Decimus Capital Markets, LLC / Haim Bodek ConsultingSM

November 2012

This paper summarizes the intentions, key properties and observable effects of the particular class of high frequency trading known as HFT scalping. By using market structure advantages that have in effect circumvented the regulatory framework of Regulation NMS, HFT firms employing these strategies dominate US equity market volumes. This class of HFT trading leads to observable market phenomena such as high frequency price fluctuations, low fill-to-cancel ratios and liquidity gaps. Traditional electronic execution services and execution strategies commonly utilized by buy side equity traders often operate in a manner that is exploited by HFT scalping strategies.

HFT scalping strategies use market structure advantages to the detriment of counterparties unversed in the often undocumented nuances of exchange special order types and order matching engine logic. This paper does not directly address closely related high frequency strategies such as latency arbitrage and rebate arbitrage, though these strategies often use concepts and techniques from HFT scalping. While this paper’s focus is on the US equity markets, the basic concepts of HFT scalping are applicable to financial markets in general.

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