price swings.
To explain to a lay person, Hunsader offers up two examples of the kinds of trades heâs seeing. The first happened less than a minute before the April Jobs report was released by the Department of Labor in Washington.
That report is traditionally one of the most dramatic market-moving events of each month. As a result, traders tend to lie low in the minute or so before the number comes out at 8:30 a.m. on the first Friday of each month, so they donât get caught when the market changes.
But Hunsader argues that heâs seeing a small group of high speed traders who arenât lying low. In fact, theyâre taking advantage of the regular and predictable lull in the market to pop high speed trades in order to intentionally create a several hundred millisecond burst of volatility, and then execute follow-on trades to profit from that.
To understand what happens, you have to go inside just one second of trading and look at the way markets move at speeds that can be almost imperceptible to human beings.
On May 4, Hunsader , he spotted those traders just before the April number was released. At 8:29:20 and about 200 milliseconds, he says, someone â he has no way of knowing who â executed a trade in the five year T-note futures market worth about $150 million.
A chart of that single second in the market shows that prices are relatively stable until the trade. And just after that, for the rest of the second, prices spike, and gyrate up and down as other automated high speed computers react to the trade.
Hunsader says he doesnât know exactly how the traders make money off the volatility that they create, but he suspects theyâre making other trades in the milliseconds following their market moving trade that take advantage of the relationships between this market and others that are impacted by it.
The traders that move first, and fastest, win, he says.
âItâs like two guys running in the woods, and they see a bear and one guy drops down and puts his shoes on and the other guy says, âwhat are you doing that for, you canât outrun a bear,ââ Hunsader says. âAnd the guy goes, âI donât have to outrun the bear, I just have to outrun you.ââ
On another occasion, Hunsader says he saw traders taking advantage of something as fundamental as the speed of light.
Because trades are executed by fiber-optic cable, the fastest they can travelâand the fastest anything in the universe can travelâis the speed of light. But even at that speed, it takes about 11 milliseconds for information from exchanges based in New York to get to exchanges based in Chicago. And that provides an opportunity for arbitrage for those who can move fast enough.
http://www.cnbc.com/id/47432428
Hunsader is the CEO of a Chicago-based market analytics firm that specializes in high-frequency tradingâsuper fast trades executed at the speed of light that can alter asset prices faster than human beings can react to the changes.
Based on his own analysis, Hunsader has come to a startling conclusion: Markets today are even more susceptible to sudden failure than they were two years ago during the âflash crash,â which brought the stock market down by about 1,000 points in mere minutes.
Thatâs because a new breed of trader armed with hundreds of millions of dollars to deploy is trading so fastâand with such spikes in volumeâthat he can dry up liquidity in an instant, causing severe price swings.
To explain to a lay person, Hunsader offers up two examples of the kinds of trades heâs seeing. The first happened less than a minute before the April Jobs report was released by the Department of Labor in Washington.
That report is traditionally one of the most dramatic market-moving events of each month. As a result, traders tend to lie low in the minute or so before the number comes out at 8:30 a.m. on the first Friday of each month, so they donât get caught when the market changes.
But Hunsader argues that heâs seeing a small group of high speed traders who arenât lying low. In fact, theyâre taking advantage of the regular and predictable lull in the market to pop high speed trades in order to intentionally create a several hundred millisecond burst of volatility, and then execute follow-on trades to profit from that.
To understand what happens, you have to go inside just one second of trading and look at the way markets move at speeds that can be almost imperceptible to human beings.
On May 4, Hunsader , he spotted those traders just before the April number was released. At 8:29:20 and about 200 milliseconds, he says, someone â he has no way of knowing who â executed a trade in the five year T-note futures market worth about $150 million.
A chart of that single second in the market shows that prices are relatively stable until the trade. And just after that, for the rest of the second, prices spike, and gyrate up and down as other automated high speed computers react to the trade.
Hunsader says he doesnât know exactly how the traders make money off the volatility that they create, but he suspects theyâre making other trades in the milliseconds following their market moving trade that take advantage of the relationships between this market and others that are impacted by it.
The traders that move first, and fastest, win, he says.
âItâs like two guys running in the woods, and they see a bear and one guy drops down and puts his shoes on and the other guy says, âwhat are you doing that for, you canât outrun a bear,ââ Hunsader says. âAnd the guy goes, âI donât have to outrun the bear, I just have to outrun you.ââ
On another occasion, Hunsader says he saw traders taking advantage of something as fundamental as the speed of light.
Because trades are executed by fiber-optic cable, the fastest they can travelâand the fastest anything in the universe can travelâis the speed of light. But even at that speed, it takes about 11 milliseconds for information from exchanges based in New York to get to exchanges based in Chicago. And that provides an opportunity for arbitrage for those who can move fast enough.
http://www.cnbc.com/id/47432428
