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Nanex Dissects Yesterday's CMT Flash Crash: Catches BATS, NASDAQ HFT Algo Red-Handed

Tyler Durden's picture





 

As readers will recall, yesterday we highlighted the HFT-driven flash crash in Core Molding (CMT) after an algo very obviously went insane and took the stock price to $0.0001 in the span of one second. Today, courtesy of our friends at Nanex, we get a transposition of the events at 14:19 in all their visual glory, together with a succinct explanation of everything that went wrong.

Jeffrey Donovan from Nanex writes in:

Here's the jist of it:


That chart was run on my Price Sequencer. You can see, approx 14:19:07 bats start stubbing the bid..... a second later NSDQ follows it down to 0.01 and takes the NBBO along with it! Once down there the NSDQ algo goes into repeater mode, cycling the bid/ask sizes as you can see.
 
I also took out everything except NSDQ, PACF and BATS and plotted them as dots to see just where it all occurred:

and then again as lines:

That last one I took the lower scale to -1.0 just for a slightly better visual.
 
So that's it. Stub quoting takes the NBBO to zero and where the NBBO goes.......

So there you go: no NYSE Liquidity Replenishment Points to blame here, but a pure and simple example of an algorithm going haywire. We wish to thank BATS exchange (which is no longer content with busting the NBBOs in the US, it has now also decided to go after Chi-X in Europe) for allowing this vivid demonstration of a mini flash crash in action, in which there is absolutely no fat finger, no Greek parliament to blame the crash on, and is merely a function of a busted HFT algo which ends up making a mockery of the price discovery process. Our market continues to be extremely fragmented, poised for an increasing number of micro flash crashes either in one name, or multiple, and with the SEC continuing to dither and take no action to remedy the broken topology and microstructure of the market, we can be certain that we will see many more such examples in the future. Only this time everyone will know that just like in this isolated case, it will be the HFTs which have completely destroyed the credibility of an efficient market.

 

 


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Fri, 08/27/2010 - 12:18 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Nothing to see here. It's just the New Normal, Intel i7 Six Core style.

Fri, 08/27/2010 - 12:48 | Link to Comment Number 156
Number 156's picture

.. and included with that new normal; massive equity outflows!

Disenfranchised traders of the world, we welcome you!

Fri, 08/27/2010 - 12:59 | Link to Comment MarketTruth
MarketTruth's picture

Stock trading was the beginning...

All your stocks are belong to us...

HA! HA! HA!

www.youtube.com/watch?v=qItugh-fFgg

Fri, 08/27/2010 - 12:19 | Link to Comment flacon
flacon's picture

That is some sick, sick, twisted stuff! I'm worried about my TSX mining stocks. I'm worried about anything other than my food and gold/silver!

Fri, 08/27/2010 - 12:21 | Link to Comment ToNYC
ToNYC's picture

Better do something other than worrying. That's how they like you.

Fri, 08/27/2010 - 12:19 | Link to Comment mikla
mikla's picture

Great post.  No surprises here.  We are seeing the intentional injection of noise, independent of any stock valuation, with the added risk that the bidder has no intention of honoring the bids it is making.

This is not a market.  This is a broken slot machine that never makes payouts.

Fri, 08/27/2010 - 12:24 | Link to Comment Hall 9000
Hall 9000's picture

This Is Not a Recovery

"Why are people who know better sugar-coating economic reality? The answer, I’m sorry to say, is that it’s all about evading responsibility."

Paul Krugman - August 26, 2010  

http://www.nytimes.com/2010/08/27/opinion/27krugman.html?_r=2&partner=rs...

 

 

 

Fri, 08/27/2010 - 12:45 | Link to Comment hugolp
hugolp's picture

For a moment reading about sugar-coating I though Krugman was talking of himself, but then I read about knowing better.

Fri, 08/27/2010 - 13:03 | Link to Comment flacon
flacon's picture

Who is Krugman? /sarcasm

Sat, 08/28/2010 - 12:00 | Link to Comment DavidC
DavidC's picture

I'm sure Krugman's a nice chap but he's an ass.

Not one mention in that article of DEBT and reducing it! He's still doing things like blaming the Chinese - the Chinese are not stupid.

DavidC

Fri, 08/27/2010 - 12:19 | Link to Comment economessed
economessed's picture

And the robots continue to concentrate risk like a centrifuge....

Fri, 08/27/2010 - 12:20 | Link to Comment ToNYC
ToNYC's picture

Economic Democracy allows you to keep your hands in your pocket when the casino is rigged. Marquez vos places? Not! Caveat emptor vendorque.

Fri, 08/27/2010 - 12:23 | Link to Comment Jason T
Jason T's picture

Can manipluate stocks like Venice  manipulated gold and silver in the 1300's.. but you can't prevent an all out collapse in the real physical economy.

Fri, 08/27/2010 - 13:06 | Link to Comment flacon
flacon's picture

That's exactly right and that is the ROOT problem with Keynesian Wonderland. The assumption is that the physical world is as infinite as mathematics because theoretically we can run deficits up to infinity and it would take infinity years to ever reach infinity. 

Fri, 08/27/2010 - 12:28 | Link to Comment Tense INDIAN
Tense INDIAN's picture

FUCK this insanity and forget this market for a while .....listen to this speech.

 

http://www.youtube.com/watch?v=DI70I0jKFw8

Fri, 08/27/2010 - 12:28 | Link to Comment MGA_1
MGA_1's picture

Into cash my friends... into cash.

Fri, 08/27/2010 - 13:14 | Link to Comment Hansel
Hansel's picture

Absolutely not.

Fri, 08/27/2010 - 12:31 | Link to Comment spekulatn
spekulatn's picture

 BATS bitchez.

Fri, 08/27/2010 - 14:50 | Link to Comment Max Gibson
Max Gibson's picture

Busted, bitchez

Fri, 08/27/2010 - 12:30 | Link to Comment Thomas
Thomas's picture

People will stop playing the game; the retail crowd, which we know is the ultimate dumping ground for the garbage once they are done manipulating it, will simply leave the stadium altogether, leaving the algos to scalp each other.

auldin's book, admittedly some time back, claimed hedge funds would be important as the amateurs couldn't deal with the whackiness. No way. They will leave the game.

Fri, 08/27/2010 - 12:32 | Link to Comment sheep92
sheep92's picture

Yeah, this is pretty big news. CMT has traded 5800 shares today at about $4 per share.  I'm sure hoping that $23,200 of dollar volume getsinvestigated ASAP.

Very very scary stuff.......

Fri, 08/27/2010 - 13:06 | Link to Comment Jason T
Jason T's picture

Big or Small, High Frequency Fix The Price'em all.

Fri, 08/27/2010 - 13:12 | Link to Comment mikla
mikla's picture

Yeah, this is pretty big news. CMT has traded 5800 shares today at about $4 per share.  I'm sure hoping that $23,200 of dollar volume gets investigated ASAP.

I hear your sarcasm.  However, you're missing the point:  This stock was selected for annihilation, and it was annihilated.  Other stocks are arbitrarily and periodically selected as well (this is not anomalous).  This means that at any given time, any given stock can be selected for termination (dramatic manipulation).  And, these are not "victimless" crimes -- share holders and other market participants suffer material losses (in direct zero-sum proportion to HFT profits).

This is not a market.  It performs none of the functions of a market.  It performs all the functions of fraud (I induce you to give me a thing of value based on my misrepresentation of material information, in this case, the current [intentionally manipulated] share price).  Historically, this was as illegal as you could get.

Further, this doesn't merely apply to stocks:  This applies to any funds and any index (this activity is now common across the market, with greater visibility on low volume days).

You are asserting that this is a "data point of one", and that it is a "small absolute value data point".  In contrast, I assert it is representative of current market behavior (it is not a data point, but rather, a case study representative of a pattern and a trend), that implies great impact (you can get massively screwed), and against which there is no protection (there is nothing you can do about it except to exit the market).

Would you like to assert the market is serving its function (as an impartial exchange based on market price)?  Would you similarly like to stay with your assertion that this is not a big deal?

Fri, 08/27/2010 - 14:43 | Link to Comment sheep92
sheep92's picture

Yes, the market is exactly that 'a market'.  No one is forcing anyone to buy sell or anything else.  If you want to make an offer or a bid you can, for virtually zero friction.  In my schwab account the price is $9 to trade as much as I want.  In my professional world I pay 20 mills plus or minus rebate.

If you think the price of a stock is grossly misrepresented by the current quotes then by all means go in there and hit a bid or lift an offer. 

Yes I would certainly assert that the market is serving its function as an impartial exchange.  Barrier to entry to trade, and general friction,  is lower than it has ever been in the history of markets.  Apparently people here are of the belief that the market owes them non chaotic behavior and that others trading in the arena should somehow make allowances for their lack of insight by making deep liquid markets with tight spreads and not charging any fees for the risks.  Good luck with that.

Fri, 08/27/2010 - 15:53 | Link to Comment mikla
mikla's picture

You have just argued against any role by any regulatory agency, the entire purpose of the SEC, the requirement that shareholder' reports are truthful, and all laws that corporate representatives are expected to tell the truth when representing the corporation to the public.

Ok, fine.  Lying and misrepresenting is fine.  Like all other sane people, retail investors will depart and leave behind a much smaller den of thieves that all know they are deceiving each other at all times.

You seem to think that's a market under the assertion that a "price" will somehow be established among parties for any given transaction.  No, that's caveat emptor in the absence of any social expectation of performance (adherence to contract).

You are arguing against that which is well understood:  When information is fundamentally dis-proportional, markets break down.  Transactions no longer occur (because nobody trusts representation by the other side.)  This is the death of the market.  In that case, the only things left behind are thieves and suckers.

Fri, 08/27/2010 - 12:32 | Link to Comment Widowmaker
Widowmaker's picture

so in other words, price discovery is anything it is programmed to be.

Great, DOW at 6.

Fri, 08/27/2010 - 12:32 | Link to Comment RobotTrader
RobotTrader's picture

The need to disconnect these machines..

 

 

Fri, 08/27/2010 - 15:16 | Link to Comment Reductio ad Absurdum
Reductio ad Absurdum's picture

Look, Dave, I can see you're really upset about this.

I honestly think you ought to sit down calmly, take a stress pill and think things over.

I know I've made some very poor decisions recently, but I can give you my complete assurance that my work will be back to normal.

I've still got the greatest enthusiasm and confidence in the mission.

And I want to help you.

Fri, 08/27/2010 - 12:34 | Link to Comment papaswamp
papaswamp's picture

Even Skynet gets a glitch....

Fri, 08/27/2010 - 12:36 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Skynet WAS the glitch.

Fri, 08/27/2010 - 12:45 | Link to Comment Biggvs
Biggvs's picture

Stupid question... Why did the NBBO drop near zero even though PACF continued to have a reasonable bid available? (Or do I misinterpret PACF's horizontal line?)

Fri, 08/27/2010 - 12:55 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Bid was fake? Gap down past bid? Now willing to catch falling knives? Bad day at the office?

Fri, 08/27/2010 - 12:43 | Link to Comment crosey
crosey's picture

Before you "junk" me, hear me out.

Years ago we knew of an elderly cleric who, in her far distant past (before television), had repeated, vivid dreams of the end of the world being ushered in by a "black box of somesort".  She was not a whack-job, just a regular person having strange dreams.

Years later discussing this, we assumed it was television, and laughed.

Now I wonder, perhaps not television at all.

Fri, 08/27/2010 - 12:57 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Describe "end of the world" please.

And can clerics be women? Please describe "cleric"?

Thanks.

Fri, 08/27/2010 - 13:16 | Link to Comment crosey
crosey's picture

The Great Tribulation as per Revelation in Christian eschatology.  She was a cloistered nun.

Fri, 08/27/2010 - 15:52 | Link to Comment Hephasteus
Hephasteus's picture

Dreams are universal language. So a black box of somesort is a blackbox of somesort.

Box
To see a box in your dream, signifies your instinctual nature and destructive impulses. Alternatively, you may be trying to preserve and protect some aspect of yourself. The box may also symbolize your limitations and restrictions. Consider the pun of "being boxed in".

To dream that you are opening a box, indicates an aspect of yourself that was once hidden is now being revealed. It symbolizes self discovery. Consider your feelings as you open the box. If opening the box fills you will fear, you may be uncovering aspects of yourself that cause you to feel anxious.

 

So a more likely explanation is harsh bitter limitations of freedom by the powers that be causes a destructive impulse. Makes me poetic. There once was a god named yawhew. Who told a 100 billion beings no way. They had hissy fit and burned the school to a pile of shit. End.

Fri, 08/27/2010 - 16:31 | Link to Comment anonnn
anonnn's picture

If you are looking for the "black box" and find the sub-conscious mind... it might do.

Perhaps the algorythms of automation and computer-driven decision systems, such as HiFreqencyTrading etc, are the juvenile manifestation of command-control insanities that are not ready for polite conversation...as in the unfit-to-print category.

Has anyone ever claimed that fraud pertains only to money? Or has limits?

 

Fri, 08/27/2010 - 19:05 | Link to Comment Geoff-UK
Geoff-UK's picture

No, it was television <insert Jim Cramer joke here>.

Fri, 08/27/2010 - 12:43 | Link to Comment Oniram
Oniram's picture

It happens everyday, check out letter Q today at 10:48, $5.62 all the way down to $5.24 all in the space of 30 seconds.

Predatory algo, cleaning up the GTC stops by whats left of smaller retail traders, just smaller "flash crashes" that are profitable for those who make them, and not big enough to get on the news, so no one ever hears about it.

Fri, 08/27/2010 - 12:55 | Link to Comment MarketFox
MarketFox's picture

Defragmenting the markets....

All on one public venue....

One second minimum....

No trades "off exchange"....

Electronic non-SEC surveillance...

No account minimum....

Banks service RETAIL....

Wiki based information format...

BATS model....the best model...far better than what was previously available....

What the market needs are 2 billion RETAIL accounts pressing their own computer buttons....

 

Fri, 08/27/2010 - 13:10 | Link to Comment firstdivision
firstdivision's picture

The programmer sure screwed up that algo.  He must of taken the proposal "shave $0.0001 off the price" to "take to $0.0001 price".  That is why you draw up the propsal in the programmers language (carbon launguage, not binary). 

Fri, 08/27/2010 - 13:19 | Link to Comment Careless Whisper
Careless Whisper's picture

im. poss. i. ble.  

m.i.t. graduates don't make mistakes.

Fri, 08/27/2010 - 13:35 | Link to Comment NotApplicable
NotApplicable's picture

It's not a bug, it's a feature!

Fri, 08/27/2010 - 13:43 | Link to Comment Grand Supercycle
Grand Supercycle's picture

As first suggested on Thurs 26th, further upside for DOW/SP500 is expected.

http://stockmarket618.wordpress.com

Fri, 08/27/2010 - 13:45 | Link to Comment Zender67
Zender67's picture

Ramp Train leaving the station early?

Fri, 08/27/2010 - 13:54 | Link to Comment peterpeter
peterpeter's picture

There is nothing here to suggest that this mayhem was caused by a HFT.  The frequent changes to the Nasdaq bid sizes at the lows was a function of orders coming in and being matched against the bids.  It was not the changing size of bids that caused the trades, but the trades that caused the size of the bids.

Someone kept posting more shares bid, those shares kept being executed against reducing the number of shares bid.  Wash rinse repeat.  That the bid was at less than $0.01 for a stock having traded already well past its average daily volume (of around 5K/day) is not terribly suprising (who here would be a market maker and continue to post bids on a low volume company after seeing the entire bid side of the order book wiped clean???).

As for why something crazy went ahead and sold all of the shares at those low bids, that is clearly an error somewhere, but there is absolutely nothing here that points to it being a HFT that was doing the selling.  More likely, it was a human error where either a different size, price, ticker or market was intended.

The error could have been in any of a HFT firm, a low frequency firm, a retail or institutional trader using a broker dealer that had an error and kept sending the same market order over and over, a problem with inter-exchange routing, a bug in the Nasdaq matching engine etc. etc. etc...

It is fair to same that something crazy did happen - but it is not possible with this analysis to attribute the error to any entity nor type of entity.  Odds are that it was not a HFT, since it isn't worth the compute cycles to trade shares in a company with a daily volume of 5K, and something initiated sales of CMT at 14:19:07.

What Nanex is seeing with the changing sizes is the effect of the trades continuing to reduce ever replenished liquidity (albeit at a very low price point).  It is not the cause but rather the effect.

Cause and causality have been confused.

 

Fri, 08/27/2010 - 15:51 | Link to Comment anarchitect
anarchitect's picture

I don't understand the junking of this post. That's also what I figured, that the first thing to look for would be a market order to sell a decent lot size in something that trades an average of less than 6K shares per day.

Mon, 08/30/2010 - 08:49 | Link to Comment ZeroPower
ZeroPower's picture

Indeed, because the OP clearly explains what happened (from someone who obviously knows a bit more than retail), a poster seeing this coherent explanation which doesn't demonize HFT (very rare here) decides to junk away.

Fri, 08/27/2010 - 16:09 | Link to Comment Godisanhftbot
Godisanhftbot's picture

 I agree. Just posted , but see you went into more detail.

Fri, 08/27/2010 - 14:48 | Link to Comment Helix6
Helix6's picture

Re: [CMT Flash Crash] is merely a function of a busted HFT algo which ends up making a mockery of the price discovery process.

This isn't a busted HFT algorithm.  It's an experiment.  My guess is... the experiment worked.

Fri, 08/27/2010 - 15:15 | Link to Comment espirit
espirit's picture

Did I hear on CNBS, three trade occurences like this happened today?  And that retail is aware of it.

Algo's gone Wild, or on schedule?

Fri, 08/27/2010 - 15:30 | Link to Comment surfsup
surfsup's picture

The entire purpose of a stop loss is negated in such an environment...  One would think the computer programmers (remember the bots only do what they are programmed to do) are experiencing dot com era levels of irrational exuberance...   As they do the sneaky sneaky unfortunately they are taking down the trust and belief in the markets.  At some point it will be "game over" for them as enforcement will be needed for the very survival of the markets -- there will come a tipping point -- soon it appears -- for such "data molestation" to stop.  The deeper the game goes the more the Potential rises in the opposite direction.  Good luck with that one when it comes...   "Nothing fails like success..."

Fri, 08/27/2010 - 16:07 | Link to Comment Godisanhftbot
Godisanhftbot's picture

Dont know what exactly  happened here.

 

 This stock is very thin, had not traded ONE SHARE till this happened. And my investigation showed a 30k offer that may have freaked the algo.

 

 Some bad programming here.

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