Trader Note

Christmas rally happens in lower volumes.

HFT Piranha

HFTs Piranha: Market Failure Inevitability

High Frequency Traders have expanded their operations and it appears to be pushing markets around. At this point, algorithmic traders amount to nearly 90 percent of market activity. These trades tend to be smaller in nature and short lived, but they do have a massive effect on the markets. Cumulative, these trades are self-fulfilling prophecies that push prices in their favor.

Imagine piranha. As the heavy rains fill the water basin, streams flood and lakes expand. These fish are then able to migrate. As the water subsides, these piranhas are confined to lakes and pools. As these lakes dry up, the piranhas eat all of the available food in that lake. Once that food is gone, and the body of water shrinks, then these fish go on a feeding frenzy. Any creature that dares enter these waterways is ferociously devoured by these piranhas.

The markets are so crowded with HFTs that they act like piranhas in small pools. As the food (volume) shrinks, these small pools become nothing but piranhas and the occasional fool that stumbles into those pools.

The movement of stock prices, with sharp moves higher and lower, would be akin to the piranhas attacking a snake. As the piranhas (HFTs) all feed off the same side of the beast, it is pushed along. When that side of the animal has no more food or becomes too crowded, the piranhas shift to the other side. This pushes the carcass in the opposite direction.

In the end, all available sustenance is removed from the corpse by the piranhas, just as the HFTs drain markets. Invariable, the bare bones will drop to the floor and all that will be left is a lifeless carcass.

The only savior for the HFTs is capital infusion. This would be akin to rain filling the piranhas` ponds, allowing them to migrate to new feeding areas. Without money being pumped into the system by reserve banks, these markets (lakes) will dry up and wither. As governments curtail money printing, markets will appear more volatile until those markets suddenly have no volume at all.

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