Four Charts That Show How Wild A Stock's Ride Can Get In Even Just One Second

One of the claims high frequency trading advocates make in favour of the practice is that they tighten the spread between the bid (what people are willing to pay for stock) and the ask (what people are willing to sell a stock for).

Eric Hunsader, over at Nanex LLC, says that’s bunk. The spread between the bid and the ask can fluctuate like crazy in one second, and it can be pretty wide.

The reason why academics and regulators can’t see this is because they aren’t looking close enough. They simply can’t afford the data or do not have the systems in place to observe this activity. Additionally, the more noise there is in the market, the more expensive the data is to process.

And Hunsader argues that HFT firms make tons of noise.

He sent us four Amgen charts from to illustrate this. All of this happened today within 3 minutes at most.

This first chart shows actual executed trades in Amgen over 3 minutes. The grey part is the spread of the NBBO (National Best Bid/Offer) the top of the shading is the best ask (lowest selling price from any exchange), and the bottom of the shading is the best bid (highest buying price from any exchange).

You’ll note that it spread’s about 25 cents — not the tightest in the world by any means. In fact, if the spread were really tight and prices were stable, Hunsader pointed out, this grey would look more like a thin straight line.

The dots represent different exchanges (the green ones are dark pools — cool huh? A lot of those are retail trades.).

amgen trades chart

You saw how many trades were executed, now here’s how many orders were put out over the same period of time. Check out those price swings.

amgen NBBO chart

This chart shows Amgen over 1 second when NO trades have been executed and quotes are fluctuating like crazy.

amgen chart nanex

This last chart is chart 3 spread out over 27 seconds. The NBBO is even wilder.

Nanex LLC

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