Pure in third, high frequency traders play hot potato

2010-12-06 16:22 PT - Street Wire

by Stockwatch Business Reporter

Pure Trading and the other alternative trading systems captured 25.2 per cent of total Canadian volume during the week ended Dec. 3, 2010, down from a record 29.4 per cent last week. The most active ATS was once again Alpha Trading Systems which took 17.2 per cent of the market, trading an average of 237.6 million shares a day. In second place was Chi-X Canada with 3.9 per cent of Canadian volume, averaging 54.9 million shares a day. Pure Trading came third with 3.3 per cent or 46.5 million shares a day, and Omega ATS came last with 0.7 per cent of the market or 9.9 million shares a day.

The Toronto Stock Exchange claimed 42.9 per cent of volume, trading an average of 593.7 million shares a day, and the TSX Venture Exchange had 31.4 per cent, with 434.7 million shares. The smallest exchange, the Canadian National Stock Exchange, took only 0.2 per cent of Canadian volume with 3.2 million shares a day.

Chi-X is the first ATS to release its November monthly report. The ATS traded 50 million shares a day on average, up from 49.7 million in October. However, its percentage of TSX volume declined last month to 6.49 per cent, down from 7.28 per cent in October.

According to an article on the Finextra website, European regulators will publish new trading rules, MiFID II, this week. Under the new rules, high frequency traders will have to explain how they design their computer algorithms, and how they work. Also, HFTs trading over a certain volume will have to be authorized investment firms with risk controls.

A fast trader can submit five trades a minute, whereas an HFT can submit 60 million trades a minute, according to a Reuters report. That means on a regular trading day of 6.5 hours, or 390 minutes, a fast trader could make about 78 trades, while an HFT could make 23.4 billion. To increase profits HFTs are constantly trying to trim milliseconds off trading time. There are 300 to 400 milliseconds in the time it takes to blink.

One TSX-V-listed company, Seafield Resources Ltd., is exhibiting what the United States Securities and Exchange Commission calls the "hot potato volume effect." This is when HFTs buy or sell to one other very rapidly. Eventually the stock will land in the hands of a fundamental investor, someone willing to hold the stock for more than a few seconds. On Friday, Dec. 3, Seafield rose 34 cents to 57 cents on 91.35 million shares. On Monday it continued its unnatural ways, adding six cents to 63 cents on 45.48 million shares. Opponents to HFT say the hot potato effect helps order execution but does not add true liquidity to the market. U.S. Commodity Futures Trading Commission chairman Gary Gensler has said repeatedly that "volume does not equal liquidity." Themis Trading's Joe Saluzzi agrees; he says playing hot potato is similar to circular trading, in which a group of traders work together trading a stock to make it look like the stock is on its way up before dumping it.