“This research indicates that today’s trading environment has changed in important ways. The sophisticated ways in which HFT strategies are ‘reading’ the tape suggests that passive order techniques are being increasingly gamed,” said Tim Sargent, QSG President and Chief Executive Officer. “If the ‘set it and forget it’ techniques offered by the first generation of algorithms are no longer effective because the competition is employing increasingly sophisticated solutions, today’s traders need better tools to find the techniques that will succeed. It is our goal to help them devise an appropriate response.”
The details of the study suggest that HFT strategies anticipate participation style orderflow. This leads to erosion of natural liquidity and can initiate a costly feedback loop as an algorithm responds to unanticipated increases in interval volume. VWAP algorithms are particularly vulnerable to this activity given the assumptions that drive their order distribution decisions. The report’s insights are especially relevant given the lack of empirical evidence isolating the impact of HFT strategies on institutions employing non-HFT strategies.
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