Are HFT Algos Taking Aim At Dominating And Manipulating The Wonderful World Of ETFs Next?

Tyler Durden's picture

While many have speculated that the May 6 flash crash was a combination of High Frequency Trading (primarily), quote stuffing, ETF participation, and overall liquidity reduction, few, and certainly not the SEC, have been able to pinpoint the participation of HFT in disruptive ETF movements. Indeed, HFTs have been isolated in individuals stocks (best seen in the infamous "crop circles" images from last summer here and here) and specific futures contracts (most recently the NG NYMEX contract which experienced a truly bizarre algo driven sine wave pattern before flash crashing with no fundamental input) but rarely in actual ETFs. Perhaps this has been due to the relatively high volume of trades in some of the most popular ETFs such as the SPY, where the impact of one single algo would rapidly get lost in the noise. Well, a few days ago, Nanex once again was the first to catch the NatGas "sine wave" in action in what is possibly the most actively traded product in the stock market: the SPY or Spider ETF. Today, Nanex once again brings something very jarring to popular attention by focusing not on the most trafficked "synthetic CDOs" but on numerous ETFs that have not been front and center in the public's eye, yet which could serve as a great practice springboard to total market manipulation via HFT strategies - strategies that if taken beyond their reasonable limit, could crash the overall market very much how the NatGas algo crashed the price of gas by 8% in seconds. Presenting the RETF algo....whose purpose is currently unknown, but whose presence in the market should be known by everyone who trades stocks.

From Nanex:

On May 2, 2011 we began noticing a strange algo phenomena that would begin
immediately after the official market close. It started with one issue,
affecting only the ask price. It soon progressed into more stocks and soon
began affecting both the bid and ask price. As of 6/10/2011 it is seen in over
two dozen issues. The algo has several unique characteristics:

  1. To date we have only seen the algo run after normal market hours
    (specifically between 16:00:00 EST and 16:15:00 EST).
  2. It runs in short and long ETF issues (i.e. an ETF and it's Inverse ETF).
  3. It averages approx. 2000 quotes per second on each issue it runs on.
  4. Quotes from multiple exchanges follow the price.
  5. It consistently raises the ask price and recently began dropping the bid
    price (many times until the bid hits zero). In the majority of cases it also
    moves the NBBO to the same outrageous price levels.
  6. We have not seen any trades occur while the algo is running (yet). As it
    runs in fairly illiquid ETF's and after hours, this is likely due to the fact
    that there are no trading opportunities at the time.
  7. It has increased it's scope of ETF issues every week.

It would be easy to say this algo is a test of some type -- if it was only seen
on one or two days. However, seeing it run every day for six solid weeks (as of
this writing), increasing in both symbol scope and frequency, raises many
questions. One thing however is painfully clear; all one needs to bring a
stocks quoting price to zero (on the bid side) or into the stratosphere (on the
ask side) is the will to do so (and an algo that will blast thousands of quotes
a second to raise/lower the NBBO in small increments, thus not violating the
recently implemented stub quote
rule
).

Click for a larger image

First Sighting

The first time this algo was seen was on 05/02/2011. Just a few small blips in
one symbol on one of our most basic high frequency quote monitors:

What was unique was that it occurred after market hours (which is not that rare
but enough to make it a curiosity) and when examined we found it involved
multiple exchanges (normally we see run-up run-down algo sequences originating
from a single exchange). This is not to imply the algo itself is running on
multiple exchanges (although it is within the realm of possibility), but that
quotes from other exchanges are following the price movement and quoting at or
near the same (outrageous) level.

In the following charts, trades and quotes are plotted sequentially as they
occur. As such, no data is lost. Exchange's bid and ask prices are colored
according to the legend on the left. When quotes are the NBBO, a red circle is
drawn for the Best Ask, and a Green circle for the Best Bid.

Click on any chart for a high resolution image.

Symbol RXL

Chart #1: The first sequence of 250 quotes shows the ask price being run
up incrementally from $60 to over $400.
Click for a larger image

Chart #2: This chart shows the ask price continues to rise, although due
to the bid price being so low the scale makes it appear to be flat:
Click for a larger image

Chart #3: Removing the bids we can see that the ask price continues to
incrementally rise and affect the NBBO as it does:
Click for a larger image

Chart #4: This rise to over $500 occurs in approx. 6 seconds, with
approx. 18,000 quotes being generated in the sequence:
Click for a larger image

On week two the algo begins to affect both the bid and the ask price and also
begins to run on numerous additional symbols. It does not take the bid price to
zero but to a much lower level before stopping, while the ask price continues
to rise:

In the following charts, trades and quotes are plotted sequentially as they
occur. As such, no data is lost. Exchange's bid and ask prices are colored
according to the legend on the left. When quotes are the NBBO, a red circle is
drawn for the Best Ask, and a Green circle for the Best Bid.

Click on any chart for a high resolution image.

Symbol IFNA

Chart #1: The first 300 quotes:
Click for a larger image

Chart #2: 1000 quotes:
Click for a larger image

Chart #3: 5000 quotes:
Click for a larger image

Chart #4: 84,000 quotes:
Click for a larger image

We now see the algo affecting both the bid and the ask price and in many cases,
taking the bid price (in incremental steps) to near zero (0.01). When the bid
price hits 0.01 it then returns to the normal price range, while the ask price
continues into the stratosphere. We also see the algo filling our high quote
frequency/algo monitors every day:

In the following charts, trades and quotes are plotted sequentially as they
occur. As such, no data is lost. Exchange's bid and ask prices are colored
according to the legend on the left. When quotes are the NBBO, a red circle is
drawn for the Best Ask, and a Green circle for the Best Bid.

Click on any chart for a high resolution image.

Symbol GASL

Chart #1:. The first 500 quotes of the sequence:
Click for a larger image

Chart #2: 1,000 quotes:
Click for a larger image

Chart #3: 5,000 quotes:
Click for a larger image

Chart #4: After approx 14,000 quotes the bid price hits zero, then
rebounds to a previous price before the sequence began:
Click for a larger image

Chart #4:Symbol GASL - The Ask price continues to rise. 84,000 quotes
shown below in approx. 41 seconds:
Click for a larger image

On 6/10/2011 we see another change in behavior from the algo. As opposed to
running for 2-10 minutes in each issue (thus taking the bid to possibly zero
and the ask as high as it would go in the time span), the algo only ran for 1
full second in each issue. It is unclear (as of this writing) if this will
become the new normal, if it will soon stop altogether or if it's previous
behavior will continue.

In the following charts, trades and quotes are plotted sequentially as they
occur. As such, no data is lost. Exchange's bid and ask prices are colored
according to the legend on the left. When quotes are the NBBO, a red circle is
drawn for the Best Ask, and a Green circle for the Best Bid.

Click on any chart for a high resolution image.

GASX
Click for a larger image
RETL
Click for a larger image 
RETS
Click for a larger image
SBM
Click for a larger image 
SDK
Click for a larger image
SJL
Click for a larger image 
SZK
Click for a larger image
UCC
Click for a larger image 
UGE
Click for a larger image
UPW
Click for a larger image 

 

Additional examples of the algo in action can be seen here.

And before readers decide that this algo does not impact an ETF they care about, here is the list of names in which the RETF has been seen:

As of 06/10/2011 we have seen the algo run in the following issues:

BIB  ProShares Ultra Nasdaq Biotechnology
BIS  ProShares Ultra Short Nasdaq Biotechnology
BGU  Direxion Daily LG-Cap Bull
BGZ  Direxion Daily LG-Cap Bear
GASL  Direxion Daily Nat Gas Bull 2X
GASX  Direxion Daily Nat Gas Bear 2X
IFNA  iShares FTSE EPRA/Nareit
KRS  ProShares UltraShort KBW Regional Banking
KRU  ProShares Ultra KBW Regional Banking
LTL  ProShares Ultra Telecommunication
MWN  Direxion Mid-Cap Bear 3X - Triple-Leveraged
REK  ProShares Short DJ US Real Estate Index ETF
RETL  Direxion Daily Retail Bull 2x Shares
RETS  Direxion Daily Retail Bear 2x Shares
RXD  ProShares UltraShort Health Care Fund
RXL  ProShares Ultra Health Care Fund
SAA  ProShares Ultra Small Cap 600 Fund
SBB  ProShares UltraShort Small Cap 600 Fund
SBM  ProShares Short DJ US Basic Materials Index ETF
SDK  ProShares UltraShort Russell MidCap Growth Fund
SIJ  ProShares UltraShort Industrials Fund
SJF  ProShares UltraShort Russell 1000 Value Fund
SJL  ProShares UltraShort Russell MidCap Value Fund
SKK  ProShares UltraShort Russell 2000 Growth Fund
UCC  ProShares Ultra Consumer Services
UGE  ProShares Ultra Consumer Goods
UKK  ProShares Ultra Russell 2000 Growth
UKW  ProShares Ultra Russell MidCap Growth
ULE  ProShares Ultra Euro
YCL  ProShares Ultra Yen

 

How long before this test attempt to manipulate prices in C-grade ETFs comes to an SPY near you... And what happens when all the other algos, unfamiliar with this electronic trading pattern pull out of the market, and we see yet another historic collapse in a market that is sustained purely on hope and algorithmic levitation?

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
centerline's picture

Some of the best scientific minds used today to create incredibly sophisticated work intended to game the system for fast money in order to live like rock stars.  Humanity at it's finest, no?

plocequ1's picture

This is bearish for charts

DoChenRollingBearing's picture

It seems to me that this has to be illegal...

How come NO ONE in power at the SEC or elsewhere has said anything about this?

Spirit Of Truth's picture

If this were a just world, ZH would win one of those fat 9-figure gubermint consulting subcontracts and be helping the SEC do it's purported job.  The investigative work done here is mind-boggling.

mkkby's picture

I don't get it.  Can someone please explain how this actually changes the NBBO?  I mean someone else was already bidding/asking better prices.  Wouldn't all these quotes be non marketable?  So what if I come in with crazy quotes 1000x per second that are nowhere near marketable.  I thought they said no trades were executed, so unless they actally buy out the price levels (from themselves?), why does this matter?

What am I missing?

sabra1's picture

they're all busy staring at weiners pics!

MachoMan's picture

in their defense, they thought it was a woman when they clicked on the link...  of course, at some point you quit getting "fooled"...

Oh regional Indian's picture

DCRB, in the current machine/capital paradigm, tech-fucking your opponent is always allowed. it get's you badges and stripes usually.

ORI

LawsofPhysics's picture

ORI,

Think about it, in the history of the world "tech-fucking" has always been allowed.  Right up until the point where you are eating your competition.  Come on now, just think of all those societies that were slow to develop and apply the use of gunpowder.

Oh regional Indian's picture

In recorded history, I'll grant you that, completely! :-0
ORI

Oh regional Indian's picture

In recorded history, I'll grant you that, completely! :-0

ORI

bankrupt JPM buy silver's picture

Im starting to document this on SLV and record my desktop platform. 

www.silvergoldsilver.blogspot.com

DoChenRollingBearing's picture

Nice blog.  Tightly focused.  If you would like a link to mine (I use my real name, and it is NOT focused, so very different) send me a gmail at my name and assure me that you will behave.

Robslob's picture

Yes...humanity.

The purpose of the algo is to simulate an "open market" while other AI machines nuke the entire planet and rid themselves of those pesky "carbon" units...

Thus when the alien life forms finally show up to bailout planet earths governments and banking cartels from decades of abuse all they will find is a perfectly functioning market...of machines.

 

 

painequalschange's picture

Isn't there anything you CAN invest in any more?

SheepDog-One's picture

Firearms, ammo, farming implements, food...

DoChenRollingBearing's picture

Gold & other PMs, water filtration devices, prescription medicines, first aid kits, barter items (booze)...

Deepskyy's picture

And play plenty of Fallout 3 during your down time.  I got a feeling we will all be "wastelanders" soon.

 

Smiley's picture

Make sure you program all the landmarks in your Pip Boy 3000 before the area becomes infested with RadScorpions; those bastids hurt like hell.

Smiley's picture

I'm considering metal ingots; copper, aluminum, titanium, tin, and nickel.

 

+1 on the booze, even if you don't drink the stuff.

Vacum sealed cigarettes are big on my list.

Smiddywesson's picture

There is plenty you can invest in during the apocolypse:

Hair gel for those mohawks

Motorcycle accessories

Hockey masks

Leather anything

Fredericks of Hollywood supplies, because there's nothing a man wants more after plying the desert blown highways of the apoclypse, then a mohawk sportin' muscle bleach blonde babe in Frederick's of Hollywood attire.

Dump your gold, Frederick's is the new reserve currency 

AmCockerSpaniel's picture

ALL paper (shares) will be destroyed. Only the physical (PM) will be left in the hands of the owners. When the markets crash/ lockup, it's the same as a run on the bank. Know that if you can not sell something, it's the same as it being worthless.

DoChenRollingBearing's picture

+ $1515

If you do not have any physical gold, you should buy some.  YES, it will go up and down, but its long term future is very promising.

Gold is the best wealth preserver in town.

Smiley's picture

Its a big fat joke and the individual investors are the punchline.

Duuude's picture

It's either called...

 

A Borgprobe

or a

 

RodSerling

 

AmCockerSpaniel's picture

First it was the equity in your home, now it's the wealth in you stock market paper.

SheepDog-One's picture

Those poor pensioners, one day soon theyll all be holding an empty bag.

Smiley's picture

And living off cans of dog food...

Wolferl's picture

Is there really someone out there who thinks ETFs are NOT manipulated?

Highrev's picture

Could it be that the NatGas "sine wave" was one of these with the buy and sell mistakenly flipped?

Cdad's picture

mistakenly flipped?

LOL!

Franken_Stein's picture

 

The crocodile jaw algo.

The spread spread algo.

 

totem's picture

This algo is the Doomsday_Machine from Star Trek... and we're all out of Commodore Decker's here on Earth.

 

The Fonz's picture

The Spread Eagle Algo, just so you know your being fucked.

InconvenientCounterParty's picture

Fairness and capitalism are mutually exclusive. Social Darwinism at its finest.

learn it, live it, love it.

SheepDog-One's picture

Algo's partying up a storm!

10kby2k's picture

And LeBron didn't join them.

irishlink's picture

If this type of manipulation continues and intensifies ,wall streets days are numbered. Who wants to try to second guess these guys.

King Durian's picture

Now it makes sense why the NYSE was willing to sell to the Germans. This HFT infested market will be Germany's problem soon enough. But, Germany outlawed naked short sells, so there might be hope for the NYSE Bourse if the Germans run it.

King Durian's picture

I am apprehensive towards the day these HFT algos have a run at the Bitcoin market. The only thing saving the Bitcoin market from this utter manipulation is due to the lengthy time it takes for Bitcoins to change hands. However, I see that changing as more and more solutions are cropping up to cut down the transmission time. For the meantime, however, I would suspect that the Bitcoin economy is HFT free. Of course, I could confirm this opinion by checking the public Bitcoin records to see if there were any abnormal transactions occuring in the market.

 

I personally think that if this HFT nonsense continues, eventually the average investor is going to catch wind of this, and are going to forego playing in these manipulated markets. It may have already happened, but I think the trend will continue on the longterm unless this nonsense stops. It may even make other stock markets more inviting.. can you see the billboard advertisements in the Swiss Alps yet? Invest in the "NIFTY- HFT and Algo Free since 2011"!

oogs66's picture

Dont leave atop loss orders. Don't leave so little equity in your margin account that your broker stops you out.

Highrev's picture

Is that a "sine-wave" I see on the /es 5 minute?

;-)

Cdad's picture

How long before this test attempt to manipulate prices in C-grade ETFs comes to an SPY near you

Why Tyler, it might even be today...as the Algo [crocodile or otherwise] unwisely pumped the market before today's liquidation hour [which is to say the last hour of trading] as fully invested mutual fund geniuses get their marching orders to sell stocks...a phenomena that shall continue until such time as Magic Ben whispers those magic words again.

So everyone, quick turn on your fractal crocodile jaw algo detectors...and call 'em out!

Ah...does anyone remember those mutual fund redemption last hour trading days?  I do...and fondly so.


espirit's picture

Pull the plug Bitchez, commence Operation Mayhem.

TheTmfreak's picture

Is there any reason you aren't already acting upon Operation Mayhem? Everyone has a part. Play yours.