The other day I mentioned on my Twitter account (@sspencer_smb) that I would begin to blog about my daily interaction with HFTs in the US equities markets. I have been actively trading stocks with heavy HFT activity since at least 2003. In 2003 I traded AAPL on a regular basis and it was already flooded with dozens of HFT programs, which although a nuisance at times did not prevent me from consistently pulling money out of the market.

The one thing that we have consistently preached at SMB since 2009 is to not attempt to rely as heavily on “scalp” trades or techniques that are based solely on speed of execution. This makes no sense in a market where HFTs can analyze and makes thousands of trading decisions before a human has a chance to blink. So the focus on SMBs desk is to find intraday swing trades or as Bella likes to call them “Trades2Hold”.

On May 7th we were looking at CTXS when it was gapping lower due to an analyst downgrade. I looked at the long term chart and noticed that 80 had supported twice in May. I also noticed that although 80 had been breached once in May it had never closed below this level. This was an area of “interest” for me and I would watch CTXS on the Open if it traded close to this level.

As the market opened CTXS was gapping down to around 80. This seemed to be a perfect opportunity to fade the weakness. I noticed some buying at 80.10 so I bid for some stock at 80.12. My bid did not get hit and within seconds it was trading at 80.40. When CTXS quickly dropped to 80.10 again I placed a bid at 80.16 but could not get hit as HFT algos cut in front of me and it quickly traded up through 81.

It appeared others had the same idea as me to fade the down move on the Open and get long.  But they were using algos to do their trading for them. There were also “predatory” algos observing the support in the 80 area and they made it difficult to get stock at the prices I deemed to be great from a risk/reward perspective. So I missed a very nice up move in CTXS.

It is very rare for me to make a Trade2Hold in the first 30 minutes of the trading day. Stocks have a tendency to reverse far to often during this time. So I am especially sensitive to my entry prices as I expect to be out of these positions within minutes and not hours. That is why I was unwilling to pay 80.25 right on the Open where the stock was being offered.

There is a simple adjustment I could have made which would have increased my likelihood of getting fills close to the 80.10 level. I could have placed my bids at or slightly above this level when the stock was trading at 80.40. My failure to do so allowed the HFT programs to react to my bids being entered once CTXS had already returned to this price.  In the next post in this series I will discuss how I used this order entry technique in VRTX, which allowed me to participate in a significant up move.

For an excellent explanation of all the types of HFTs check out this blog from T3 Live.