An interesting PDF concerning latency arbitraging in the world of HFT has been released by Themis Trading. In it, they explain just how HFT works with computers doing all the heavy lifting, though that quote about 60% of daily volume is way off. I’ve heard reports of 3 to 5-per cent:
Themis Trading: Here’s an example of how an HFT trading computer takes advantage of a typical institutional algo VWAP order to buy ABC stock:
1. The market for ABC is $25.53 bid / offered at $25.54.
2. Due to Latency Arbitrage, an HFT computer knows that there is an order that in a moment will move the NBBO quote higher, to $25.54 bid /offered at $25.56.
3. The HFT speeds ahead, scraping dark and visible pools, buying all available ABC shares at $25.54 and cheaper.
4. The institutional algo gets nothing done at $25.54 (as there is no stock available at this price) and the market moves up to $25.54 bid / offered at $25.56 (as anticipated by the HFT).
5. The HFT turns around and offers ABC at $25.55 or $25.56.
6. Because it is following a volume driven formula, the institutional algo is forced to buy available shares from the HFT at $25.55 or $25.56.
7. The HFT makes $0.01-$0.02 per share at the expense of the institution.
It is currently estimated that HFT accounts for 60% of all share volume.