A perfect example of how HFTs pick your pocket — courtesy of the CME Group


Pocket picking at the CME Group (@CMEGroup, $CME) — how the electronic futures trading platforms cannot control volatility creation by the HFTs

Two charts are shown to demonstrate how the HFTs manipulate the CME’s electronic platform to pick the pockets of speculators. This chart also reinforces my recent posts on the paramount importance of the closing price and the irrelevance of intra-day volatility.

Chicago times are used. Two charts below show the pocket picking caught on security camera. Remember, spot and futures trade at reciprocal values, so a rally in the spot should be reflected as a drop in the futures. Let’s watch the pockets being picked minute by minute.

7:29 ending

  • Spot closes at 1.0039
  • Futures close at .9953

7:30 ending

  • Spot has very narrow 3 pip range, closing at 1.0043
  • Futures break 43 points (worth $430 per IMM contract) on thin air, closing at .9910

7:31 ending 

  • Spot opens at 1.0043 and drops quickly on economic news. Very little volatility occurred prior to the sharp break.
  • Futures open at .9966. In other words, there were NO trades between .9910 and .9966 (a value of $560 per IMM contract)

This is what happened at the IMM (host of the HFT pocket pickers).

The HFT programs recognized the stack of IMM stops starting at .9936 when the market was trading at .9953. The HFT sold the market heavily into the stops so that the sell stops cascaded. The HFTs then took the over side of the cascading sell stops, covering the sales required to create the cascade. Once the stops were cleared up the market traded up 56 points without a trade.

Let’s assume the HFTs did not sell at the high of 7:30 (ending time) minute and buy at the low. Let’s assume they picked up half of the 7:30’s range of 42 points, or a profit of 21 points. Not a fortune, but repeated (to lesser extremes) hundreds and thousands of times per day we can start to grasp why 60% of futures volume is coming from the HFTs.

Now, let me make this clear — what the HFTs did is not illegal. But, it shows the great risk traders taken by trusting the CME’s electronic platform with intraday stops. It is obvious to me that the electronic exchanges have stacked the deck in favor of HFTs against the interests of small traders.

Traders beware. This is the importance of the closing price.



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