This Chart Shows How You Get Screwed in the Stock Market

By Wolf Richter: On a day like this, when markets stumble, maybe you have other things to worry about than how algos screw you out of more or less small amounts of money every time you trade, or every time your mutual fund trades, and how this money adds up over time, like one of the endless fees that you pay directly or indirectly as you try to ride the stock market into the sky.

But you no longer know if any of the quotes you see still exist when you see them.

They’ve been debated for years, even in Congress: the real or perceived evils of High Frequency Trading. There are many defenders of the practice, particularly among those that benefit from it. And there has been some give and take…. To where Eric Scott Hunsader, founder of Nanex, tweeted: “Every positive suggestion made by #HFT lobbyists has come after being backed into a corner where lies no longer worked.”
He also offered a chart that would make you want to hang on to your wallet.
Turns out, 14% of all orders for large ETF are cancelled within 1 millisecond (ms); about 27% are canceled within 10 ms, and 65% of all orders for those large ETFs are cancelled before 1 second has elapsed.
Large stocks follow a similar trajectory: 16% are canceled within 1 ms, 27% within 10 ms, and 56% are cancelled within 1 second. Midsize ETFs are close behind. In short, the majority of all orders are canceled within 1 second.
This chart shows how long these orders live in the system:

Why does that matter? Because by the time you see quotes and make your decision and send your own buy or sell order, the data that you based your decision on doesn’t exist anymore. It was an ephemeral figment of an algo’s inner workings. It’s not just you. The mutual fund you own has the same problem. Nanex, which tracks this sort of thing, describes it this way:

It is very common to find examples of stock quotes changing rapidly – hundreds and sometimes thousands of times per second in a single stock. At the extreme, we’ve seen in excess of 25,000 quote changes in a single stock in one second of time or less…. Often there are no trades during these events. Sometimes a simple pattern evolves from the quote price changes, such as in the case of a certain High Frequency Trading (HFT) algorithm that we’ve recently seen run every day in Google stock.
The algo starts with an order to buy 100 shares at $581.87. This is replaced, sometimes only milliseconds later, with an order to buy 100 shares at $581.88 (1 penny higher). Over the course of 1.5 seconds, this process repeats another 253 times, ending with an order to buy at $584.41. Within less than a second, the $584.41 order is canceled and replaced with an order several dollars lower, and the cycle repeats.

And actual market pricing? Forget it. It’s you against the machines. It’s your mutual fund and pension fund against the machines. And you lose every time. But on a day like today, when deep red oscillated across the screens, you might have bigger problems to worry about.

Source