Wednesday, September 16, 2009

High Frequency Trading in Small and Mid Caps Using First Solar as an Example (FSLR)

He knows from whence he speaks. From Themis Trading:
...The presence of HFT in small and midcap stocks is actually much more obvious than in large cap stocks, by many accounts.

Typical scenario:

1. Buyside trading desk receives an order from PM to buy 200,000 FSLR (First Solar).
2. Trader1 places bid in ECN for 135.20 for 25,000 shares with reserve book showing 200 shares, and discretion, or pehaps an arrival target algorithm, which does something similar.
3. Trader1 takes 600 shares at 135.30, and bids 135.25 for 24,400 showing 200, with discretion.
4. HFT1 automatically bids 135.26 and takes 1,000 shares up to 135.31.
5. HFT2 automatically bids 135.31 and takes 1,300 shares up to 135.35.
6. HFT3 automatically bids 135.35 with discretion up 3 cents from there.
7. Trader1’s algorithm floats his bid up to 135.35 and takes 1,300 shares up to 135.40.
8. Trader2 at another institutional firm, who already had an algo in place to be 15% of the volume, sends in 800 shares to buy at the market; FSLR now ticks 135.55 with a building depth of book on the bidside.
9. Trader1, frustrated, at his own lack of buying volume, and the fact that the stocks jumped 40 cents on less than 5,000 shares, takes stock up to 135.75 to catch up on volume. He bids 135.60.
10. HFT1 and HFT2 continue to bid ahead of him and accumulate shares. At some point HFT dumps the shares much higher than their buy price.

The HFT is not making pennies here. It is making dimes and quarters and more. Is HFT in small caps? A good many of us would answer differently than the WSJ article....MORE

HT: FT Alphaville who linked to the piece in a post headlined "No HFT in small-caps? Puh-lease…".