If the market closes lower by more than 2% on Monday, I will never, ever make a post on this board again (I can hear the cheers now!).
Fib, this is in no way a challenge thrown at you. It's just a technical debate. I don't think anyone would cheer at you not making a post on this board again, except maybe some permabears. Please stick around irrespective of the outcome.
Question...what is the difference between program trading and high frequency trading as it relates to price action and its reaction to movement?
Can I ?
There's a huge difference. HFT is a specialized and a dangerous subset of program trading. Program trading in a traditional sense refers to pushing bulk orders to the exchange using computers. It was plain vanilla high speed bulk order execution. It did not involve specialized algorithms to probe order books, hunt stops,etc which is what the algorithm trading is all about. It's the hot money playing games with each other as long as there's an orderly market and providing "Superficial liquidity" to markets. That liquidity can abandon the market in a heartbeat.
Here's an example. Assume that the market is trading at an important support. The entire universe knows that the support will not be taken out without a fight. Now comes a mini intraday bounce from the support towards the next resistance. It's a perfect opportunity for the algorithms to probe the stops above the resistance and the HFT boyz would push hundreds of billions of dollars to probe the order book. In a normal market, the HFTs would hunt the stops and mission accomplished and they are on prowl for the next opportunity. But what do you think would happen, if in the middle of their probing, huge volume enters the market in the form of instituitional selling ? Not only will the bids dissapear once the support breaks, but the HFT money (huge temporary liquidity) will desperately try to get out at the same time, which can exacerbate the decline. Well, i am not in anyway saying that this is what happened during the May crash. But it's a very plausible scenario in today's high leverage market mixed with dumb robotic trading. I say "dumb", cuz these algorithms are trend neutral and they operate both with and against the trend.
Edited by NAV, 23 October 2010 - 09:52 PM.