HFT (high frequency trading) has dominated the financial media of late.  @zerohedge, Charlie Gasparino and CNBC, the StockTwits nation, @steenbab, GMan from @smbcapital, and many other talented bloggers have all weighed in.  And then came Senator Schumer:

(from Bloomberg courtesy of @zerohedge):  Senator Charles Schumer asked the U.S. Securities and Exchange Commission to ban “flash orders,” saying the transactions give high-speed traders an unfair advantage over other investors.

Wow!

For all those heavily invested in adjustments to HFT you cannot ask for a more powerful person to enter the room.  You have gotten Senator Schumer’s attention.  Well done.

I will let others discuss the merits of HFT in length.  I am not an expert in market ethics or the strategies employed by sophisticated hedge funds and mutual funds employing HFT.  And I do not decide policy for the securities markets.  I will tell you though that I cannot get fills that I used to get.  Programs touch a few shares of my order and immediately cut me.  I can add there is more trading being done on exchanges that I cannot access.  This is unfair.  I have spotted HFT programs that are impossible to beat.  So I stay clear of them.  And as I trader I certainly hope the markets offer a level playing field for all of us.

Look, the players are in the room.  And this is excellent work done by those who have spoken out.  Senator Schumer and government agencies handle policy.  I am a trader.  I will focus my attention on the adjustments that I must make during this trading period that includes HFT.  And I hope in this blog to offer a few helpful ideas for traders while this HFT controversy is sorted out.

Yesterday we had such an example of HFT that I have learned to avoid.  At 86.60 @smbcapital tweeted:

if you want a good example of HFT manipulation watch $AMZN around 86.60

HFT was dominating trading around this level.  I could not read whether AMZN would trade higher or lower.  And my charts were not definitive.

A few times I thought I could read the tape and made plays around 86.60.  The results?  A short term short in front of 86.60 ended in a loss of 25c (and my entry and exit prices were much worse b/c I couldn’t get this seemingly liquid stock at the price I preferred).  A long above 86.60 ended in a small loss.  Ok so now I see a pattern.  The short term longs are losing and the short term shorts are losing.  And our losses are greater than normal.

Now I had a choice.  I could continue to pretend that I could compete against these difficult programs at this price.  This undoubtedly would have concluded with me giving back all of my gains.  Or I could choose a different path.  And so I tweeted:

a great example also of when we shouldn’t play in $AMZN around 86.60 bc of HFT manipulation. wait 4 it to trend then play. but not now.

I waited for AMZN to pick a direction.  Around 86.40 I could read the tape again.  AMZN was headed lower most likely.  I reshorted.  And I caught a nice move down to 85.90.

HFT makes our trading more challenging.  There are set ups and time periods we need to avoid, such as AMZN 86.60.  But trading is trading.  We look for strong stocks and get long.  We search for weak stocks and get short.  Yes HFT shakes us out of more positions.  Yes it is harder to get stock.  And yes it would be nice if HFT were not as prevalent.  But guess what?  HFT is here.  And it will only grow.  So as a trader I must adapt.

But we as traders can limit their impact through our own trading.  We can choose not to play when HFT eliminates our edge.  If you go to a local restaurant and they charge too much for what they offer, then most of us choose not to revisit.  And we can do the same when we spot HFT.  If you do not play then they cannot take your money.

Now that does not mean that adjustments should not be made to HFT.  There are solid arguments being proffered that changes must occur.  Manipulation has no place in the markets.  And we should all have access to the same order flow.  The market should reward the best traders and not those with an unfair advantage, such as access to exchanges others of us cannot reach.  But we can all still compete even with all this HFT.

When we went to 1/16ths back in the day I heard this was the end of intraday trading.  When we transitioned to pennies I heard that it was all over for the intraday trader.  When Hybrid was introduced this was supposed to be the final nail for us.  When programs entered our markets this was supposed to manifest our dissolution.  Some traders were forced out during each of these changes.  But good traders adapt.  They find new patterns to exploit.  HFT will not be our ruination.  It is just another market challenge that we must learn to overcome.

I would like to see some changes made to HFT.  But you know what?  If things remain the same, then I will adapt.  Today I am at the office on Saturday ripping through some charts for excellent set ups on Monday.  And now that SPY closed above 96.10 on heavy volume, I like the way the market is set up.  This is a market overflowing with opportunity.  I will figure out how to make money even with the HFT.  I am a trader.

*****Tomorrow I will answer some questions that I have received about Reading the Tape.

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