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December 16, 2011

Algo Monitor Watches for HFTs

By John D'Antona Jr.

Santa Barbara, Calif.-based HCMI has developed a real-time service for the buyside that scans the market for evidence of high-frequency traders and their computerized strategies.

HCMI is a customer of data provider Nanex. The underlying technology behind HFT Alert comes from Nanex, and HCMI distributes and supports HFT Alert software.

According to HCMI president Steve Hammer, HFT Alert monitors the smallest levels of algorithm activity in the marketplace at any given time by searching for "fluttering." Fluttering, Hammer said, is small changes in either the bid or ask price that are the precursor to a trade.

"HFTs are doing the fluttering," Hammer said. "The alert is an algo detection system that checks for various types of algo activity, such as fluttering or cycle repeaters."

Once it detects fluttering in either the bid or ask, HFT Alert sends an audiovisual alert on the user's desktop. Once the trader receives the notification, he can then modify his trading strategy. The system can monitor an unlimited number of stocks or a single stock that exhibits a high degree of message or quote traffic, usually in excess of 1,000 quotes per second.

Hammer added that fluttering can circumvent the national best bid and offer requirement mandated by Reg NMS. At one point in time, the new fluttered bid could be the best bid and the algo could execute a trade at one price on one exchange and at another fluttered price on another exchange.

"In essence, you have two NBBOs on two different exchanges," Hammer said. "Portfolio managers can use this to help to prevent front-running of their orders."

The system is targeted at the both the buyside and sellside.

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