9.30 am: A mutual fund needs to raise cash and is selling 20 percent of the average daily volume traded in your stock. To do so, it will use a sophisticated broker/dealer algorithm, which will slice up the order to minimize the selling pressure it puts on the stock.
9.45 am: The mutual fund has sold only 5 percent of its order, but the stock is starting to head sharply lower, down 2 percent now.
Every time the fund tries to access a lower price point, it executes only a small amount of its order but is having meaningful price impact. What’s happening?
While the mutual fund is doing its best to minimize market impact by slicing up its order into small pieces, it is leaving a trail of orders on various stock exchanges. This trail generates an enticing pattern for predatory, sophisticated high-frequency trading (HFT) strategies to recognize and trade ahead of. It enables HFT firms to sell your company’s stock a fraction of a second before the mutual fund in anticipation of the mutual fund being forced to sell at a lower price…
Click here to read the special feature.
