"Do It Yourself" Latency Arbitrage: How HFTs Can Manipulate The NBBO At Whim Courtesy Of NYSE Empty Quote Gluts
Another day, another stunner from the statistical wizards at Nanex. As readers will recall, in our latest piece we discussed the implications of the temporal arbing of the NBBO between the Consolidated Quote System and proprietary pricing tapes, like NYSE's OpenBook, which indicated a major discrepancy in the pricing data in widely held stocks like GE. In summary, at its peak, at 14:45:55 on May 6, the latency between the CQS and OpenBook pricing hit a high of 24 seconds, making a mockery of the NBBO as all those who had premium access to OpenBook were all too aware that 99% of the investing public were seeing pricing data almost half a minute stale, and could trade accordingly on secondary "dark" venues. At the time we were disgusted with the implications this phenomenon had on the NBBO, as this was nothing less than a full-blown NBBO arbitrage opportunity for the haves vs the have nots. Yet today Nanex takes this observation, and our collective blood pressure, to a whole new level, by not only confirming that there is in fact a trigger threshold in terms of quote saturation which immediately causes a latency arbitrage between the CQS and OpenBook, but closes the circle on the ongoing constant presentation of mysterious "crop circle" quote stuffing data. In essence, what Nanex' data implies is that HFTs can create latency arbitrage on demand between the NYSE pricing data dissemination to the CQS, but not to NYSE's own proprietary product, OpenBook, by pushing the consolidated NYSE quote rate beyond a magic number of 20,000/second. This immediately begs the question: just how much of the NYT's as defined "conspiracy theory" for an "on demand" Flash Crash is theory and how much is fact, if the cause and effect of the May 6 events have been inverted, and the NYSE's Liquidity Replenishment Points failed only as a result of HFT quote bombardment.
If confirmed, this is a stunner, as there is no reason why the NYSE should delay data hitting one data stream, the CQS, but not its own premium product, OpenBook - this would mean there is a gating factor that is essentially imposed artificially for the plebes (and the bulk of investors) who use the commodity CQS tape. It would also open up questions as to how often this form of borderline illegal arbitrage occurs on a daily basis on the NYSE: if all it takes is for the HFT participants to bombard the exchange with a few thousand extra quotes (as in "stuffing" the exchange) that have no intention of being traded on, but merely serve to choke the NYSE-CQS pricing translation system, then nobody can have any faith in anything coming out of the biggest public exchange. We can not wait to get the NYSE's, and most certainly the SEC's, explanation for this surprising, and even more market credibility destroying, phenomenon.
We wanted to see the extent of the delay between NYSE quotes from CQS and
OpenBook on a more recent trading day. So we synchronized quotes from CQS and
OpenBook for GE between 1pm and 4pm Eastern time and plotted 30 minutes worth
of timestamp differences along with the quote price which are shown in Chart 1
below. We were surprised to see the frequency and magnitude of the delay. We
thought high quote activity in a stock would cause a delay in that stock's
quote, but could not find any correlation between the quote activity in GE and
Then we decided to focus on the one minute that had the highest delay, which is
highlighted with a yellow circle in Chart 1. This one minute sample of the
delay is plotted in Chart 2.
Instead of looking at the quote rate for just GE, we decided to plot the
quote rate for all stocks that NYSE sends to CQS. In other words, we plotted
the sum total number of quotes where the listed exchange and reporting exchange
are NYSE. This is plotted in Chart 3, which has the same time interval as Chart
You can see that there is a very strong correlation between the quote rate in
Chart 3, and the delay in Chart 2. Whenever the quote rate in Chart 3 exceeds
20,000/second, a corresponding delay is seen in Chart 2. The higher or longer
the quote rate exceeds 20,000/second, the greater the delay.
We then looked at all 3 hours and noticed the same relationship between total
NYSE to CQS quote rate and a delay in GE.
Then something very disturbing dawned on us. If the average or base quote rate
is around 10,000/second, then it only takes an additional 10,000 quotes/second
to reach the magic 20,000 quotes/seconds where a corresponding delay is seen in
CQS. This 10,000 quotes/second can be in any stock or combination of stocks
that NYSE sends quotes to CQS for.
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