No, It's Not The Nat Gas "Fractal" Algo: Nanex Discloses The Very Ominous Implications Of Today's Berserk Crude Algo

Tyler Durden's picture

After we reported about the aberrant Crude Oil Futures algo earlier, we asked out friends at Nanex to take a closer look. What they discovered is something far more disturbing than merely another iteration of the confused "fractal" algo seen previously trading Natural Gas.

In essence, the odd trading pattern in CL was not isolated, but worked in tandem and in seemingly perfect arbitrage with events in the key crude-related ETFs: USO, UCO and SCO.

In Nanex' words:

What appears to be a massive arbitrage algorithm involving the NYMEX Crude
Oil futures (CL) and ETF symbols USO, UCO, and SCO, began executing at
13:35:43.850 and ended about 5 seconds later. The August futures contract (CL
Q11) cleared out both sides of the depth of book 4 times.

At first sight, the oscillations in the CL future appear somewhat similar to
the oscillations from another algorithm involving
natural gas on June 8,
2011
. However, on closer inspection, this is something entirely
different.

And for all those who are convinced that it was not merely HFT that caused the May 6 flash crash, but a tandem sell-off between futures and correlated ETFs, here is the sobering conclusion as to why absolutely nothing has changed since the Flash Crash.

This is an event that regulators need to spend time taking apart and analyzing
in detail. It will be well worth it, because there are similarities with
algorithms that cause disturbances in the equity market via arbitrage between
the S&P future and the equity ETFs SPY, IWM, QQQ, etc (one of those
disturbances resulted in the "flash crash"). Someone has a distinct
speed advantage and is taking full advantage of it.

In other words, the very same actors are still engaging in all the same manipulative activities that caused the biggest (if very short lived) market drop in history are still here, however they are now trading other products, which as is well-known the administration has a keen interest in seeing plunge in price.

For the conspiracy theorists out there, recall the events surrounding the market crash and the exigency to pass circumstantial legislation that both prevented an audit of the Fed, and to encourage Europe to bail out Greece for the first time. In other words, keeping with the conspiratorial bent, if the SEC does not pursue the perpetrator of this trading pattern, who very well may have been the same one to crash the stock market back in May of 2010, at least we will know why. Oh, and don't be surprised to see the equity flash crash transposed to other politically convenient products when so required (preferably before key political events that require the consumer to suddenly feel wealthy). Such as crude... and of course precious metals (which incidentally reminds us: has anyone found who caused that massive crash in silver on May 1 which marked the top in the silver market? We didn't think so).

Some visual evidence courtesy of Nanex:

Zoom in, Price Only:

Symbol UCO, PROSHARES ULTRA DJ UBS CRUDE

Symbol USO, UNITED STATES OIL FUND LP:

Symbol SCO, PROSHARES ULTRA SHORT DJ UBS

CL.Q11 - AUGUST 2011 CRUDE OIL

Symbol UCO, PROSHARES ULTRA DJ UBS CRUDE:

Symbol USO, UNITED STATES OIL FUND LP:

Symbol SCO, PROSHARES ULTRA SHORT DJ UBS

CL.Q11 - AUGUST 2011 CRUDE OIL

 

 

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Superslam's picture

Fractal fracking, bitchez! Oh wait...crude oil? Um...never mind.

Contura's picture

The bottom one looks like the dog in Dire Straits "money for nothing" MTV-video from the 80´s....

Fish Gone Bad's picture

If you have (inside) information, and trade on it one week in advance, it is insider trading. 

If you trade on it, 1 day in advance, it is insider trading.

If you trade on it, 1 hour in advance, it is insider trading.

If you trade on it, 1 second in advance, it is high frequency trading.

Ahmeexnal's picture

JPig will use the algos to bring silver price down so they can cover their shorts.

As soon as they do, they will go long and you know the rest of the story.

 

gjervis's picture

lets just plank

nope-1004's picture

Bankster whores.  No conscience, no morality, just white-collar crime.

 

Saxxon's picture

It's ok; I'm out.  These electronic markets are simply infected with RAGE and will have to burn themselves out fighting with one another.

LeBalance's picture

you are not out.  you live in the impact zone.  :)

Goldilocks's picture

Do you mean financial impact? … & / or something else …

Imagine the aftermath of nuclear bomb sabotage (like Fukushima) at one of USA’s massive semi spent nuclear material garbage dumps / holding facilities.

USAs handler’s seem to have had a love affair with creating / collecting gargantuan piles of extremely lethal poisons … despite a plethora of better technologies & ideas. (they have been forward thinking indeed & going long the apocalypse)

& Now that the potential dooms-day-devices (the world’s biggest dirty bombs) are in place … we’ll concede to anything. As for our (USA’s) sovereignty, what the hell good is that, when we have massive bombs parked up our collective asses?

</sarc on> Now get back to work, pay taxes, & tow the line … or else, booom. </sarc off>

No place to run to … no place to hide. (less those planning on leaving planet earth via spaceship, stargate, or whatever …they might say, “go on, you’re special”, but more likely,  you will be “the special”, food that is)(sorry about the austerity / harshness of this message)

Back to reality … Perhaps those ghost cities & such in China have a purpose, after all.

</sarc on> Long live the dollar! USA!… USA!….USA!… </sarc off>

Ohh yah, one more thing… one wrong move & the country gets it. Do what he say, do what he say … (black humor, I know … sorry about that too!)(why did I even bother posting ;-)

Oh regional Indian's picture

Nice riff, good change of pace there Goldi. :-)

ORI

SubjectivObject's picture

Pimps ..... bankster pimps .... the real monsters.

DaddyO's picture

 

Great Art Work!

DaddyO

ThoughtCriminal's picture

Cubist algos ... Suprematism algos ...

wandstrasse's picture

abstract expressionism, the last three could be from the great Clyfford Still:

http://media.wikiartis.com/images/work/clyfford-still/clyfford-still-195...

wandstrasse's picture

Twombly passed away recently. I made an extra unconscious doodle during a phone call in memoriam.

Jacks Creation's picture

Who on earth would flag that as junk? Some disgruntled hyper-realist? Wtf.

jm's picture

So what the hell... stay out of indexes and liquid trades?

hambone's picture

More generally, avoid earth and mankind.

wandstrasse's picture

transform into a sycophant. that is what I did.

ebworthen's picture

Or an angrily alcoholic hermitic luddite misanthrope.

Troublehoff's picture

i'd love to

 

but unfortunately, there is this thing called 'money' that i seem to perpetually need for essentials such as food, shelter and the purchase of mothers day cards etc...

for that reason, I am forced to work in a job, I'd prefer not to do and socialise with people I would otherwise avoid

...and i'm one of the 'lucky' ones

oh the humanity!

CrazyCooter's picture

This is as good a place as any to toss out my random $.02.

Some quick background before I shoot my mouth off. My first job out of college was writing "productivity tools" for semi-conductor mask layout. I went on to work in semi-conductor manufacturing. Most of the last 15 years of my life, I have written software of some variation or another, spanning multiple platforms, languages, and problem spaces/industries. I am sure that all sounds like Greek, just like some ZH posts I earnestly try to digest but just don't get (like those charts above - I just stare and feel dumb).

I love what I do and I am blessed to be able to move around as much as I have (i.e. going from semi-conductor to telecom to reservation systems to insurance to ... you get the idea). This "travel" has given me very unique perspectives on many things. My point is that I think I have a damn good fundamental understanding of "information technology" or "humanities ability to process information as a society". I want to share something, which may or may not augment this post/thread:

Technology is a tool. It is neither good, nor is it evil. It is men who are good or evil.

What I fear is present here is a group of men/women who are developing warfare systems, without realizing this is what they are doing. These tools are for rape and pillage. But there is no code of honor here. There is no concern for collatoral dammag. I think the scope of what is being allowed, due to regulatory capture, is far more insidious.

Let me digress once more ...

There have been a couple times in my life when I whacked the <ENTER> key and was shortly filled with dread. The metal taste in your mouth, bowling ball in your stomach kind of dread. The kind of feeling you get when you KNOW you just fscked up bad or that bad things are imminent. Real bad things. Cost the company lots of money bad. In all cases, I was able to recover (and not get my ass fired). I have since developed a distinct habit of being quite paranoid and thoughtful when making changes to live software systems.

Along those same lines, how many gun owners will admit to accidentially discharging a weapon? I have. I did it once. I was at a range, pointed down, but I was used to lever action (I was young) and it was my first semi automatic. I lowered the barrel of the 30-06 after making my first shot and discharged into the ground teen feet in front of me. None of the men present said a thing; they must have seen my face (I knew gun safety basics). But it was that same feeling; I could have killed someone.

There will come a time when these men/women will set lose an algo, with the intent of profit, and this whole shit show will seize up and divide by zero. That <ENTER> will not yield profit, but will instead set forth a chain of destructive events that races out of control. For those in the control room of these RnP algo's, I hope you aren't sociopaths. I hope you get that sense of dread, of fear, of knowing what you did. I hope you go to your grave, cowards, hiding from what you have done like Nazis fearful of every door knock, of every phone call.

For those of you who are in finance/investment/daytrading/whatever; think long and hard about the writing on the wall. Are you satisfied doing what you do? Are you productive?

When you are satisfied, you are successful. For that is all there is to success is satisfaction. – Will Rogers

The Weimar had this same period, with so much brilliance at work shuffling paper. When the game is up, well, I guess I should say "if" the game is up, make sure you have a seat. I would further note, seats won't be for sale, you need to snag one before the music stops.

Best wishes to all,

Cooter

P.S. I am an angry, alcoholic, hermitic, luddite, misanthrope. True story.

TrafficNotHere's picture

I did not consider the possiblities of these algorithms being used as economic weapons.

Crap, want to take down a company stock, or a country's markets and following, its economy... hell, just insert enough mess into a market, flash crash here and there... so the people lose confidence...

Sh*t

UGrev's picture

As as a software developer as well, I too stare at these graphs and just go "deer in headlights".. but I am on your page here, brother. It's software as a gun for sure! Sometimes we geeks just do shit because we can and don't think about what it can really do. Nuclear science followed a similar same path. A powerful and wonderful new technology that could be used for good or evil. 

I don't know about you, but I've been contacted by no less than 3 companies looking for algo devs. I told each to fuck off because I knew exactly what they were doing. Warfare indeed; and I wanted nothing to do with it. 

aerojet's picture

I think you're wrong.  It's not software as a gun.  These people are exploiting a software system in ways it wasn't designed to handle except through regulatory oversight.  The regulators are not doing their jobs, however.  We could end algorithmic trading tomorrow if we wanted to by simply adding delays to all those orders so that it would be impossible  to HFT or front run orders.  The trouble is, they are the only ones left trading and whenever the algos shut off, liquidity disappears. 

I just don't see it as weaponized software.  It's more some kind of fodder for a Bruce Sterling novel or something. 

 

Fukushima Sam's picture

Just so you know, it's okay to write the word "fucked" here.

And I know the <ENTER> key thing.  That is always a bad feeling.

SoNH80's picture

My old man once erased a custom COBOL program he wrote by hitting "Enter."  He spent Thanksgiving 1989 wandering the house drunk, in his bathrobe.

TheRipper's picture

THAT is funny!  Nearly a beer-through-nose incident. 

ebworthen's picture

Thanks Cooter.

Yes, technology is a tool and science is knowledge.  Do we use them for good or evil?

Nitroglycerine - deadly explosive or help prevent a heart attack.

Splitting the atom - killing billions or creating energy.

I suspect these gyrations are a form of warfare; either between trading desks or between nations.

They are probes for weakness and advantage, or for manipulators here or abroad. 

They are either nefarious for profit, or traps being triggered.

We can hope they are signs of regulation and sniffing out the bad guys; but based upon the actions of Wall Street and Washington 2001-2011 I kind of doubt it.

CrazyCooter's picture

Feynman talked about that some in his classic interview ... I originally got the link to the YouTube off of ZH ... I put it up on my blog ...

http://allthefederales.blogspot.com/2011/05/think.html

Most folks won't like my blog. I am a crazy nutjob that packed it up to Alaska, but I think I got a swell deal.

Feynman has it figured out with tech, listen to what he has to say.

My other favorite source is Danny Hillis (he has a great book called "the pattern on the stone" for any older geek wanting to pass down a bit of insight into the profession) who wrote an article called "The Big Picture" back in '99.

http://www.wired.com/wired/archive/people/danny_hillis/

Much like Stewart Brand says over at ForaTV, there are patterns in nature whose cycles are measured in many generations. We are at an inflection point in our species history; I think the outcome will surprise everyone. It always does in these situations.

Regards,

Cooter

P.S. For geeks that miss their "elenco electronics kit" as a gift idea for nephews (and the occasional neice), check out Thames and Kosmos, which have the following:

http://www.thamesandkosmos.com/products/tech.html

Right now, I am the "best uncle ever".

Disclosure, I have one sister (no kids) and a brother (my niece and two nephews)

Wait til they get "panning for alaska gold" dirt for xmas this year! <cackles madly> Dirt. Water. Gold lust. Mom's house. GrandMa's live for this kind of history. My mom will have to set up a bucket station in the house so they can flip out and try to sort the gravel from the goodies with the pan I give them with the dirt. :-)

Cheaper than flying and lots more street-cred ... plus, gold bugs gotta start somewhere!

P.S.S. Feel free to steal these gift ideas. :-)

magis00's picture

Right on Cooter -- thanks for sharing. 

Mec-sick-o's picture

From your post, you'll probably like to read some of Ayn Rand work or novels, specially her 2 bestsellers, if you haven't read them yet.

 

takinthehighway's picture

Thanks, Cooter. Certainly food for thought.

tom a taxpayer's picture

Good insights, Cooter. Thanks for sharing.

aerojet's picture

You're a bit over-dramatic.  Firing a round into the dirt in front of you isn't the same as pointing the rifle in the wrong direction and doing same.  You have to break two of the rules for anything bad to happen. 

The whole runaway algo scenario you describe will not happen.  We've had flash crashes and all the exchanges do is roll back the trades and return everything to normal. 

StychoKiller's picture

Perhaps, but what will the exchanges do when it's EVERY trade...for days/weeks on end??

toady's picture

that's what my wife calls me!

MsCreant's picture

+500 trillion, located in a dark cesspool, rotting somewhere in the Caribbean Islands.

Funny shit!

jm is bright but still thinks you can anticipate these thieves, go with their flow, and earn. I have been saying this, jm and I had a nasty exchange over it a long time ago (though I respect him a great deal) but the longer you try to play their games the more likely you are to get burned. IF THEY PISS YOU OFF, GET OUT OF THE FUCKING MARKETS KIDS.

jm's picture

That wasn't so nasty, was it... oh wait.

So how ya been MsCreant?

 

MsCreant's picture

Doing better. House destroyed by a passing Tornado when tree hit it, doing the whole insurance, rebuild trip. Living in a rental. But we are safe and good and I am still prepping for the worst. Storm may be a blessing in disguise, I have been forced to reevaluate everything. 

You guys who do this and can make it work are so bright, I can't help but feel that your intellect and (no offense) balls could be better applied somewhere else, solving real problems instead of trying to outscam the scammers. I love your breed if I am honest about it, but kinda hate what you do. Don't take it personally (doubt you will).

Hope you and your family are well.

jm's picture

Sorry of the circumstances, but happy that your spirit is solid.

You are very kind.  All work is nothing more than a spiritual quest to unlock hidden mysteries of the universe, some more mundane than others.

Good luck in all ways.

Marley's picture

Sorry to hear of your misfortune.  Glad to hear you and yours are safe.