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HFT Firm Faces Charges For Causing "Oil Trading Mayhem"
Could the tide finally be turning on the high frequency churners-cum-manipulators? In an exclusive report, Reuters informs that "a big high-frequency
trading firm faces possible civil charges by regulators after its
computer ran amok and sparked a frenzied $1 surge in oil prices in
February, according to documents obtained by Reuters and sources
familiar with the continuing investigation." The firm in question is Infinium Capital Management, which confirmed that
it is the company at the center of a six-month probe by CME Group Inc
into why its brand new trading program malfunctioned and racked up a
million-dollar loss in about a second, just before markets closed on
February 3. And yes, once all is said and done, it will be precisely this kind of algos gone wild that are found to have caused the much more devastating move on May 6, as we have been claiming all alone, and which the HFT lobby has been fighting tooth and nail to bury under the rug.
The glitch explains for the first time the lightning-quick oil-trading surge of that day -- and it may have been a catalyst for the abrupt and largely unexplained $5 slide amid record volumes the following two days.
The firm's buying frenzy also reveals how faulty computer codes, known as algorithms, can spark sharp volatility and send electronic markets spinning all in the blink of an eye.
Futures exchange operator CME Group is looking into the incident, which occurred at the New York Mercantile Exchange and highlights some of the same electronic-trading concerns raised by May's "flash crash" in the U.S. stock market.
The specifics on the actual trade:
Infinium, a household name in Chicago's burgeoning trading community, relies on computer horsepower and quantitative models to earn razor-thin profits from short-term trading. It uses its own money to make markets and capitalize on tiny imbalances, a common high-frequency strategy.
The documents, dated March, reveal that Infinium used an algorithm that was less than a day old to execute a "lead/lag" strategy between an exchange-traded fund called United States Oil Fund, which tracks oil prices, and the U.S. crude benchmark future, West Texas Intermediate.
The algorithm was turned on at 2:26:28 p.m. (Eastern) on February 3, less than four minutes before NYMEX closed floor trading and settled oil prices. It immediately started uncontrollably buying oil futures, according to the documents, which include letters from Infinium's lawyer to the regulation unit of CME Group, and cite notes from a company developer.
Infinium placed 2,000 to 3,000 orders per second before its flooded order router "choked" and was "dead in the water" a few seconds later, the developer's notes said. The algorithm was shut down five seconds after it was turned on.
By then, the documents show, the firm had sent 4,612 "buy limit" orders into the market. It quickly offset the position, mostly with large "block" trades in the next few minutes, leaving it with a $1.03-million loss.
Infinium's burst of buying and selling represented about 4 percent of average daily trading volume in the contract, and caused a brief 1.3 percent jump in oil prices, from $76.60 to $77.60, before settling at $76.98, Reuters data show. Trading volume spiked nearly eight-fold in less than a minute -- and the reverberations turned some heads.
The next day, February 4, commodities traders struggled to explain a 5 percent plunge in oil prices, the biggest one-day drop in half a year. On February 5, crude fell further, to $71 a barrel, and volume touched a then-record high.
Some people fingered London hedge fund BlueGold Capital Management for selling long positions -- a charge it promptly denied -- while others pointed to the unusual end-of-day market action the day before.
Stephen Schork, who runs market analysis company The Schork Group, told Reuters at the time the volume jump "reeks of someone making a mistake or (who) was in trouble and is in more trouble today." CME Group said February 4 it was looking into the matter.
Infinium's Whitman told Reuters the firm immediately alerted the exchange to the problem. "The parties associated with this error are no longer with the firm," he said, adding the firm since adjusted its software "to ensure this error would not be repeated."
The observations that the market is now on the verge of breaking every single day have gotten others to appreciate the market structure scourge that is the HFT community:
"The ironic and sad part of the broken algo story is that the traders identifying patterns in the market unfortunately don't use their expertise to identify abnormal patterns in their own trading," said Larry Harris, a market structure expert and professor of finance and business economics at University of Southern California's Marshall School of Business.
"The failure to have simple counters to identify potential problems with the algo, such as having thousands of buy orders in a row, is extremely troubling."
However, as we have been pointing out for a long time, at this rate of attrition, it won't matter soon, as the HFTs will soon be left to trade only with themselves, in this wreck of a marketplace.
Also, as we recently pointed out, this is not a simple case of "banging the close" as platinum and palladium trader Chris Pia was recently found to have done, not only in commodities but in FX as well:
Commissioner Bart Chilton told Reuters late last month he is "itching" to use the CFTC's new authorities, under the Dodd-Frank Act, to fight trading practices that disrupt oil prices.
Under the new bill, the CFTC needs only to show that a trader acted in a manner that had the potential to disrupt markets to prove a manipulation case.
The documents did not suggest that Infinium was suspected of what is known as "banging the close" -- an illegal practice in which traders try to move the futures market by flooding it with orders just before it closes.
Infinium said its primary failure on February 3 was allowing thousands of orders per side per contract, instead of limiting it to the planned one, according to the documents citing the developer's notes. The notes also indicate Infinium's computer may not have properly recorded that it was sending orders.
Of course, at the end of the day, there's talk of change, and actual change. And while the former is increasing, the latter is sadly missing, and is not lost on the millions of investors who have now given up entirely on stocks. While we are confident that this will be confirmed by a 16th consecutive outflow in funds when ICI releases it weekly flow data tomorrow, it is about time the idiots at the SEC finally wake up and realize that they have a broken, corrupt and manipulated market, where the Ph.D. geniuses, with their flawed algos, have destroyed any and all remaining integrity and faith people may have once had in capital markets. Alas, it also means that nothing will be done until the next far more substantial market crash destroys everything that the US capital markets have fought to represent after decades of technological progress and hard work.
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SkyNet bitchez!
So a commodity that spikes UP is under investigation, but when it plunges DOWN it is completely ignored by the compromised & corrupt CFTC...
Duh! Equities up = good. Commodities up = bad. Or so think our regulators.
Double whammy: these guys run an algo for 5 seconds and it costs them $1mil in losses. And THEY are the ones getting investigated? How about the algos GS runs (profitably) that are never investigated?
On another point: seriously, who was their testing team for the algo? As a programmer, this would be a seppaku-level incident.
Wake me when the charges reflect the $80 Enron-market-making two years ago.
Yes. I'll be convinced when Goldman and Vitol are hauled in for manipulating crude to $147, using dark pools and trading on I.C.E. to avoid SEC reporting requirements.
Oh, it was GLITCH. Hey, I understand, it happens. You can just have a do-over.
Thiss kind of bullshit is only panhandling by politicians for donations from the HFT lobby before electons. Nothing will change.
It's always good to remember that disclosed information has two components. One is the information itself. Is it shocking or useful or revealing or informative? Does it help put the bad guys away or does it help the bad guys cover their tracks? And so on.
The other component is the timing. Why now, why here? Of course, Reuters and the other mainstream media outlets always work from the presumption that they're above the actual news, that they're independent and not influenced by things such as politics or money.
However, readers of ZH and other fine blogs are becoming aware that the MSM media is, and has been for many many decades, bought and paid for by various agencies, either private or public. So, understanding that Reuters is essentially standing in the cesspool calling everyone else cesspool dwellers brings me pause.
Why here and why now?
Just as way of support: ""We are grateful to The Washington Post, The New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected their promises of discretion for almost forty years. It would have been impossible for us to develop our plan for the world if we had been subject to the bright lights of publicity during those years. But, the work is now much more sophisticated and prepared to march towards a world government. The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the national autodetermination practiced in past centuries." David Rockefeller, founder of the Trilateral Commission, in an address to a meeting of The Trilateral Commission, in June, 1991."
La?
How does a secret cabal of world domination-minded elites let a quote like that escape? Ever think it's fabricated?
The elites have long experience with a simple concept; the average Joe doesn't read. Period. Other than the comic section.
And then there's reverse psychology that comes into play. The abuser always wants their victim to understand, to feel within their very bones, that they are helpless and hopeless, that they can do nothing about their condition, that they are being controlled and personally out of control.
It is imperative that the abuser use terrorist techniques on the abused for ultimately the abuser needs to control the abused 24/7, an impossibility unless the abused agrees to remain inside the cage when it's not guarded.
The public psychological beat down isn't really intended for those who stay within their cages, who were trained and conditioned and have accepted it years/decades ago. It's intended audience is for those who are beginning to test the unlocked gate, to consider alternatives, to look beyond. When that no longer works, then the trained will be turned upon the dissidents as unpatriotic and endangering the trained. We are just about at that point now.
And...
If I build a device and I run it with a particular goal I am everyone who is in league with me are the real culprits. Not the "algo gone wild."
"We didn't mean it," just makes me laugh.
> Why here and why now?
They are catching heat and the typical industry response is to pin it on a few "bad guys", "bad practices", etc.., paving the way for self/no regulation: "We know we have to clean up our industry..blah blah..we are working on standards..blah blah."
It's a win-win for corrupt regulators and the perps.
LOL and wondering where the "parties" ended up?
"The parties associated with this error are no longer with the firm," he said, adding the firm since adjusted its software "to ensure this error would not be repeated."
Dr. Sandi's quick translation:
The guys who were actually smart enough to create this software have resigned. They are launching their own startup. The remaining members of the software team are trying to reverse-engineer it, but they don't really know how it works.
So let me get this straight. Left free and un-coerced, HFT shops will lose their own money at the rate of $1M a minute. But the mandarins can write a few thousand pages of regulation to make them not do this??
How many failures of regulation will it take before people start demanding LESS regulation than more?
The broken market structure is NOT due to lack of regulation. Finance is tightly controlled and manipulated by the government:
- fiat debt-based money
- central banking
- too big to fail and other moral hazard policies
- POMO, PPT, etc.
- Community Reinvestment Act, etc.
The above benefits the politically well-connected, to the detriment of everyone else. The word for this is not "free market" but "fascism" (I would even concede that guild syndicalism, corporatism, or mercantilism are pretty good words for this also). But the key is that the government is the dominant player--dominating every aspect of what passes for "markets" nowadays.
The solution is not to somehow compensate for all of this distorting coercion by adding yet another layer of it. The solution is to dismantle the beast.
P.S. I am a compute software developer by background. I've had a number of discussions with some of my team about the issues of queue depth growing without bound, "kicker" algorithms that must at some point step in and chop off the older part of the queue to prevent overflow, throughput rates, latency, etc. We all had to laugh at the idea that a compromise between Barney Frank and Christopher Dodd to produce a new 1000-page law... turned into regulation by compromises between Mary Shapiro, Ben Bernanke, Tim Geitner, Goldman Sachs, JPM, Citi, etc., with lobbying done behind the scenes by Soros, Buffet, etc etc etc could POSSIBLY IN OUR WILDEST DREAMS FIX THE ACTUAL ENGINEERING ISSUE!
If the NYSE has typical corporate/financial firm programmers, the HFT has bleeding-edge superstars, then NYSE is losing its business model. Too bad we don't have a de-regulated free market so that some other firm could step up and provide a platform that doesn't allow unbounded latency growth if a HFT computer starts throwing orders at it beyond some arbitrary limit! But we do, and so NYSE's position is protected against would-be competition. And they will be part of the cartel that puts together the regulation that allegedly saves us from HFT, but in reality protects their incumbency even further.
Do the exchanges stay open without HFT? Its more than half their volume. Plus the rent.
I'm so freaking sick of the distortion of the use of mayhem. We call it aggravated battery. It's not just chaos.
http://www.nolo.com/dictionary/mayhem-term.html
So that fucking insurance company that keeps talking about insuring against mayhem. I want to see eyes scooped out with mellon ballers and arms cut off.
Hell, we all do. But you can't get it on cable; you need to order the DVDs from Scandinavia.
Ouch, the slap on the wrist to these guys will smart-for a few hours
hmmm..selective enforement; sounds more like these guys fucked the GS desk. I think we'll be seeing a lot of firms being harassed but it won't stop HFT, it will only give an appearance of doing so while knocking out the smarter guys causing problems for the connected firms.
REVENGE OF THE ALGOS
http://williambanzai7.blogspot.com/2010/08/revenge-of-algos.html
After reading the article:
No one has shown that it was not a broken or malfunctioning algo.
It performed as programed.
So, the market distortion is not from broken or malfunctioning algos.
Frenzied $1 surge in oil prices, LOL!!
They didn't mind when oil was being manipulated to $150.
Oops.
That's because that runup was an attempt to save the TBTFs.
Right--since oil is denominated in dollars. Higher oil price would increase the demand for dollars, keeps the dollar from devaluing. Of course that's bad for consumers and mfg, but the banksters don't care about stuff like that.
Infinium Capital Management ? Hum, good that I refused to work for them...
You never volunteer to be the fall guy. Scardy monkey!!!
So, Infinium is really infinitum, chasing it's own tail because it would take too many precious nano-seconds to actually tell itself what it was doing!
I'm kinda dissapointed that it took 5 seconds for it to eat $1M of itself, though. This day in age, I expect these suckers to supernova in a flash.
Can't have a counter, that would add a line or two of code and occasionally a disk read or write. That would slow things down a few micro-secs. Can't have that, can we.
These guys gobble up intel SSD disks like a 1980's nerd gobbled up floppies.
I've also noticed that many developers are blissfully ignorant of the TCP/IP stack. They just 'write' to it like it was mass storage, no care taken about packet payload efficiency or anything like that.
Can't believe they didn't even test for potential edge-cases. Or at the very least - a big fat STOP TRADING condition if the queue got overwhelmed.
Yeah. I was gonna say that.
What was it?
NBBO not HFT
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