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A Forensic Reconstruction And Visualization Of The Impact Of Waddell & Reed's "Sell Algo" On The Market
With the SEC hoping to promptly bury its disgraced "findings" on the Flash Crash, and move on to greater and more memorable crashes, it is no surprise that it will be years before anyone hears back from Mary Schapiro's porn addicts on their policy "recommendations" vis-a-vis fixing the second derivative of the Fed's POMO actions known as the market. We can promise the SEC much more will soon be heard on the topic of Waddell & Reed's involvement, but for the time being, courtesy of Nanex, we would like to provide all those who refuse to buy the SEC's scapegoating campaign of W&R's "sell algo" with definitive confirmation of just how little impact this evil, rogue "sell algo" had on the overall market in one pretty visual.
From Nanex:
The first chart below shows the price of the eMini futures contract
(ES.M10) along with cumulative (sum) up and down tick contract volume
beginning at 14:32 on a one second interval. In the eMini, cumulative
up/down tick contract volume is an excellent proxy for Buy/Sell volume.
The second chart shows the up (green) and down (red) tick contract
volume plotted separately.
Starting with the last paragraph at the bottom of page 15 of the SEC report:
Between 2:32 p.m. and 2:45 p.m., as prices of the E-Mini
rapidly declined, the Sell Algorithm sold about 35,000 E-Mini contracts
(valued at approximately $1.9 billion) of the 75,000 intended. During
the same time, all Fundamental Sellers combined sold more than 80,000
contracts net, while all Fundamental Buyers bought only about 50,000
contracts net, for a net fundamental imbalance of 30,000 contracts. This
level of net selling by Fundamental Sellers is about 15 times larger
compared to the same 13-minute interval during the previous three days,
while this level of net buying by the Fundamental Buyers is about 10
times larger compared to the same time period during the previous three
days.
Summarizing the above: between 14:42 and 14:45, the Sell Algorithm sold
35,000 contracts and other Fundamental Sellers sold 30,000 contracts for
a total of 65,000 short. The chart below shows the cumulative up/down
volume at 14:45 is approximately -60,000 contracts -- only a 5,000
contract difference
And now pay attention here:
From page 14 of the SEC Report:
This large Fundamental Seller chose to execute this sell
program via an automated execution algorithm (“Sell Algorithm”) that
was programmed to feed orders into the June 2010 E-Mini market to target
an execution rate set to 9% of the trading volume calculated over the
previous minute, but without regard to price or time.
The two charts below shows the price of the eMini ES.M10 future and the
contract volume at a one-second interval. The contract volume is split
into two components: 91% (black) and 9% (light blue) illustrating the
relationship between the Sell Algorithm trading volume (blue) and the rest of
the market (black). Since we do not have access to individual trade reports made
by the Sell Algorithm, we can only show a simple percentage per
interval. It may be possible with some effort, to estimate more accurate
values. Nonetheless, the purpose of these charts, is to bring
perspective of the size of Sell Algorithm's trading volume.
And there you have it: W&R's algo impact visualized based on a heuristical algo. In other words, according to the SEC, it is that barely visible blue wiggle that was responsible for a $1 trillion loss in market cap.
As we said, the SEC has not heard the last of this by a long shot.
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Uhhhh, 'blue-wiggle, bitchez?'
Isn't this tagline mandated?
Seriously, though. The bottom chart is nullifies any remaining credibility of the SEC.
flaming gay. put your dress back on
When I inverse-FFT'd the black signal it said:
Daisy, Daisy, give me your answer do.
Backwards, it just sounded like a polka.
HAL lives.
Are these the same guys who wrote the 9/11 Report?
Well done. Now if only the "Oxygen" could be replaced with "helium" at all FRBNY trading desks we could have something to respond to?
W&R *WAS* responsible.
Because they tried to sell actual shares. Didn't they fucking KNOW that trying to actually sell real shares would crash the market?
FINE THEM
The SEC could care less what anybody thinks because they operate on the principle that they are smart and everyone else is stupid, distracted and not paying attention.
If a butterfly shits in the Amazon how many nanoseconds later will the markets crash?
Can you make a cartoon out of that?
It is as if the SEC is trying to make themselves look like corrupt jerks.
Waddell & Reed should sue the SEC for deformation of character/slander or whatever they can. Seriously, time to sue the SEC for billions of dollars.
defamation
definition
I think Nanex misunderstood these two sentences from the SEC report:
"Between 2:32 p.m. and 2:45 p.m., as prices of the E-Mini rapidly declined, the Sell Algorithm sold about 35,000 E-Mini contracts (valued at approximately $1.9 billion) of the 75,000 intended. During the same time, all Fundamental Sellers combined sold more than 80,000 contracts net, while all Fundamental Buyers bought only about 50,000 contracts net, for a net fundamental imbalance of 30,000 contracts."
Nanex wrongly interprets this to mean that there was 35k of W&R selling plus >30k net other fundamental selling, for a total of >65k net fundamental selling. Which is not what the SEC means. The SEC is including W&R's 35k selling in that >80k of total fundamental selling.
What the SEC means is that net fundamental selling was >30k including W&R's selling of 35k. Which implies that other fundamental players except W&R were net buyers of less than 5k contracts. The SEC's presentation of the data is confusing, probably intentionally.
Since Nanex counts about 65k total net selling, that means there was another >30k non-fundamental net selling, presumably mainly by HFTs.
I think the real story here is that HFTs caused the flash crash by faking volume to induce the W&R sell algo to accelerate. In a nutshell, the HFTs ambushed and slaughtered the W&R sell algo, making huge profits for the HFTs, huge losses for W&R, and substantial losses for a lot of others caught up in the panic.
I think you're 100% correct, and this kind of thing goes on every day and is at the core of what HFT banditry is about. High tech tape painters doing whatever it takes to steal a dishonest dollar.
If it can be proven that HFT firms are engaged in wash trades for the express purpose of painting the volume higher, and 'forcing' legitmate participants to trade at manipulated prices, they can be shut down.
The SEC report on the flash crash as presented and interpreted by ZH and Nanex is the single lamest thing, by far, that I've ever read on this web site. Given the amount of crazy stuff highlighted here in the last 18 months, that says something...