Friday, August 3, 2012

Knight Fall or how to profit from a HFT computer glitch

On August 1st, a glitch in trading software at Knight Capital caused unusual behavior of various stocks listed on the NYSE.

At least one trader was able to profit from market disturbance caused by Knight Capital, by taking a short-time position in some affected asset.

Since, brief and limited in scope mini flash crashes and jumps are pretty common these days, it seems potentially profitable to create a high frequency strategy that identifies and trades such mispricings caused by other HFT algorithms.

Even that the Warsaw Stock Exchange has not implemented a HFT trading platform yet, unusual short-time disturbances are not total strangers here.

The chart below presents one such situation: the price of PZU, the largest Polish insurance company, decreased by 2.76% in one second on substantial volume on 27. July 2010.

Since PZU was a constituent of WIG20 index at that time, such a move should be reflected in the price of FW20 index futures. And in fact, the price of FW20 changed. But only after 5 seconds. It is a very long time in HFT terms...

Chart: PZU vs. FW20 futures contract, 2010-07-27, 10:47:39 -60 / +200 seconds
the blue bars represent volume


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