High Frequency Trading and ETFs
A startling example of the unholy alliance between high frequency trading and ETFs has been reported by Reuters with the case of Infinium Capital Management.
Infinium has been revealed as the company being investigated by CME Group, the exchange operator, after it managed to lose $1m in a matter of seconds after a brand new high frequency trading programme malfunctioned.
Infinium used an algorithm to execute a "lead/lag" strategy to exploit any miniscule arbitrage opportunities between United States Oil Fund, a well known exchange traded fund that tracks the price of oil, and West Texas Intermediate, the benchmark US crude oil future.
On February 3 of this year with less than four minutes to go before Nymex closed floor trading for the day, Infinium turned on its new computer programme, which immediately started buying oil futures uncontrollably.
The algorithm managed to place 4,612 buy orders before it was was shut down five seconds later. The company then sent large offsetting sell orders but was left nursing a loss of $1.03m.
Infinium's burst of buying and selling represented about 4 per cent the trading volume of the contract that day and caused a brief 1.3 per cent jump in the oil price.
But the spike in trading volumes attracted attention and over the next two days, other funds reacted with aggressive short-selling, suspecting that somebody in the market was holding an unsustainable long position and running into trouble.
Infinium's chief executive, Charles Whitman, said the CME's probe was a "routine investigation" into an incident that "was a result of both human and computer error."
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