The race to the swift
The depth of the order book on S&P E-mini contracts plunged dramatically from June through August in 2011 as these market studies from Nanex show.
Every line in “Momma said there’d be days like this” (below) represents a trading day at one-minute intervals, color-coded by date. The higher the line, the deeper the order book. The purple lines are one year ago, the greens at the bottom are from August and the red lines are the most current.
Nanex believes this represents reduced activities as medium-term traders backed away from the market for fear of being stung by HFTs. Note the sharp plunge at 10 a.m. (when many economic reports are released) — reflecting an evaporation of liquidity on news, when it’s needed most.
Trading always has gone slow around news events, only to erupt seconds later, but this behavior has become more pronounced in the past year after intermediate-term traders found themselves getting stung by HFTs. “Liquidity gaps” (below) illustrates this phenomenon, showing how the order book depth now plunges from roughly 15,000 per side to less than 1,000 — leaving the market even more susceptible to wild moves on small reactions. The bottom chart shows the depth of book at each level and the top chart shows last trades. The color blue indicates less depth.