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"Do It Yourself" Latency Arbitrage: How HFTs Can Manipulate The NBBO At Whim Courtesy Of NYSE Empty Quote Gluts

Tyler Durden's picture


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.

From Nanex:

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
the delay.

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.

Chart 1:

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.

Chart 2

Chart 3




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Mon, 08/23/2010 - 09:41 | 537377 Missing_Link
Missing_Link's picture

Tyler hits yet another gold mine.  Keep up the great work!

Mon, 08/23/2010 - 09:45 | 537381 Racer
Racer's picture

I hope this brings about a complete failure of the market as the HFTs find no suckers to sell to because humans see no reason to participate in this rigged casino.

The market originally was a market for companies to raise money, pay dividends from their earnings and give something in return for the capital raising.

Now it is just a bunch of machines trying to rig the system and rob blind anyone who dares trying to look at it from fundamental or economic point of view.

Starve the beast and don't participate IMO is the best option, let them eat each other alive till only the tails are left!

Mon, 08/23/2010 - 10:12 | 537425 mikla
mikla's picture


When you think about it, they've created an absolutely brilliant system.  It's the equivalent of a "rounding-the-penny" funneling of fractions into an account-of-choice, which is triggered on-demand.

This means we can shunt capital into any person's or company's account at whim.  And, we can all pretend it is a "victimless crime" (e.g., we're merely manipulating the market, front-running/quote-stuffing, and rounding-the-penny to our own accounts).  It's like having infinite power to control the "winds and the tides" of capital flow and capital accumulation.

Best of all, this type of system leaves no "smoking gun" like the cattle futures trades that burned Hillary.  Rather, the system works because it's hidden in the opaqueness of statistical analysis -- try getting a jury to understand *that*.

Of course, the ultimate problem is market distortion (things are priced incorrectly) and investor confidence (people don't trust the system anymore).  We're long past that, as retail investor outflows continue (nothing in this market is sane, it is dramatically overpriced).

It's probably game theory that brought it down:  If they exercised more discipline, they could have profited forever with no one"catching on".  However, like the failure of OPEC, the incentive is for some player to "cheat" a little more, skim a little more, and so the other players skim-and-cheat more as well.  At some point, the cheating reaches "too high" a level, and the suckers catch on.  That's what's happened (as shown by retail investor capital outflows).

Reminds me of the political system, where everyone hates their official, and nobody thinks government is doing a good job.  Strangely, people still tolerate the system, because it's all they have.  At least we are permitted to leave the capital markets (at some token level).

Mon, 08/23/2010 - 10:23 | 537439 SWRichmond
SWRichmond's picture

Excellent sum, mikla.  It also explains 100% profit trading quarters pretty well, doesn't it?

Mon, 08/23/2010 - 11:20 | 537543 Assetman
Assetman's picture


You've summed it up very well, Mikla.

I find it interesting that this Administration has somehow managed to alienate: (a) small businesses; (b) retail investors; and (c) non-government/non-unionized employees-- at the expense of a much broader population base. 

As for HFT, if you're a retail investor, Tyler has done more than enough to demonstrate that it's a losers game for the retail investor.  Moreover, it's becoming apparent that it's becoming a losers game for hedge fund managers (without HFT operations) as well.

What we simply have here is grand theft... with a complicit SEC looking the other way, and exchanges providing finanical rebates for "liquidity".  Folks, it isn't good liquidity when HFTs are circumventing NBBO's by flooding quotes.  They are destroying liquidity by forcing out market participants and weakening the market structure.

The next flash crash should be a doozy, though.

Mon, 08/23/2010 - 12:10 | 537673 mikla
mikla's picture

Folks, it isn't good liquidity when HFTs are circumventing NBBO's by flooding quotes.  They are destroying liquidity by forcing out market participants and weakening the market structure.


It isn't liquidity at all.  It's volume.  HFTs provide volume without providing liquidity.

As you point out, it actually removes lequidity (as everybody figures out that the only way to win is to not play.)

Mon, 08/23/2010 - 15:18 | 538279 Assetman
Assetman's picture

How about a nice game of Thermoneuclear War?

Or, better yet... strip poker? :)

Mon, 08/23/2010 - 18:59 | 538921 mikla
mikla's picture

Your options....

Tue, 08/24/2010 - 02:18 | 539496 Assetman
Assetman's picture

Well crap... REGULAR poker, then.


Mon, 08/23/2010 - 10:34 | 537382 Mercury
Mercury's picture

This is why market structure needs to be totally overhauled.  At this point the market is nothing but a video game played by computers and in this particular case the computer algos and their programmers aren't even trying to anticipate the market or outwit the competition with a better mousetrap but have instead figured out how to quite simply overload the processing power of the system and create a smokescreen between themselves and (most) all other market participants.

The point where additional value was being added in terms of liquidity, price discovery and lower transaction costs by further computerizing and automating the marketplace was passed a long time ago.  The need to co-locate servers just to keep the playing field level was kind of a bad sign.

If this were an old-fashioned, mechanical pinball machine the *tilt* light would be on right now which everyone could see and understand (transparency - see?).  If we had a simpler and more transparent market structure primarily designed to connect willing buyers with willing sellers, this kind of crap would simply go away. More complex technology, complex regulation or (always politically tainted) prosecutions will not fix this this problem.

Mon, 08/23/2010 - 09:48 | 537386 Racer
Racer's picture

The sooner the companies/people who set up these multiple quotes that have no intention of being filled are brought to justice the better.

The country is broke, how about some nice fat fines on those that do this? After all it is illegal, why not DO something about it?

Mon, 08/23/2010 - 09:48 | 537387 sheep92
sheep92's picture

Yes, NYSE technology sucks.  Anyone trading with them or using their quotes is foolish.  This is known to anyone trading algorithmically.  Anyone sitting in front of a screen would have no idea anyway so who cares.  As of two years ago (last time I had direct knowledge) the main reason NYSE can't keep up is because of the specialist system where specialists are given the first look at an order and they have some number of milliseconds (used to be about 180 but I'm guessing its less now) to decide if they want to act on it.  This slows down the order flow.  If the specialists like they can even manually halt the order flow.  Anyone trading with them needs to have their heads examined. NYSE is a joke.

Mon, 08/23/2010 - 11:45 | 537603 sid farkas
sid farkas's picture

interesting, this is why all this HFT bashing makes no sense to me, in the FX world all of the exchanges monitor the number of orders/price updates you make and automatically boot you if you are sending too many.

Mon, 08/23/2010 - 09:48 | 537388 rogersails
rogersails's picture

     Nice to see this come to light. In the internet world, it's called a "Denial of Service" attack.

      This was the topic of a comment I posted 2 weeks ago re: a prior quote stuffing article. My comment appeared for 5 minutes and then disappeared. Interesting. I'm not posting any more good stuff here.



Mon, 08/23/2010 - 09:50 | 537392 Tyler Durden
Tyler Durden's picture

Your comments have never been moderated

Mon, 08/23/2010 - 09:55 | 537400 Azannoth
Azannoth's picture

You mean this

the system says you commented on it, but i can't find you're comment and and topic is 'Updated' I guess it's a bug in the comment system


Tyler, how do I file a bug report ?

Mon, 08/23/2010 - 11:01 | 537407 MichaelG
MichaelG's picture

Page 2?

Mon, 08/23/2010 - 10:04 | 537409 rogersails
rogersails's picture

Yes, Azannoth, that was the article. The post went online, and after a few minutes, it disappeared. Maybe I'm just a cynic (hey, I'm a ZH reader), but since it disappeared, I've been waiting for this new article to appear.



Mon, 08/23/2010 - 11:01 | 537413 MichaelG
MichaelG's picture

[duff link]

Mon, 08/23/2010 - 10:40 | 537471 Waterfallsparkles
Waterfallsparkles's picture

You probably hit the back button.  I have done that.  Yet, if you go to the top and hit home and check again, your comment is there.

Maybe you should go back to the original article and check to see if your comment is there.  I bet it is.

Mon, 08/23/2010 - 10:48 | 537483 rogersails
rogersails's picture

Its not

Mon, 08/23/2010 - 11:03 | 537500 MichaelG
MichaelG's picture

It was a long thread, and the interjection of replies has pushed your comment onto page 2.  I've posted the link to it above.  I don't think the black helis were involved this time.

Edit: OK, that link's not even working for me, now!  But srsly - go to the article, scroll down to the end, click the link for page 2, and CTRL-F to find your name.

on Sat, 07/31/2010 - 18:21

Can they stuff a pipe so full it slows down, and use their own pipes to race orders to their execution point - in effect, frontrunning ?


Mon, 08/23/2010 - 11:11 | 537525 rogersails
rogersails's picture

Michael G

     You are correct - I see it on page 2.  I stand corrected.Tyler, my appology.

The point of my initial post is also validated by the current article. Quote stuffing can be used as a denial (or delay) of service tactic to arbitrage or front run other players.


Mon, 08/23/2010 - 09:49 | 537389 Azannoth
Azannoth's picture

This beats all not only the HFT can set prices they can also control what(or rather when) other market participants see, it's like playing a shooter online against a GameMaster, u ony win if he alows you to

Mon, 08/23/2010 - 09:49 | 537390 nonclaim
nonclaim's picture

Come on Nanex/ZH... So, different products that provide different data sets somehow behave differently and this is a stunner?

Thanks for the laugh, but the ignorance in the matters is the real stunner. But, to be honest, this is getting beyond ignorance and becoming a method... which is a bigger problem.

Mon, 08/23/2010 - 09:52 | 537397 Tyler Durden
Tyler Durden's picture

The "different products" have the same input source. What is the difference: OpenBook is used by <1% of the trading community and has no latency. The CQS is seen by everyone else, and is irrelevant when it comes to prices during market crashes.

What was your point again?

Mon, 08/23/2010 - 09:57 | 537402 sheep92
sheep92's picture

Open book is used by whoever wants it.  Costs about $75 a month.  Used to be $5000.  Has plenty of latency relative to BATS, ARCA, and INET.  Anyone trying to trade HFT without looking at all the major books deserves to lose money.

What was your point again?

Mon, 08/23/2010 - 10:06 | 537412 Tyler Durden
Tyler Durden's picture

The point is bolded and highlighted. Feel free to reread the article as many times as needed.

Also, free free to peruse the following DC Circuit decision that the SEC needs to do more to justify its decision to collect fees for giving access to NYSE Arcabook (and look who is representing the NYSE - the one, the only Eugene Scalia - gotta love supreme court junior capture). Oh wait, so the regulators love a two-tiered market? But yes, what is $75 to someone who knows the market is broken.

And let me paraphrase your sarcastic conclusion: "Anyone trying to trade HFT without looking at all the major books deserves to lose money."


Mon, 08/23/2010 - 10:16 | 537426 sheep92
sheep92's picture

Your only point seems to be that NYSE has technology problems and that they can be overwhelmed by volume.  Gee, thats news.  You also seem to believe that anyone that 'trades' deserves to lose money.  That's not very insightful.  If you are an investor then none of this makes a whit of difference as who really cares whether you get filled 18 milliseconds earlier or later.  In fact, if you are an investor you should love flash crashes cause then in you have a GTC order in at a low price it might get hit.

If you are a trader, then yes, you ought to know what you are doing. 

Mon, 08/23/2010 - 10:22 | 537436 Tyler Durden
Tyler Durden's picture

"if you are an investor you should love flash crashes cause then in you have a GTC order in at a low price it might get hit."

Judging by the 15 weeks of outflows, investors are certainly loving the flash crash...and eagerly awaiting the next one (alas, without GTCs, which will get cancelled past whatever limit the PTBs determine is too far away from the NBBO for an execution price).

As for traders, with stock volumes at 1 year lows, they certainly don't appear to know what they are doing.

Mon, 08/23/2010 - 10:42 | 537475 sheep92
sheep92's picture

If you find yourself consistently alongside the public when it comes to investing then you ought to rethink your methods. Over time the public consistently underperforms any benchmark you might come up with.

I don't get your assertion that trader's knowledge is correlated with stock volume.  Does that mean traders were brilliant during the 87 crash when volumes hit a then record?  Or was the first day after 9/11 another time of collective wisdom?




Mon, 08/23/2010 - 10:47 | 537480 Tyler Durden
Tyler Durden's picture

Oddly enough, if you find yourself in the most HFT concentrated stocks you have lost money on a 6 month, 1 and 3 year basis. ( Maybe HFs should rethink their methods. As for your volume question, you answered it yourself perfectly.

Mon, 08/23/2010 - 10:53 | 537491 sheep92
sheep92's picture

You have an interesting style. When you are pointed out to be factually incorrect you wander off to another topic.  All this blather about HFT stealing billions from unsuspecting daytraders and 'ruining' the markets is just that, blather.  Are you secretly shilling for some specialist firm hoping to get spreads back to an eighth?


Mon, 08/23/2010 - 10:59 | 537503 Tyler Durden
Tyler Durden's picture

No, not at all. Are you, on the other hand, not so secretly shilling for an HFT lobby group hoping get order cancellation rates up to 99.99%? Or has the recent heat by regulators gotten you a little on edge this morning? As to your false observation "If you try to place an order that will cross the NBBO it gets rejected" look up Rule 611 A exemptions - Qualified Contingent Trades: "Can cross stock outside the NBBO if part of a larger "properly hedge" options trade." And guess what, since the rule is retroactively compliant, the options and the stocks can have crossed anywhere in our disjointed market place, in both time and space, in essence making NBBO arbs more than feasible. "According to the SIA Exemption Request, a contingent trade “is a multi-component trade involving orders for a security and a related derivative, or, in the alternative, orders for related securities, that are executed at or near the same time."

But of course you knew that.



Mon, 08/23/2010 - 11:20 | 537547 sheep92
sheep92's picture

No, I trade for myself and a few friends.  I do no HFT cause I am not a broker-dealer.  If I get a rebate it about covers my trading and clearing costs so I don't 'make markets'.  If you think that there are free arbs in the market then why aren't you doing it and getting rich instead of whining about it.

Mon, 08/23/2010 - 11:25 | 537556 Tyler Durden
Tyler Durden's picture

Because since this is a blog, and not a hedge fund, we do what we are supposed to do, which is to inform the people. You know, like what a non-corrupt media should be doing. But if you believe our IRR would be better trading in a broken market, we are more than happy to accept venture capital.

Mon, 08/23/2010 - 11:37 | 537580 sheep92
sheep92's picture

Then by all means inform them.  But don't make sh%t up or spin it so that it seems important.  All hft goes home flat for the night.  So no matter what some phd math/comp sci person has discovered about gaming the market its effect on an investor is near zero.  If you want to be a day trader then I'd suggest that no one owes you anything. 

Mon, 08/23/2010 - 11:44 | 537598 Tyler Durden
Tyler Durden's picture

Make sh%t up? You mean like a conclusion that assumes the validity of your own initial assumption despite evidence to the contrary. And while most certainly not all HFT go home flat (yes, you will amazed to learn how many HFT funds file 13Fs), HFT is very pregnant during the day (and during the futures session, which surprisingly they trade too). Which is precisely where the next crash will come. But you must have been perfectly prepared for May 6, right?

Mon, 08/23/2010 - 11:57 | 537635 sheep92
sheep92's picture

So in your best blog informative style could you give some idea of the AUM of the hft funds that go home with a net bias and some idea of what that bias is.  That way we can at least bracket their influence.


No, on may 6th I was hiking with my girlfriend.  SInce I run a mostly flat book I'm not too scared of the next crash but thanks for your concern.


Mon, 08/23/2010 - 16:17 | 538469 Pillage
Pillage's picture

If I had a few GTC's down at filled and cancelled, I'm not loving it!

"HFTs can create latency arbitrage on demand "........but do they offer NFL GAME DAY?........

Mon, 08/23/2010 - 18:55 | 538911 mitack
mitack's picture

"Costs about $75 a month.  Used to be $5000"

So, you are saying they post old info on their web site ?


reads "$5000 for the access + $50/display"...

Mon, 08/23/2010 - 10:21 | 537428 nonclaim
nonclaim's picture

Same source, different data sets.

One shows the best quote, the other the order book up to a depth. One has an old convoluted flow, the other is a direct stream. Latency is a problem on both systems, more on CQS aged system, less (but still there, frequency update) on OpenBook due to system/hardware capacity.

But you know all that. You *must* know all that.

It is the "let's find a conspiracy" mindset that bothers me. Plus the misuse of technical terms by Nanex that, while doing a good job presenting the side effects of algo trading, partially destroys the value by dis-informing the reader.

You have an intelligent readership. No need to dumb them down.

[This is a constructive comment, BTW. ZH is the best out there and I want it the stay that way.]

Mon, 08/23/2010 - 10:28 | 537446 Tyler Durden
Tyler Durden's picture

You said a lot of interesting things. Yet it does nothing to change the fact that there are times when there is a 24 second latency between CQS and OpenBook, which can be effectuated and arbed.

Mon, 08/23/2010 - 10:43 | 537457 sheep92
sheep92's picture

You cant arb a consolidated quote feed and a real book.  You can only trade on a real book.  If the book is hopelessly latent then when you try to actually get filled then nothing will happen. There are no such things as intermarket arbs because that would imply that the books are crossed across markets.  If you try to place an order that will cross the NBBO it gets rejected.

Mon, 08/23/2010 - 11:03 | 537511 defender
defender's picture

If you look at the graphs, the latency is introduced at points that have an implied momentum.  As people try to front run the momentum, the latency makes them put in bids that are biased one direction or the other.  This allows the algos to extend buying or selling points whenever they feel like it.

Also, the latency isn't in the real book, it is in the CQS system.  Everyone thinks that they are getting a bargain because the price they got was better than the tape, when in reality, the price had already moved on and they were left holding the bag.  To put it another way, anyone will sell above the tape price, or buy below the tape price; but if the numbers that they hit are on the wrong side of the real price then they are just being screwed over.

Mon, 08/23/2010 - 11:16 | 537531 sheep92
sheep92's picture

let's say you have just two markets A and B.  On one market IBM is bid 100 offered 101.  On another it is 95 bid at 105.   For some reason the consolidated quote feed is stale and shows the market 98 bid at 99.  If you put in an order to buy at 99 then nothing happens in the real world because your order is below the best offer. If you are a seller at 98 on the wide market then your order is rejected because it would cross the books.  If you put in a market order you will be filled at the market price.

No arb.  No nothing.



Mon, 08/23/2010 - 11:33 | 537571 Assetman
Assetman's picture


You sound like a smart guy.  What do you do for a living?

Mon, 08/23/2010 - 11:42 | 537594 sheep92
sheep92's picture

I trade with a small group of friends. About half the capital is traded algorithmically about half is 'invested' the old fashioned way.


Mon, 08/23/2010 - 15:22 | 538296 Assetman
Assetman's picture

Thanks... very interesting... are you making more money these days algorithmically... or the old-fashioned way?

Mon, 08/23/2010 - 12:43 | 537743 scratch_and_sniff
scratch_and_sniff's picture

Sheep, forgive me, but are you trying to tell me that when quote stuffers have intent to create latency for market makers then you see no wrong?

The possibilities for exploiting market makers are endless if you can create latency. If two market makers A & B, quote the same price at one point, then you create a latency for A and wait for the quote from B to rise and then place your bids with A. If the actual B quote doesn’t rise in the span of latency you have created, then you do it again until you get the arb, no matter how small. I cant quite figure out how you can say this is not a problem?

Mon, 08/23/2010 - 14:24 | 538069 sheep92
sheep92's picture

First I have no idea whether or not anyone is 'trying' to create latency.  Latency in and of itself does nothing unless you get to slow down the pipe and look at the inflow which is something that NYSE specialists do but still can't seem to make any money hence they keep going out of business.

Market makers do not make markets in a vacuum on one market.  If I am making a market on INET you can be sure I am monitoring everything else.  If some other market has a stale quote it is either way away from the market or if on the other side will cause the books to cross.  If you see crossed books you know to back away cause it is a technology glitch.  I get emails all day long telling me to route away from various markets/symbols cause of tech glitches.  I sincerely doubt that people are making a living doing DOS attacks on exchanges.  Every quote and cancel is tracked so if some brokerage unleashes a huge load which screws up the system you can be sure they are in for an unpleasant time.  Do you think that the folks that own the exchanges want them to be seen as unreliable and flaky?  They would have no problem in cutting off a brokerage for repeated infractions.  I believe that if cancel rates get to high the exchanges charge back the brokerage firms.

Mon, 08/23/2010 - 16:31 | 538503 scratch_and_sniff
scratch_and_sniff's picture


I think this discussion took a wrong turn when we started talking about HFT's exploiting latency. Whether or not they are exploiting it (which they are) is totally irrelevant to the impact these activities are having on the market, that is including market sentiment, from all corners, especially from the retail end.

There is a huge issue of trust here... if i come across a DOS attack on a web site, i am not concerned about who is behind it, as a user all i am worried about is can i use the damn site, will it be safe to do a transaction, or will there be any repercussions of any kind etc. The thing is, the damage has been done, the site is broken and its not doing what it should, when it should. If the HFT's are creating latency intentionally or not, then yes that’s a problem. What are we supposed to think? oh never mind that the HFT's can go fishing for whatever price they want whenever they want, yeah they can make a whole exchange lag for like 20 seconds, but pffff who cares, they are only making 5 cents a trade. Forget who might be profiteering, the fact is that its is a pain in the ass for ordinary market participants and has unlimited chaotic potential to completely screw everyone...well worth the 5cents profit a trade!



Mon, 08/23/2010 - 11:27 | 537541 Mercury
Mercury's picture

It's not venue arbitrage it's time arbitrage. By piecing together super-fast direct feeds from the exchanges you can anticipate or even game the more slowly disseminated "official" NBBO tape. Many other market participants (volume-adjusted is what really matters here) use the NBBO midpoint to determine where a lot of dark pool and other crosses get printed.  If you can anticipate where a stock will print you can print money.  You don't need to cross the NBBO if you know where it is now and where it will be at some point in the future.

Mon, 08/23/2010 - 11:29 | 537564 sheep92
sheep92's picture

It's amazing to me how so many people see a way to just 'print' money and yet they don't do it.  I'll bet you also could probably fix tiger woods' golf swing.

And yes I have the super-fast direct feeds just like everyone else.  big deal.  when institutions do vwap orders etc don't you think they are using the same feeds or using vwap engines supplied by Lehman, Bofa, goldman etc. which do the same? 

If there is frontrunning it is the front running of customer order flow.  But since I have no direct knowledge of it I can't really comment.

Mon, 08/23/2010 - 12:40 | 537713 Mercury
Mercury's picture

...don't you think they are using the same feeds...

No I don't, that's kind of the whole point.   I think the guys who are really making money at this kind of thing are using better proprietary technology, have the advantage of a prime physical location and have deeper pockets and/or a lower cost of capital than you do. When you're trying to shave fractions of a penny, size, speed and firepower matter. And although they do, you have no idea where matching engines like Cross Finder or SigmaX are taking your orders. You may not care about losing a penny or two here and there but again, that's kind of the whole point: a whole bunch of pennies from people like you add up to a whole lot of dollars for the guys on the bleeding edge of the arms race.

Mon, 08/23/2010 - 12:50 | 537762 scratch_and_sniff
scratch_and_sniff's picture

+1 , you hit the nail on the head. End of skirmish. Technological warfare, where the civilians are the casualties. But, like all arbing opportunities, they will be ironed out eventually and we will all be better placed at the end of it.

Mon, 08/23/2010 - 13:36 | 537876 sheep92
sheep92's picture

Well, you would be wrong.  Every high speed electronic broker colo's at the same places.  Even if you had a time advantage it is useful only to do index arb or etf arb.  There is no free lunch.

And I don't use any matching engines or anything like that.  I post directly to exchanges and am slowed down by about 100 microseconds which is the pass thru time thru my brokers system.

My BATS fills round trip are on the order of 6 milliseconds.  When I post, on average my posts stays up for many seconds.  If I take, the number of times I fail because the offer was pulled either because of cancel or someone beat me to it,  is minimal.  LIke I said above, I don't do index arb or try to make markets.  My holding periods are 24 hours to a few days.  The impact of HFT on my life is tiny and I trade a lot.  For an investor the effect is near zero.

Mon, 08/23/2010 - 14:31 | 538099 Mercury
Mercury's picture

Unless you're in the same building as your co-located broker and plugged right into his server it takes you longer to post bids/offers than someone who is closer to the source and there's no way you can post the rapid succession of quotes necessary to tweak markets in the way some HFT algos can.

Of course it's human nature and the nature of the free market to want to find an edge for yourself.  When market structure is relatively simple and transparent such potential edges are limited to the point where it's more productive to look for them outside of market manipulation.  But when gaming the system and overwhelming the mechanics of the market itself becomes one of the hottest games in town, it's just not a good thing for the US the capital markets as a whole.  Just the perception that the market is rigged is enough to ultimately drive existing and potential capital away - even if you happen to think it's no skin off your back right now.  I mean, just think about it.

There have been times in the past where technology has been used to successfully (and briefly) exploit inefficiencies in the market (if you had access to a computer in the early 70's for instance when Black-Scholes first came out and options were quoted in eighths.)

This isn't one of those times.

Mon, 08/23/2010 - 14:48 | 538184 sheep92
sheep92's picture

Well yes I am in the same building as my colocated broker and have a wire to wire connection with his network. And yes you are probably right that there are folks out there that can post bids or offers a millisecond or two faster than I can.  And as I said the only value in that is probably index arb in a fast moving market.  If the spread is already 1 cent which it is in a whole lot of stocks then beating me by a millisecond to become the 8th bidder for 100 ibm at 122.56  is hardly going to make you a ton of money. Rebates are on the order of 1/4 of a cent. So if you post a 1 lot and get hit you make the grand total of 25 cents on that trade assuming you get out even.  While I'm sure that market makers make a living I know of at least one specialist firm which went out of business two years ago cause they could make no money even with all the 'advantages'.  Google Vander Moolen.

The perception that markets are 'rigged' by HFT players is just plain wrong.  It is a competition among algorithms for sure but rigged is not the right word.  And you are right that it makes much much more sense to look outside of the high frequency game for money making opportunities.

Mon, 08/23/2010 - 15:45 | 538351 Mercury
Mercury's picture

There can't possibly be any quantitative strategy behind posting 20,000 quotes a second besides the manipulation and obfuscation of the market itself.  I'm not even blaming the HFTs if that's where the incentives and the action are. But having a market structure where that kind of thing is even possible is ridiculous.  If nothing else it obviously contributes hugely to systemic risk (Flash Crash) with little to no reciprocal benefit in terms of performing the functions that markets are supposed to perform.

Mon, 08/23/2010 - 11:26 | 537549 nonclaim
nonclaim's picture

Yes, 24 seconds is a shame isn't it?

By all means put the heat on NYSE for what it is: an old quote system that lived past its moment. Shame will force them to upgrade, not some bogus conspiracy claim that only inflates their ego.

People will continue to arb on that until they can't.

Mon, 08/23/2010 - 09:49 | 537391 nopat
nopat's picture

Is this the source of the no volume melt-up?

Mon, 08/23/2010 - 10:05 | 537394 Thomas
Thomas's picture

Some guy on CNBC this AM referred to quote stuffing. I only saw the foreshadowing, so I do not know if he professed to be the messenger or just some deliverer of old news.

Key point: This is appalling.

Mon, 08/23/2010 - 09:53 | 537398 cnbcsucks
cnbcsucks's picture

Are you watching this ramp job this morning?  I'm so glad the SEC is looking out for us.  How the hell can they sit back and watch this bullshit?

Mon, 08/23/2010 - 10:43 | 537476 Widowmaker
Widowmaker's picture

What's an "SEC?"

This is USA Inc.

Mon, 08/23/2010 - 10:02 | 537405 DarkMath
DarkMath's picture

And where's the SEC. When are they going to stop playing with themselves and show up to work? Why do I have ZERO confidence the SEC will do ANYTHING about this.

Ladies and Gentlemen this is a sign our Government has been taken over. The rule of law no longer applies.

Unfortunately for all you fence sitters you're next....

Mon, 08/23/2010 - 10:06 | 537411 Racer
Racer's picture

If you or me broke the law ONCE we would be brought up before the courts and the full force of the law would be upon us.

This illegality is happening many thousands of times a SECOND, yet nothing is done about it!

Why should we uphold laws if this blatant rampant law breaking is condoned?

Mon, 08/23/2010 - 14:25 | 538071 Things that go bump
Things that go bump's picture

It all depends on who is doing the law breaking now, doesn't it.  There are two sets of laws, there really always have been, its just more blatantly obvious then it has been in the past, two sets of moral standards; in fact, there is a whole other world out there that you and I don't have access to and aren't really meant to see.  We wouldn't even be aware of these shenanigans if not for the internet and our access to it.   

Mon, 08/23/2010 - 11:07 | 537520 Waterfallsparkles
Waterfallsparkles's picture

I think the lack of confidence in the SEC comes from many sources.

Everyone remembers the SHO List.  Where Stocks that were Naked Shorted for over 3 days were put on the list.  The Naked Shorts were supposed to cover their Naked Shorts within 3 days or I think 13 days for Market Makers.  Yet, some stocks stayed on the list for years.  It appeared to me to be a list of Stocks TO Short because if you were unfortunate enough to own one of those Stocks it NEVER went up. So, much for curbing Naked Shorting.

Then you have the SEC issuing fines to some firms for 1% of their profits for a wrongfull act.  This also comes with no acknowledgement of wrongdoing.  Investors are never compensated for their loss but the SEC walks away with a ton of money.

I think SEC is just a buffer between the Wall Street Crowd and Investors.  They in may cases actually protect Wall Street.  How about the recent fight about if they have to disclose the information in their investigation.  They Blocked the disclosure of information collected about the wrongful acts discovered by them.  Why?  I think because as I said they are just a buffer.

Mon, 08/23/2010 - 10:07 | 537416 Boilermaker
Boilermaker's picture

So...I'm at a bit of disadvantage of using a Scottrade account?

Mon, 08/23/2010 - 10:11 | 537420 spartan117
spartan117's picture

There is absolutely no volume out there.  Scary.

Mon, 08/23/2010 - 10:11 | 537418 Real Estate Geek
Real Estate Geek's picture

Thank you, TD, for CONTINUING to spread the word.  Because the so-called regulators refuse to do their jobs, I hope that your continued clarion calls will at least attract the attention of some hungry class-action litigators.  Perhaps they can use their power for good and initiate civil actions, including discovery, subpoenas, etc.  If they can prove the damages which we all know have been inflicted on market particpants, then the contingency fees would dwarf those of the tobacco litigation.


Mon, 08/23/2010 - 10:12 | 537421 Leo Kolivakis
Leo Kolivakis's picture

Speaking of stunners, anyway we can "temporally arb" this claptrap:


Mon, 08/23/2010 - 13:46 | 537945 Careless Whisper
Careless Whisper's picture

FSLR up 4 points right now. LoLz

Mon, 08/23/2010 - 10:12 | 537422 TumblingDice
TumblingDice's picture

I am not trying to be a provocateur here just playing the devil's advocate since those defending these practices would bring up these questions.

Is the 20k/sec threshold important because of an IT shortfall or because the NYSE must follow a particular protocol once it encounters so many quotes? What solutions are available to the NYSE to reduce this latency?

What is wrong with a 24 second latency? A retail investor rarely trades in such short timeframes.

Also, since the NYSE is a private enterprise why can't they be able to sell this potential low latency via the Openbook system? If market forces prevail, the consumer who would consider these methods unfair (and I would assume a large number, if they were clued in, would) could just seek a better alternative for their financial needs. In the end NYSE are only screwing themselves by setting up the possibility for such high arbitrage by limiting the number of participants (especially retail) in the exchange that is evident in the current mutual fund outflows. Then again, this might be the intention... so go long!

Mon, 08/23/2010 - 10:35 | 537461 dvsteenk
dvsteenk's picture

What is wrong with a 24 second latency? A retail investor rarely trades in such short timeframes.

The whole point is that a handful of market players know up to 24 seconds in advance of a crowd of delayed traders that stock XYZ is trading xyz dollars or euros lower than is perceived by that majority as the current price. In a way they are trading in the future, by delaying the present with a few seconds...

Mon, 08/23/2010 - 10:18 | 537429 drheywood
drheywood's picture

Who's up for cofounding a low-frequency market place? Name suggestions? LFX maybe?

Mon, 08/23/2010 - 10:21 | 537433 Jim in MN
Jim in MN's picture

What's insulting is not so much the fleecing as the piousness.  Market transparancy....arbitrage...freedom of choice....all lies.

And then some commenters say it's essentially stupid to have believed in markets in the first place.  Nice.  Hope said commenters don't mind sharing 'Zee Incredible Shrinking Non-Markets' with none but central banks and other HFT droids.  Sounds lonely and meaningless, not to mention a stupid business model

Be Seeing You

--Meat-based non-investor with diverted wealth

Mon, 08/23/2010 - 10:21 | 537435 Yorick7
Yorick7's picture

Very interesting story and it also sounds plausible, great spot by Nanex.  However even if the latency were cut to zero, the retail investor, at home trying to day trade stocks via the internet inherently has enough latency that they will always be behind the market and get arbed.

But, that doesnt change the fact that if true, to me at least it represents a form of market manipulation.

Mon, 08/23/2010 - 10:22 | 537437 Cognitive Dissonance
Cognitive Dissonance's picture

In essence, what Nanex' data implies is that HFTs can create latency arbitrage on demandbetween 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 is just a natural progression of the thieving. First you catch some of the apples tumbling out of the basket, then you shake the basket to dislodge more apples, then you hijack the apple cart.

Nothing to see here, move along.

Mon, 08/23/2010 - 10:30 | 537450 Racer
Racer's picture

and in the end they have to cut down the apple tree and then they will wonder why there are no more apples!


The fable of the goose and the golden egg

Mon, 08/23/2010 - 10:52 | 537487 Cognitive Dissonance
Cognitive Dissonance's picture

The fable of the goose and the golden egg

Agreed. There are no new scams or cons. Just new ways to package old games.

Mon, 08/23/2010 - 10:22 | 537438 orangedrinkandchips
orangedrinkandchips's picture

great stuff as ususl T-dog!


Makes compete sense....jam the fuck out of one route and the others fall behind and see the future!

20k/second is the threshold...hmmm...

That is why so many investors, mainly indy investors, have taken their ball and gone home.

Coorelation is so high, the market is one...1 stock, 1 exchange, 1 company.


eggs in 1 basket.

"im gonna get my kicks before the whole shit-house goes up in flames....ALRIGHT!" (J. Morrison)




Mon, 08/23/2010 - 10:24 | 537441 scratch_and_sniff
scratch_and_sniff's picture

This is like a DOS attack by quotes.

Mon, 08/23/2010 - 10:33 | 537456 Cognitive Dissonance
Cognitive Dissonance's picture

This is like a DOS attack by quotes.

Only while no one else can get to the site per the DOS you have full access via the back door or different pipe/pathway.

Mon, 08/23/2010 - 10:24 | 537442 Bluntly Put
Bluntly Put's picture

And yet another stellar example of technocracy in action. All hail the age of the machine. Maybe we can program our government out of existence.

Mon, 08/23/2010 - 10:34 | 537460 Cognitive Dissonance
Cognitive Dissonance's picture

At first I was going to say that they are trying to program you out of existence, but in reality they're just trying to program you. Period.

Mon, 08/23/2010 - 11:56 | 537634 Rusty Shorts
Rusty Shorts's picture

"Maybe we can program our government out of existence"

Mon, 08/23/2010 - 10:42 | 537472 Racer
Racer's picture

Putting everyone else in slow motion so they can take advantage of it! The proof of 100% trading quarters should be adequate proof as to the guilty parties.

Complete and utter CROOKS, thieves, robbers, muggers and any other such name you can put on such sharks/squids

Mon, 08/23/2010 - 10:57 | 537493 Miles Kendig
Miles Kendig's picture

Smoke 'em since you have 'em.  Parasitic engineered predation.

Mon, 08/23/2010 - 10:57 | 537495 Cognitive Dissonance
Cognitive Dissonance's picture

And at 10:50 AM EDT the market rolls over.

Question. Has anyone else noticed that over the past week or two, the futures are increasingly "off" compared to where the market opens. It happened again this morning as well as Friday and a few other days last week. Anyone else seeing this?

I smell manipulation. Sure it happens occasionally, but I've seen it 4 out of the past 6 trading days, which is when I began to notice it. I measure not from the moment it opens but about 4 or 5 minutes into the session.

Mon, 08/23/2010 - 11:28 | 537561 superman07
superman07's picture

The question is in my mind, is the goverment complicit in that it uses these tools as a idiotic form of economic and monitary policy. Alllowing thier friends to benifit in the process? The Gov. probably couldnt figure it out.

Who cares about the trade deficit if you could pluck overseas investors while they dumped thier capital in your stocks.


Mon, 08/23/2010 - 11:28 | 537562 Bruno the Bear
Bruno the Bear's picture

Wasn't this same arbitrage front running technique basically at the heart of the Newman/Redford 1973 movie The Sting?  Involved betting on horses instead of stocks but the principal seems to be the same - seeing the future.

Mon, 08/23/2010 - 11:44 | 537599 Jim in MN
Jim in MN's picture

Yes, only here they program computers to do it for them and then close their eyes and insist they didn't see anything, so nothing happened.

Rather like the 4-year-old 'la la la la la la la' strategy.  With cookie crumbs in the corners of the mouth.

Mon, 08/23/2010 - 11:53 | 537623 Rusty Shorts
Rusty Shorts's picture


Mon, 08/23/2010 - 14:14 | 538034 Saxxon
Saxxon's picture

Bruno, that was the first thought that came to mind.  Indeed, the gangstas of old front-ran FLA horse races whose results were being wired up to NYC.

Mon, 08/23/2010 - 11:58 | 537639 YouAreBliss
YouAreBliss's picture

The point is, does this violate the "Fair Dealing" rules?


"...A just machine to make big decisions
Programmed by fellows with compassion and vision
We'll be clean when their work is done

We'll be eternally free yes and eternally young

What a beautiful world this will be

What a glorious time to be free"(Add If you work for GS or Citadel)

I.G.Y. - Steely Dan


Mon, 08/23/2010 - 12:35 | 537719 Biggvs
Biggvs's picture

Tyler, for the benefit of doubters and the simply confused (and MSM lurkers, but I repeat myself), could you spell out how the gangsters would actually trade this latency to enrich themselves?

Mon, 08/23/2010 - 14:40 | 538139 TraderTimm
TraderTimm's picture

If I may, it is similar to the delay-ticker scam touched upon briefly in the film "The Grifters" (1990)

If you can delay the dissemination of quotes on-demand, then you are trading ahead of everyone else. By stuffing the quote mechanism while still retaining the ability to see the real market, HFT engages in temporal-arbitrage.

By the time the other participants have caught up, the profit is already captured. Repeat tens of thousands of times a day, and you've got a nice pile of cheddar.

Hope that helps!


Mon, 08/23/2010 - 14:12 | 538024 Saxxon
Saxxon's picture

Who can rehabilitate a loaf of stale bologna shot through with maggots?  Play poker.  I'll never, ever daytrade again.

Mon, 08/23/2010 - 15:45 | 538372 steelhead23
steelhead23's picture

Yes, this is terrible, terrible - wish I'd thought of it!  Look, every hot-blooded trader wants an edge - whether it be Prechter's pattern recognition, a "friend on the inside", or whatever - we all want it.  Goldman Sachs and others have it.  They've nailed it.  If you had the smarts to bet on GS back in October 08, you would have tripled your investment - and with this OpenBook advantage going, its certain to keep rising.  Each and every one of you knows, deep down, that SEC and NINFA aren't about to fix this - why aren't you buying GS?  Heck, Jamie is probably wondering how much he'd have to pony up for Tyler to stop running pieces like this so he can continue fleecing the market.  Remember, in trading - leave your heart - and your ethics at the door.

Mon, 08/23/2010 - 17:16 | 538638 Grand Supercycle
Grand Supercycle's picture

Updated S&P500 chart:

Fri, 10/01/2010 - 07:14 | 617747 Herry12
Herry12's picture

Thanks for such a great post and the review, I am totally impressed! Keep stuff like this coming!...
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