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Conquering Fear in Trading

In this exclusive to Traders Magazine, therapist Storm Copestand examines how traders can manage expectations and conquer their fear during the entire execution process.

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August 1, 2010

So Not Fast!

By By John D'antona Jr. and Peter Chapman

However, others contend there is no data to support the thesis that faster trading speeds or markets push volatility higher. While the VIX has shown that volatility has risen from a low of 10 in mid-April to 26 in mid-July, peaking at 47 in May, sources say the increase in volatility was in fact due to macroeconomic factors-such as the European debt crisis, the BP oil spill and the nascent U.S. economic recovery-rather than speed.

"Where's the beef?" asked Angel. The finance professor said he hasn't seen any data proving that speed breeds volatility. "I would love to see the data on that, because it would make a really cool paper."

Quote Flickering

In fact, Angel did a study comparing short-term volatility for all U.S. exchange-listed stocks measured at one-minute, five-minute and 15-minute intervals relative to volatility at the one-hour interval. He concluded that there has been no discernible increase in these volatility ratios over the past several years, indicating to him that high-frequency trading has not been a short-term disruptive influence.

Even if exchange computers operated more slowly-at one-second speed intervals, rather than one millisecond-the market would still be subject to extreme volatility if spooked by macroeconomic conditions, Angel added.

If today's high-speed trading does not contribute to extreme price moves, so-called "quote flickering" has become a problem for many. Quote flickering occurs when quotes are posted and then quickly disappear. The phenomenon is not new. It emerged when the industry moved to trading in 1-cent increments in 2001. But high-frequency trading stratgeies. which often involve a tremendous amount of cancellations, has brought the problem to the forefront.

Nagy told the SEC that retail investors expect to be able to trade at the prices they see on their computers and "do not accept the excuse that the quote they saw is not attainable." The exec petitioned the SEC to make quotes effective for a minimum amount of time. The SEC is taking the request seriously. SEC commissioner Elisse Walter broached the topic at the June market structure roundtable.

Sal Arnuk, a partner at Themis Trading who participated in the roundtable, told Walter that vanishing quotes were a routine affair that bedeviled him almost daily. There may be liquidity in the market as he begins to trade, say, a 50,000-share order, but it disappears in the middle of his trade. Buyers or sellers fade when they get wind of a buyer or seller, he explained.

"Speed is tied to the quality of the quotes," Arnuk said. "Speed is good when it is good for everybody and everybody is playing on the same field. But when certain participants use a co-located advantage to make markets, they will pull their quotes."

Market makers counter that they have the right to cancel their quotes when they want, to protect themselves.

Liam Connell, chief executive at Chicago-based high-frequency trading firm Allston Trading, told Traders Magazine his quotes and orders are akin to probes into the market. They provide him feedback on the state of the market. The thinking goes: The more quotes and orders placed, the more information he gets-and that makes for more efficient markets and better pricing for all the market, including retail investors.