The "Fractal" Limit Order Buster: The Latest Market Manipulation Algo Gimmick

Tyler Durden's picture

Yesterday, just after 8 pm Eastern we presented a very curious move in NatGas trading on the NYMEX when under very light volume, the NG performed something akin to a sine wave expansion, with about 12 peaks and troughs with ever increasing amplitude, until ultimately it triggered a major sell off when it appeared to touch off an avalanche of limit orders about 3% from the prevailing price, leading to an almost instantaneous 8% drop in Natgas which was promptly recovered. We dubbed this a fractal pattern, and after a follow up with the trade forensics experts at Nanex, it appears this was a very spot on designation, as zooming into the pattern indicates increasing levels of self-similarity and complexity. Yet aesthetic observations aside, this latest algo appears to be nothing more than a limit order-busting market manipulation device, whose sole purpose is to destabilize and generate volatility for the creator of the algo. Curiously, as Nanex indicates, the algo is not limited to Natgas but also appears to recur in other far more liquid instruments, such as the SPY, when a comparable fractal pattern was observed in broad daylight. As to how the algo itself profits from the price instability it generates: we are unsure. One could certainly trade the increased volatility through derivatives, by buying vol cheap in advance of such as limit order triggered waterfall, especially in very thin markets, and then selling the vol at the apex of a given move. Obviously, this is merely speculation. That said, we are dead certain Finra and the SEC are promptly pursuing the trader responsible for this glaring attempt at market manipulation in order to find out precisely how one profits from such fractal algorithms.

Below we present increasing levels of granularity associated with last night's attempt to manipulate the price of NatGas, courtesy of Nanex.

In the following chart, 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. Trades are colored in white.

Activity before the drop, prices only:

Activity before the drop, prices and size:

Activity after the drop, prices only:

Activity after the drop, prices and size:

Zoom in of the pattern:

 

But wait there's more. It's one thing to manipulate a thinly traded, specialized market. It is another to go for the SPY, which is precisely what this next HFT algo seems to have done.


Exchange Code Legend:

1     NQEX     Nasdaq Exchange
3     NYSE     New York Stock Exchange
4     AMEX     American Stock Exchange
5     CBOE     Chicago Board Options Exchange
6     ISEX     International Securities Exchange
7     PACF     NYSE ARCA
8     CINC     National Stock Exchange
9     PHIL     Philidelphia Stock Exchange
11     BOST     Boston Stock/Options Exchange
17     CHIC     Chicago Stock Exchange
59     NTRF     NYSE Trade Reporting Facility
60     BATS     BATS Trading
63     BATY     BATS Y Exchange
64     EDGE     Direct Edge A
65     EDGX     Direct Edge X

 

Obviously we were joking that someone, anyone, at the SEC or Finra would very possibly care about this. We also are joking when we say that as ever increasing examples of this kind of market manipulation become prevalent and demonstrated by sites such as Zero Hedge, that the investing public will rush to put their money into a casino which is more and more obviously geared to profit only those whose HQs are either located south of Houston street, or who can create nanosecond sine waves designed merely to knock out anyone stupid enough to still trade stocks.

But more seriously: it appears this is nothing short of an attempt to push people away from limit orders and to use market exclusively. Alas, the problem there is that one will likely be subpennyed to the point where the implementation shortfall is large enough to cause substantial losses... Very likely by the very same firm that was responsible for this algo to begin with.