Guest Post: Deconstructing Algos 3: Quote Stuffing As A Means Of Restoring Arbitrageable Latency; Or Is The CQS TRYING To Crash The Market?

Tyler Durden's picture

Submitted by The World Complex

Deconstructing Algos 3: Quote Stuffing As A Means Of Restoring Arbitrageable Latency

In a recent article Nanex has shown that quote stuffing can slow down
the updating of series of stock prices, bids and asks. The article was
less clear about why one might do that. There could be arbitraging

One of the first games these clowns got into was latency arbitrage.
HFTer offers a number of shares for sale at one price, and at the first
sign of interest, pulls all of the offers and resubmits them at a higher
price. The latency comes into play because as another player send his
orders in to fill HFTer, and these orders all find their ways to the
market via differing routes, each of which has a different latency (lag
time)--so instead of all arriving at once, they arrive singly, giving
HFTer time to pull the rest of his bids.

Early this year, Royal Bank of Canada (RBC) launched a new trading program called Thor,
which was designed to avoid latency arbitrage. The gist of the program
was that the system would monitor the various latencies to all the
different exchanges to which orders would be routed, and artificially
delayed the submission along the fastest route so that all the orders
would arrive simultaneously on all exchanges. While perfection did not
occur, the early claims were that the various latency would me measured
in microseconds, which at the time seemed reasonable.

Presumably RBC is not the only player that has developed such software.

Now we hear that orders are being stuffed down different channels at such speeds as to change the latencies. In the Nanex article we see:

Today (June 28, 2011) between 10:35 and 11:17, algorithms
running on multiple option exchanges (6 or more), drove excessively
high quote rates for SPY options (and 2 or three other symbols that I
haven't identified yet).  Fortunately this was a quiet trading period. 
A total of about 400,000,000 excessive quotes were generated -- that is, compared and scaled to the previous day.
In one 100ms period, 2,000 SPY option contracts had about 16,000
fluttering quotes (some combination of nominal changes in bid, bid size,
ask, ask size) resulting in saturating/delaying all SPY options on that line. These events occurred several times per minute during the interval. If these algorithms include more symbols, or if they run again during an active market, we will see severe problems. It is shocking to see this so widely distributed across so many exchanges and contracts simultaneously.

pretty sure this is not intended to be damaging to the market. The fact
that it runs for short bursts on limited channels suggests that there
is a particular target. A target like Thor.

Saturating the quotes on individual lines will change the time lags
(latency factor) during the intervals the quotes are generated. For Thor
to work properly, it has to estimate by observation the precise lag
between sending an order and having it arrive on each market. Randomly
changing the lags for the different lines would confound RBC's (and
others) attempts at ensuring all its orders arrive on all markets at the
same time.

The quote stuffing in this case is intended to be noise, and its intent is to give the latency arbitrageurs the
upper hand, as it is easier to generate an immense amount of random
noise than it is to formulate an anticipatory response to it in real
(microsecond) time.

The only approach I can see (if this is possible) is some kind of
all-or-nothing fill on your orders. So your orders arrive on the
different markets at slightly different times, but they aren't triggered
until they are all ready and then they trigger at the same time. Of
course the arbitrageur is probably also the "market maker" and
can see you trying to match up your orders prior to execution, leaving
you up shit creek in any case.

I really can't see an argument for these actions providing liquidity.



But wait, there's more.

Once again reverting to Nanex' work we now find that beginning this past Tuesday, the Consolidated Quote System not only did not do anything to moderate the threat of qute stuffing, incidentally one of the laments of the Bank of England itself as was noted previously, but has in effect just given a green light to even more quote stuffing, by increasing the CQS capacity from 750,000 quotes per second to 1million quotes per second across all 12 multicast lines.

An innocent, not very sophisticated observer would put a) and b) together, a) being that the market crashed on May 6 due to excessive quote stuffing and b) being that the capacity for quote stuffing was just raised by a third, and conclude that someone high up is actively doing their best to set the scene for another massive market crash at the touch of a button.

That someone will probably be right.

Below is Nanex' full piece on Equity Quote Saturation:

CQS transmits on 12 multicast lines in order to distribute the processing load.
The capacity guidelines, expressed in quotes per second, are as follows:

Capacity (Quotes per Second) per multicast line all 12 multicast lines
Before July 5, 2011 75,000 750,000
Starting July 5, 2011 100,000 1,000,000

The following charts plot each of the 12 individual CQS multicast lines and the
total (which is divided by 10 to fit into the same scale) on a 1 millisecond

The first chart shows one micro-burst of activity as it occurred on July 5th,
2011, which is the first day after CQS capacity was increased by 33% to 1 million
quotes/second. The second chart shows how this same data might look if we
imposed the capacity limits that were in effect prior to this trading day.

As you can see, the delay is significant. If this activity level occurred using
the limits that existed on July 1st, the delay would have lasted approximately 200ms.
We came up with three possible explanations:

1. July 5th just happened to be 33% more active than any trading day in history.
2. The capacity limits from before July 5th were at least 33% too low.
3. An algo is testing how much more quote noise it needs to generate to cause the
same effect as before.

So where does it end? CQS is already planning to increase capacity an additional 25%
in October 2011. How long before that limit is hit ? We think it will be hit the very
next trading day. If 3 years ago someone told us that equity quote traffic rates for
NYSE, AMEX and ARCA issues would exceed 1 Million/second (not even counting Nasdaq
stocks), we would have thought the market would have entered the greatest bull or
bear market ever known. Instead, you can't even recognize from a 1 minute chart where
these bursts of out-of-control quote traffic rates occur. And when they do occur,
a significant percentage of those quotes will have already expired before they even
leave the exchange network.

At these rates of growth, we will no longer have a diversity of trading participants
with accurate market data, and regulators will have no hope of ever piecing together
what happened after the next disaster. It took the SEC five months just to assemble
equity data to analyse the flash crash. When the next disaster strikes, they will
have to contend with 5 to 10 times more data.


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the mad hatter's picture

crooked crooks in a crooked casino in a crooked nation of crooks.

Cursive's picture

@the mad hatter

Well said.  On another note, may I suggest a different avatar?

Popo's picture

Yes.  Crooked crooks in a nation of crooks.  But what is important to remember is that not all crooks are on the same side.  

And thanks to the work of the prevailing 'guild' of crooks,  the market has been driven into the stratosphere.  And now at these crazy P/E ratios, there is oh so much meat on the bone for any number of rival crooks to be tempted by.

That's the problem with rigging the market higher:  All that goosing really does is create a bigger and bigger jackpot on the short side.  As the stakes go up,  so does the incentive to break from the pack and work towards kickstarting the cyclical countertrend.

Right now the market is one gargantuan, overstuffed pig.   And as we begin to realize that the hog may not be getting much fatter -- the real prize is becoming more and more obvious:  Slaughter the fucker.

But as all seasoned shorts know: The danger with shorting is that timing is everything.   Longs have an easy time investing.  Upward cycles tend to be long and slow.   Crashes are week long events that happen with amazing speed, uncertainty and unpredictability.  

But what if you could "encourage" a downcycle?  What if you could increase the odds of timing your short bet -- even by a little?  

Well then,  you'd be in a position to reap untold rewards...

ebworthen's picture


Instability, or volatility, is an advantage for those first in line with the fastest machines/connections, no?

Perhaps we are at the point where the theft is naked; after the bailouts and no one of consequence in Wall Street or Washington under investigation or in prison they have been given permission by ommission of consequences.

I still hold a tiny hope I keep hidden under my teddy bear that some decent souls out there are trying to catch the malfeasant; but don't quote me on it.


Selah's picture


Instability, or volatility, is an advantage for those first in line with the fastest machines/connections, no?

No, this is legitimate price discovery by an efficient market, or else the SEC would be all over it.

If you think I'm wrong, what can you do about it?

What will you do about it?


The masses of any fascist state are well aware of the lies and corruption, but refuse to rise against it.


ebworthen's picture

Sounds like ye need me ration of rum and some hard tack.

IAmNotMark's picture

What will I do about it? 

I've pulled everything from the market except my IRA.  I'm in physical PM. What's the poker phrase?  I'm all in.

I've stopped flying.  No more TSA.

I make half of what I made 2 years ago.On purpose.  That's all I need to live in a reasonable manner.  I've cut my tax bills.  I've stopped working for the parasites as much as I can.  I've shrugged.

If things continue to go downhill I'm ready to pull in further. 

I'd leave the country but that's a tough call.  Unlike the Germans in the '30's that escaped their country by crossing a border, American subjects can't go anywhere to escape the reach of the US.  The IRS will follow.

So what have you done?


HungrySeagull's picture

Let's see.

Removed our 401k's by eliminating the employer (Quitting in favor of more fulfilling part time)

Eliminating the fancy 300 channel of crap and distilled it to about 30 channels of Waltons and other shows long forgotten. Did the same until the budget is less than what we take in.

Physical metals bought on credit and stored at home, backed by weapons and training to use same.

Learning new skills and working face to face with neighbors at our fence line on all sides and see how best to accomplish things like felling a storm damaged tree and discovering who can most use the resulting firewood for heat in the coming winter. I am into my third year keeping several families warm and have yet to go through all my timber.

Growing crops at home, unafraid of new laws making such activity illegal and punishable by jail time.

Preparing and excercising for disasters ranging from Nuclear all the way through earthquakes to common ones like tornadoes and home invasion. I have been on generator for weeks at a time when gas stations no longer had power. Now I provide power to those who can best use it hopefully.

I share what little I know that is useful RIGHT NOW so that others will wake up and quit being sheep peacefully bleating while grazing in the killing fields.

I have replaced my entire home's electric skeleton and eliminated all but one electric device. Driving my Kilowatt use from 1600/month in the summer to less than 300. And not because of tree hugging but more for surplus power planned to be exported off the Sun in the future. Farming the sun, wind and geo for income back to the grid is attractive.

Also the capacity to turn on the system and leave it cooling for 24/7 to maintain our own health, strength and well being without excessive charges on billing is useful as well.

We don't need the money, therefore we dont participate in today's spirit crushing, morale breaking, slave driven workforce horsewhipped beyond pain into a state of zombie like compliance as they stumble through the day unable to muster enough energy to give a goddamn what is happening when they are off.

We count the gallons used of water each month, pay the city once a year of a few hundred dollars. To be paid when the current amount is exhausted after a year or so or added to for the new year.

No longer do we stress about bills. It is all auto deducted (Non FDIC Banks) and anything left is surplus against next months bills etc that accumulate over time.

When Bin Laden destroyed our Payroll (Killing the people who actually processed our checks each week) in the NYC Trade Towers, we did not notice the loss of payroll for weeks. Our savings was sufficient to keep us and our rig rolling at 100% in a time of great need.

Now that Bin Laden is dead, what more do we worry about?

Oh yes, the redneck Muslim who decides to commit acts of terror in the name of allah. That is why I exercise and train with my 2nd Amendment rights while using my first amendment to help others while we can.

Gasoline is itself a occasional expense now. With the development in our area, we can use bikes or horses to care for our every need locally. In fact a surplus of gasoline is on hand to put the truck through necessary work.

The old fashioned reel mower keeps us fit and requires no gasoline as today's lawn care does.

Dozens of Contractors have been hired at a moment's notice, some of which contain Iraqi war vets seeking peace and solace in good honest work away from the PTSD inflicted fears outside our lands. We tried our best.

We spend our money and have leather trades men make by hand what we need here in the USA. None of that imported chinese crap that breaks in 6 months. I can and want to find more US Based Tradesmen across all skill levels to build useful things for a living and learn to work with others the same way.

cosmictrainwreck's picture

What we need is a gang of highly-incentivized fuckin' $1000/hour lawyers. How that works out, I've not a clue.... but those fuckers 'posed to be so smart (and devious, too). Surely there's some tiny glitch, opening or whatever to exploit. Short of that, I thnk we be royal-fucked.

jerry_theking_lawler's picture

casino doesn't seem so crooked when you look at these markets...

Everyman's picture

"I think it is just gonna be cheaper to shoot that son of a bitch."


Shelly Marcon, in The Last Boy Scout.

Vic Vinegar's picture

Are you gonna talk about it or are you gonna do about it - Sean Salisbury, former ESPN analyst.

What do you have to say here?  Your act is tired.

Ident 7777 economy's picture

Hmmm ... 'quote stuffing' ... can two (or more) play at that game?


What about forming an org that provides specific quote stuffing services - for a fee even?


Any takers?



laughing_swordfish's picture

Excellent idea. A Fund could be built around it.

USP: Random Noise generation in the quotes of any company,index, future or commodity in which you have a position and wish to generate momentum in a particular direction.

The Hedgies would be lining up at your door.

lolmaster's picture

pretty silly stuff. Whose fault is it if RBC is retarded? Thor my ass...

Reptil's picture

Good detective work!
In the crash of 2010 the market was also taken down ON PURPOSE.

It's a trap!

samsara's picture

 "...conclude that someone high up is actively doing their best to set the scene for another massive market crash at the touch of a button."

As I said,  wait till they all (all of them on the A-Team that is) act in concert to each other. 

Again,  It will breathtaking.   There will be no doors for anyone.   The A-Team will have already left the building.


Vic Vinegar's picture

I feel you dude.  

When I was a kid I wanted to be Murdoch.  Yet now I see I'm ready to be Hannibal.

And yet so many here are ready to be Hannibal.  What to do?

All I know is trav does not want to be B.A. Baracus.  Something about peak oil and small brain sizes.  I forget.

Vic Vinegar's picture

New world order, bitches.  Times change.  Get over it.

el Gallinazo's picture

Is that Hannibal of Carthage or Hannibal Lecter?

espirit's picture

Ah, least fastest is the bagholder. Now I get it.

espirit's picture

This makes the intent understandable.

We control your set. won't load, see 5min / 3day chart of the $SPX and you'll see the obvious effects of the TCTC (the crooks that control).

Atomizer's picture

Romper, bomper, stomper, boo. Tell me, tell me, tell me do. Magic mirror, tell me today. Did all my friends have fun at play?

Romper Room KTNT Ch 11 Margaret Lloyd

Some will remember, questioning authority causes flipping a new page to tell a new lie.

House, Senate, and Congress are whipping up new lies to sell to the general public.

I know that my intelligence caused backlash within the educational system... some 20 years ago.

Selah's picture


I remember Romper Room...

Scary stuff in retrospect.


HungrySeagull's picture

Yea.... I watched that stuff as a child.... 40+ years ago.

Now looking back on it.... I shiver with horrors yet to be discovered by such a program.

How could we have been SO STUPID!?



They tell the story of the Pied Piper. Romper was our piper back then.



And dare I say it?


Fat Albert and Schoolhouse Rock.


Also the education system today would not stand for self motivated learning as we did back then. Example Sex ed. Optional Course under rigorous doctrine carefully sanitized for the children.

My Sex ed was a single graphic clinical book in the back of the library accurately drawn in pencil, and the next step was to chase and catch my girlfriend to show her the same. When the day was out, we had much to discover and a life time to do it.

Not 6 months rotting in a classroom being force fed crap about say no, safe sex or whatever the mission objective was for that year.

Widowmaker's picture

So for those that have a horizon of months or years... they never saw it coming.


fuu's picture

Nanex has the best porn.

Missiondweller's picture

Sounds like we need a way to give traders a limited number of quotes per trading day. Right now, the quotes have no scarcity, they're limitless.

I would assume any computer has an electronic ID and with that, all participants could be given a limited number of quotes.

knowless's picture

then they just get more computers and register it under the intern.

HungrySeagull's picture

Hot interns fanning themselves while feeling a sexual surge in a place of finance and power, by the dozen from both sexes all willing and eager to feed said computer.

MsCreant's picture

If a lab rat understood what was happening to it (does not matter the experiment) I think it would be pissed, if it could be. I think it might try to destroy the experimenter. Wouldn't you if you did not know you were being experimented on and then found out about it?

At least a university has a human subjects board it has to run all of it's research by. I have always felt like they were research Nazis (there are many good projects that get shut down by IRBs) but this really gives me pause. It is unethical, never mind the fact that the market is being rigged by the most powerful player.

It is unethical to experiment on people without their consent. The market place has become a laboratory that is going to explode because there is no oversight.

knowless's picture

it's a zerg rush over dialup. Seems less like an experiment, and more like someone that took their videogame experience and applied it to the only part of reality where it was applicable.

it's funny that videogame federations quite possibly enforce tighter regulations than the SEC.

snowball777's picture

I worked at Blizzard. Videogame companies go to extreme lengths (~10% of the dev time for SCII, for example) to guarantee fairness in multiplayer games because they know it has a profound effect on people's willingness to keep playing. 

FPS players often use devices in between their NIC and their cable modem to introduce artificial latency to great advantage too.

Nothin' new under the sun.

snowball777's picture

"What are we gonna do tonight, Brain?" - Pinky

Sun Tsu's picture

 Serious use for gifted mathematicians sanctioned by law and regulatory latency

Sun Tsu's picture

 Serious use for gifted mathematicians sanctioned by law and regulatory latency

AustrianEconomist's picture

It is clear that the Economic
theories in place are outdated, just look at the unemployment report, 99.99% of
professional economist were completely wrong and are all wearing their rose coloured
glasses rather be realistic. The US economy is in huge trouble, that’s a fact.

Check out the latest from the Capital Research Institute (CRI): Creative Destruction – A New Economic Order

Marco's picture

Economic theory is irrelevant, the problem is that government is bought and sold.


If government was actually Keynesian it would print money (not QE, which plants the seeds of deflation even while causing inflation in the short term ... and also includes a no string attached gift to the financial industry) and put people to work with public works programs. That's Keynesian, FDR was Keynesian ... we can argue about the effectiveness of what he did, but I think we can agree that Obama hasn't even tried to be Keynesian in the same way as FDR.


If government was Keynesian it would have run balanced trade too.


Keynes is just a convenient patsy for plain old corruption.

snowball777's picture

The problem with FDR is that he did the "filling holes" thing per Keynes, but he also made fundamentally stupid mistakes like creating a price-fixing committee composed entirely of industry in the NRA. Separating the useful policies from the disastrous ones is difficult so it's easy to play the blame game without establishing actual causal relationships.

And there's also the problem of how you manage to return to a normal economy after going into "trickle up" mode without having a 1937 experience.

Tense INDIAN's picture

i dont understand these ........but they have FULL control and they can CRASH it whenever they want ....Machines RULE 

Reptil's picture

It seems Wintermute has a counterpart, or adversary.


sudzee's picture

Need to impose a Treasury Reducing Implied ( or otherwise ) Transaction fee ( TRIT ) of $1 which would generate more $'s per second than the Treasury spends. Deficit done with no need to beg avearge joe for a few bucks to help out.

SwingForce's picture

By quote=stuffing the options exchanges, are there trades actually occurring outside of the proper theoretical values? I mean, is someone actually profiting from this latency by buying undervalued / selling overvalued options? I would love to hear more about options arbitrage, especially how 2 major back-to-back options expirations last week may have affected the markets (month end Thursday & weeklies Friday). Thank you.