The Liquidity Mirage or what you should know about High Frequency Trading

• This seems like an exotic topic for the trading aficinados only.
• This is also not a trivial topic.
• This is another example of how my 2nd Derivative theme, where the smartest and sharpest minds found ways to exploit "commonly accepted and employed procedures" of the "average" institutional investor.
• This is most likely right now the most profitable and risk minimal trading strategy on Wall Street. (Zero guesses $ 4bn for Goldman alone per year)
• This works because most participants (read YOU and YOUR investment and/ or mutual funds) don't even know that they are fleeced (you know about the old proverb saying that if you don't know who the sucker is it is most likely YOU...).
• This is completely legal !!

good Videos explaining the basics.....
http://zerohedge.blogspot.com/2009/07/joe-saluzzi-provides-further-color-on.html

http://zerohedge.blogspot.com/2009/07/themis-trading-principal-program.html


related white paper http://www.themistrading.com/article_files/0000/0348/Toxic_Equity_Trading_on_Wall_Street_12-17-08.pdf

or here

http://zerohedge.blogspot.com/2009/07/toxic-equity-trading-order-flow-on-wall.html



more background info on Program Trading on the NYSE
http://zerohedge.blogspot.com/2009/07/is-case-of-quant-trading-industrial.html



This also means that you have to be very careful with your standard VOLUME analysis, because the volume you see is a derivative of program trading and black pools and might not represent liquidity in the original sense.


hat tip to http://zerohedge.blogspot.com/ for their in depth coverage