Does High Frequency Trading Really Affect The Price Action For Day Traders

Today’s electronic trading is dominated by what we now know as High Frequency Trading.  We know this computerized order entry technique has changed the day trading landscape, but does high frequency trading really affect the price action for day traders?  For simplicity, we will call our high frequency trading “HFT” for short during the rest of this article.  HFT is done by computers and what makes it so interesting is that the computers can place and remove huge orders in the blink of an eye.  The biggest complaint about this new form of computer trading is that it’s not real in the majority of cases.  In other words, most of the orders are placed for the reason of distracting or fooling the rest of the day traders into seeing false buy and sell orders that if real, could heavily affect market direction.  Most of these orders are not intended to ever be filled, but instead are placed in an effort to distort the market balance and trick day traders so that they don’t know the true size of buy or sell orders that are sitting in the marketplace.

Does High Frequency Trading Affect The Price Action

Does High Frequency Trading Affect The Price Action

If you have day traded the US indexes for any amount of time, you have likely noticed these large orders that appear in the blink of an eye, and then suddenly disappear just as quickly.  If you have seen or notice this, then you have witnessed HFT in real time in the markets.  There is some debate as to whether or not this type of trading should be legal or not, but the fact remains for now that it is not illegal and it’s certainly being used on a daily basis by some of the large trading firms.  It’s certain that it does give them some advantage as well, but how much of an advantage is likely debatable at this point in time.  The most important thing that you must understand as a day trader is that these HFT orders are real, and that they are likely not meant to be executed.  Instead, they are meant to distract you and to fool you into making irrational or incorrect trading decisions.  The most concerning part for me is that we can indeed notice the very large orders that suddenly appear, but how much of the actual bid and ask orders are real orders and how many are really HFT orders that are pulled quickly before they are executed?

Here is an excerpt we found in an article that discusses more about HFT.  This article was posted at and had the following to say.

he Nanex HFT chart I posted last week went viral, becoming by far my most popular post of the year; I even did a version of it for Buzzfeed. In the comments to that post, Kid Dynamite defended high-frequency trading by saying that spreads have tightened in substantially for everyone as a result of HFT. But neither of us really had the numbers — until now.

The NYT’s Nathaniel Popper, today, runs this pair of charts, which basically tells us everything we need to know. The main thing you need to notice is that the x-axis is the same on both charts, running from 2000 to the present day; my HFT chart from Nanex ran from 2007 to the beginning of 2012.

What’s clear from the top chart in the NYT (and from my Nanex chart) is that the explosion in HFT took place from 2007 onwards. And what’s clear from the bottom chart in the NYT is that benefits to small investors more or less stopped at that point.  You can read the rest of the original article here.

I’m guessing that anyone that defends are is in favor of HFT must be involved with it in some way, because otherwise, why would anyone be for anything in the markets that had as a main purpose the desire to be deceptive?  Day trading is difficult enough at it is, so anything that works against the small guy that is trying to make it in the markets is a bad thing in our opinion.  We would like to see HFT eliminated, but at the same time, we also know and understand that some regulation of the markets is great and is needed to ensure that they remain healthy and legitimate.  On the other hand, too much regulation can also be a bad thing, so how we go about making the necessary changes to get a handle on HFT is unclear at this point.

Back to the question about how HFT affects the price action, well the answer is mixed to a small degree.  What we believe is that the price action is King, and this is why we don’t use or trust indicators and it’s also why we try and avoid watching the DOM and the bid and ask as well, because they are indeed manipulated by HFT orders.  What you can not manipulate is the price action, and if the price action is telling you the market is trending lower, then you better be prepared for lower prices.  If prices are trending higher and the price action is giving you buy signals, then you better be buying, even if the Dom is telling you there might be a brick wall just ahead.

The thing is, if there is a brick wall just ahead, there will be other clues in the price action that will verify this, so use that information over what the order ladder or bid/ask is telling you every time.    While you can still get fooled by the price action on occasion, you are much less likely to get fooled when following price action than by watching an order ladder that is filled with false orders due to the HFT orders, but likely even by day traders themselves in some cases.  I know we place quick temporary orders ourselves for particular reasons, so we know it happens even at the micro levels.  So, does high frequency trading really affect the price action for day traders?  Our first thought is no, not really, so by concentrating on the actual price action or price movements and patterns on your chart, you are much less likely to get fooled versus someone that is trading off the order ladder and watching false orders being placed on a regular basis.  We are not saying that you can’t make money trading the DOM or order ladder either.  We just think by learning to follow the price action alone, you will have an advantage in your overall trading.