Is An Options-Based Market Flash Crash Imminent?

Tyler Durden's picture

If it had not been for Nanex's stellar forensic analysis of last year's flash crash, the SEC would still have no idea who to scapegoat for the unprecedented HFT quote stuffing incursion that cost the Dow 1,000 points in a matter of minutes, when virtually everything that could go wrong for broken market structure, did go wrong. Yet for all its fantastic insight, Nanex has traditionally been a post-facto, and at best concurrent, warning indicator. Until now. If Nanex is correct, and if tomorrow's trading session is as volatile as many expect, which will likely occur at a time of complete market illiquidity (the vote is expected to take place at 1pm Greek time, so 6 am EDT), we may well see the next culprit in the broken market structure rear its head. And no, it's not shares or ETFs this time. In fact, it's a long lost friend of major market crashes... Options.

Per Nanex:

With the Greek deal culminating before the open, we could have a serious issue tomorrow: Today 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.

As a reminder, Nanex proved beyond a reasonable doubt (only further validated by the SEC's stern refusal to acknowledge it, and idiotic insistence to blame Waddel and Reed for singlehandedly breaking the stock market) that it was the kind of HFT algo induced quote-stuffing and massive churning patterns that Nanex is now seeing in the option realm. Should there be an even modest deviation from the expected and thus priced in (and it is again time to load up those Syntagma square cameras), tomorrow has all the hallmark warning signs of yet another Greece-induced flash crash.

We have been warning that 2011 is a carbon copy of 2010 for months now. It will be supremely ironic if Greece is again the cause for the historic market wipeout event of the year.

And while we are on the topic of irregular option activity, we would like to present some further just released thoughts on option quote stuffing and OPRA time stamping of options trades courtesy of Harold Lanier:

Immediate regulations should be put in place to:

  1. Force the Option Price Reporting Authority (OPRA) to time stamp all option data as it occurs not when it can be pushed out of the queue.
  2. Force the nine Option Exchanges to stop allowing “Quote Stuffing.”

OPRA transmits option quote data via 48 different lines.  Each line is designated for symbols in a specified alphabetic range.  For example, line 1 is for options between A and ADMZZ, and line 38 is for SPY – SPYZZ.  This document will focus on line #38 because it is easier to research only one option chain rather than the other lines where multiple option chains would be required.  It should be noted that all lines appear to work similarly though the gates are set at different levels for each.

The attached chart uses the color scale on the left to plot the quote rate in quotes per second for the 48 lines plus a total quote rate for all lines.  The X-axis is time in milliseconds starting at 15:14:59:000 and ending at 15:15:01:200, the Y-axis is the quote rate in quotes per second. The bold black line is the sum of all of the 48 quote rates.  In this chart the Total (Black line) makes a big spike at around 15:49:59:650 up to about 1.5M quotes per second.  This spike is within the OPRA limits of 3.5M quotes per second.

At approximately the same time notice the bluish/purple line (#38) spikes up to about 150,000 and then flat-tops for about 100 ms then moves up to about 275,000 for a period and then drops back off.  This flat-top behavior occurs frequently throughout the day in all channels.  Statistically, a flattop like this can not happen unless the data flow is being controlled by a governor/gate which is assumed to be done by OPRA.

Since the chart is plotted in quotes per second and each instant is a millisecond, then it is assumed that the initial gate setting for line #38 is 150 (150,000/1000) quotes at any one instant.  There are approximately 2,152 SPY option symbols.  It would therefore take approximately 14.35 ms to completely update the SPY option chain for one exchange.  There are 9 exchanges so to update all exchanges’ quotes (19,368) would take 129.12 ms.  As can be seen the flat top gate is increased to 275 after 100 ms which allows more data to flow.  Using gate two, the time to update all exchanges is reduced to about 116 ms.  This demonstrates that any significant market move creates a significant data delay.

The immediate issue with this gated system is that the data coming out at 116 ms is actually information from 116 ms ago though it is time stamped as current data.  This improper time stamping is a significant problem.  Data should be time stamped when generated, not when pushed out of the system.  Obviously, proper time stamping is necessary for a trader to make knowledgeably trades.  The inability for researchers to adequately understand what actually happened during the “Flash Crash” is further evidence for this need.

In a previous post to the SEC’s Concept Release questionnaire

It was assumed that the eventual intent was to use “Quote Stuffing” to clog up the entire option market.  Now, understanding the 48 different broadcast lines, it is obvious that the attacks are actually at specific stocks at different times.  Since the post it has been demonstrated to the SEC’s Compliance Inspectors that unnecessary high quote rates are now being broadcast from all option exchanges.  With rates reaching as high as 7,000 quotes per second on a single option symbol and a day where 4,487 attacks were in excess of 1000 quotes per second on just the BBO data.

On June 17, 2011, the same day as the chart above, the best bid on the SPY_20110630_137_Call flip flopped back and forth between ISE 83 contracts at 0.01 and C2OE 150 contracts at 0.01 all day long at a rate of approximately 100 changes per second.

oSPY_1130F137|09:30:04.125|ISEX|     0.01| 83|NationalBBO
oSPY_1130F137|09:30:04.125|C2  |     0.01|   150|NationalBBO

oSPY_1130F137|15:14:59.650|C2  |     0.01|   150|NationalBBO
oSPY_1130F137|15:14:59.650|ISEX|     0.01|    83|NationalBBO

oSPY_1130F137|16:00:00.000|C2  |     0.01|   150|NationalBBO
oSPY_1130F137|16:00:00.000|ISEX|     0.01|    83|NationalBBO

Detailed time and sales by exchange shows that the C2OE was placing and canceling its 150 contract order at a continuous rate of about 50 times per second for the whole day.  All of the option exchanges are now charging cancellation fees to supposedly stop this type of public activity.  At $2 per cancellation the above placing an order and cancelling would cost a trader about $2.34million for the day.  It is safe to assume that the activity is not being done by the public.  This narrows the search for the bad guys down to those exempt from Exchange cancellation fees.

Unnecessary activity like this adds to the data flow that has to be handled by OPRA to broadcast quotes.  It is obvious that strategically placed burst of data chatter (Quote Stuffing) can easily blind one of the option market data lines without appearing to disrupt the total OPRA stream.  Quote Stuffing must be stopped.

Proper time stamping should assist in detection of data delays.  OPRA certainly publishes statistical numbers such as average quote delays which are presumably used to determine if OPRA is meeting its mandates.  All time stamping, both in the option market and the equities market should be done as the event occurs, not when the information is finally pushed out of the queue. 

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SilverDoctors's picture

Ted Butler has been harping on the damages HFT is doing to the silver market almost non-stop lately.  Good luck getting the regulators to do anything about HFT fraud.

Tyler Durden's picture

We have been harping about the damage HFT does to every market before anyone had even heard of HFT.

Michael's picture

There could be a flash crash in July's unemployment numbers.

Does ZH have a pole or estimation on how many state public employees will be laid off nationwide come July 1st, the beginning of most states new fiscal year?

There's going to be a lot of crying, weeping, and gnashing of teeth this go round.

By the way, July4th is the end of the spring home selling season as most buyers must have a signed contract in hand by then if they are going to get their kids enrolled in their new home school district by closing time.

Michael's picture



How many Obama wars does it take for a staunch democrat's head to explode?

DeadFred's picture

And please keep it up. What's the price of a couple of Molotov cocktails? Thats all anyone has to spend (plus contractor's fees) to set off another crash event tomorrow. I don't think they ever caught the thugs who torched the bank on flashcrash day that gave those pics that set the right mood for Flashcrash 1.0. Anyone think that neither the squid nor any other banker would stoop that low for a few billion? Not me.

The Fonz's picture

Open a "Riot" account today and recieve 10 free incendary devices! Today only! Also we'll give you 10 bucks to open your account. thank you!

DoChenRollingBearing's picture

@ Tyler,

GREAT work re HFT and flash crashes and other damage to J6P.

I will never forget that day in May when the Dow was down 300, then a half hour later (on the way to the range to shoot some rounds) I heard the Dow was down over 900...  A true "WTF Moment" for me...


Find a way for me to mail physical FRNs, and becomes only the 2nd site I give money to...  You guys have my email...

TruthInSunshine's picture

Checklist of 'Oh Shit' -

  • Near Record or Record Margin
  • Near Record or Record Leverage
  • An Unregulated and Private Derivatives Market With a Notional Value Approximated at 600 Trillion USD, Which Will Ultimately Necessitate More Bailouts of 'TBTF' Entities Under Threat of "Martial Law" & "Tanks in the Streets" When Certain, Special Entities Lose Their Wagers
  • Excessive Governmental Meddling That Distorts Supply/Demand Curve
  • Excessive Central Bankster Meddling Via Monetary Policy Distorting Supply/Demand Curve
  • Complete Lack of Transparency As To How, What, When & Where Central Banksters Are Doing Things
  • An Accumulated Debt Overhang Built Over 40 Years That Puts Interest Component On National Debt, Alone, At Several Multitudes of What The Entire National Debt Was Just 20 Years Prior
  • An Accumulated Debt Carried By the Federal Government So Large That Nearly 30 Cents of Every Dollar Borrowed by Federal Government in Form of Annual Deficit Spending Goes Toward Interest on the Debt
  • A Structural Change in Employment Base Whereby a True 20% of the Workforce (18 to 60 Year Olds - Not Disabled) Can Not Find Permanent Work
  • A Structural Change in Employment Base Whereby a True 30% of the Workforce Can Only Find Work that Puts Them In 'Working Poor' Status
  • A Structural Change in the Economy & Society Whereby a True 50% of the Population is Dependent on Direct Government Aid & Subsidization In Order to Meet the Basic Expenses of their Day-To-Day Subsistence
  • Having The 'Financial Services' Industry Constitute 40%+ of the U.S. Gross Domestic Product, While The 'Manufacturing' Sector Consitutes Roughly 16% (Exact Inverse of Where Things Stood in 1968)
  • The U.S. Government Spending 1.41 for Each Dollar of Revenue it Receives On An Annual Basis.
  • Having Property Taxes at the Local Level of Government Grow 480x Over In 80 Years in Real Dollar Terms
  • Having The Government Move From A Model Whereby It Is Able to Balance Its Budget Taking a Mere 6% of the Average Annual Income of Americans in 1913 to One Whereby It Is Running An Annual Deficit Equal to 16% of GDP and Has A Debt of 108% of GDP (It's Actually Much Higher Than That) While Taking Nearly 20% of Average American's Incomes (This Nearly 20% Doesn't Include Sales Tax, Property Taxes, Use Taxes, Permit or License Taxes/Fees, License or Registration Taxes/Fees, State Income Taxes, Death Taxes, Personal Property Taxes, or a Myriad of other Taxes).
  • Having 3 Segment of the National Annual Budget Consume 80% of Spending: Medicare, Social Security & Defense
  • Having a Congress, Executive & Judicial Branch of Government in 'Deep Capture,' That Works For the Best Interests of the Military-Industrial-Financial Complex, Always
  • Having Sacrosanct Provisions of the Constitution Gutted, Shredded & Vaporized So Completely That The Constitution Becomes A Mere Reference Point & "Sometimes Persuasive," Rather Than A Mandatory Roadmap


What have I missed?

I know that I missed a lot.

In other, cheery news:

Local TV: Water has leaked into building containing radioactive material at Ft. Calhoun nuke plant — “That water we treat as radioactive waste” (VIDEO)

Chief: “We have fire all around the lab – It’s a road away” — “Zero percent containment”

Cooling pump fails at New Jersey nuclear reactor, plant shut down — Remains in ‘hot shutdown’

Peak Everything's picture
  • physics & economics prevents any combination of alternate energies from filling in for declining net fossil energy
  • total net energy in terminal decline, real growth no longer possible, most debt worthless
  • $1 US (1990) equals 9.7 mW of power, total global wealth will decline soon
  • 4 degree+ global warming this century is now past point of no return, expect harvest declines and increased frequency of disruptions to the economy
  • all major fisheries will have collapsed within 15 years due to over fishing
  • declining food & wealth + increasing population = trouble
  • majority of citizens unable or unwilling to understand what is going on, expect dangerous politics
zhandax's picture

DoChen, you have to think more like a banker.  Take your FRN to the supermarket or drugstore and buy a Visa gift card.  Use that, the Bernank's name and the address of some trailer park in Des Moines.

SheepDog-One's picture

I remember back then when people were still calling HFT a 'conspiracy theory'.

falak pema's picture

when will the US financial community commit collective suicide around the naked derivatives play all HFT'd into manipulated "fast eddie" pool sharking?

This 600 trillion cloud has to net out one day, and when it does the nodes will all collapse like a spider's web on the porch that implodes when the breeze blows hard. WB7 had a good picture of it with the nodes all going from green to red, like burning dominoes. A true recession/depression will drive that trend like an avalanche on snow mountain.

Ted K's picture

I criticize you on some things Tyler, but I got your back on the early HFT info and call.  And we out here in "fly over country" appreciate it.  I wish you would call out FINRA as much as you do the SEC, as FINRA is really the ones pulling the SEC puppet strings.  But you are more informative on market shenanigans than WSJ or any mainstream outlet for certain.  WE DO APPRECIATE IT TYLER AND PLEASE DON"T STOP

spekulatn's picture

Outstanding post ZH.

mfoste1's picture

does anyone know where we can watch the vote in real time?

fellatio is not fattening's picture

I'm sure CNBC Europe, just hit mute

fellatio is not fattening's picture

I have to admit, when I started investing as a 15yr old in 1975 all that was available was a quarterly report that was 30 days old when it was available, than real time quotes were awesome, as most were 15 minute delay, so this, this makes my eyes do a Marty Feldman and my last 25 hairs stand up, but it's the world we live in and in 30 years someone will look at this and think, man, how did we survive?  Thanks for the info and your parents should be proud.  So are my DIA, SPY puts and my Gold Futures going up or down Wednesday?

monkeyshine's picture

TPTB benefit from any information that they can get before you.  It's not just paper bags of cash given to the CFO's secretary's apprentice (though that helps).  There is no reason why all exchange data cannot be made available in real time to all players. Yahoo Finance gives you stock info, but not futures info, commodities or options.  After the Calamities you would think this would be something they would push as an easy one, but nope. Of course I think all the dark pool data should be shared as well, and more, but at a minimum option info such as time stamp, volume, trade at bid or at ask, etc should be freely available.

Yeah I know its better than it was in the 70's.  It should be better than it was in 2008. But I know I'm preaching to the preachers by posting here.

SheepDog-One's picture

Youre assuming survival of the greatest world depression? 

Flounder's picture

And this type value, benefits the greater good and does God's work in what way?

YesMaybe's picture

I was under the impression that neither value nor money are created in a stock market.  If they are, I'd like an explanation of when and how.

Oh regional Indian's picture

YesM, that statement went right to the heart of the matter. Really well said, it's true.

A stock market creates only the mirage of "profit".

I'd say that's quite the insight!~


LudwigVon's picture


Why would anyone be under the impression that the equities market creates money?

Value? Sure, value for small companies looking for funding and value for sheep looking to diversify out of paper currencies and invest in a company that they believe will grow.


YesMaybe's picture

Seriously.  Are you saying value is created in an IPO, in trading later on, or in both?

Case 1, IPO.  How does my taking a company and selling it in shares to a bunch of people create any value for anyone?  I get their money, they get the company, but the money is the same as it was before and the company is as well.  It's like if I buy a bicycle from you for $10: the $10 is still $10 and the bicycle is still the bicycle.  The only 'value' I could see being created in its being a limited liability company so that it could do all sorts of nasty shit without the owners being liable for it.


Case 2, trading.  I buy a share of IBM or whatever for $5 from some Ms. X.  She gets the $5, I get the share.  The $5 is still exactly $5 with which one can pay a $5 debt and that's it, and the share still represents ownership of a certain unchanged fraction of IBM.  That I own it rather than her doesn't make a difference to IBM.  Where's value being created?  I later sell my share for $6 to Mr. Y.  Where's value being created? 


Seriously, tell me where and when value is being _created_ and what this value consists in.  Next thing you'll tell me that value is created in all exchange?  Like if I buy a loaf of bread for $1 and sell it for $2, that I've created $1's worth of value?

A Broken Bear's picture

With regards to Case 1 - Consider the Option of a Company going down the IPO path to raise new capital, i.e. Currently company is worth $10, and are now raising a further $5 to use that money to invest in a new Dry Bulk vessel (just to add to the current vessel glut), the company is now worth $15 and in an ideal world that $5 will create further value as the vessel is proiftably used over its life.


The joy is, after realising buying a new Dry Bulk vessel was a bad idea, investors have very little recourse to do anything about it(unlike banks who can pull the plug on your company)

YesMaybe's picture

ok, this exactly proves my point, whether intentionally or not.  Before the trade, the company is worth $10 and the investors have $5.  Afterwards, the company is worth $15.  No change except in distribution of claims: the previous stockowners now hold 2/3rd of a claim on $15's worth, instead of 100% of a claim on $10's worth, and the new stockowners hold 1/3 of a claim on $15's worth instead of $5 cash.  Value is the same overall.  As you point out, the new value (if there is any) is not created in raising the new capital (which is what happens in the stock market) but in the concrete uses to which the capital is used (which is outside of the stock market).  It's just like the simpler case: I buy $5's worth of seed, sow it and sell the resulting $20's worth of grain.  The value is created in the farming (in which nature plays its role, of course, not only the farmer is 'creating' value), not in giving cash for the seed or getting cash for the grain.

Al Gorerhythm's picture

You have to remember that this kind of..... er,,,, trading adds liquidity to the market. Where've you been?

SumSUN's picture

Learning is good.  Thanks 0 hedge.

vegas's picture

Long July Molotov cocktails - short July ECB credibility. If only it could be so.

Great post TD.

phungus_mungus's picture

Skynet acting up again?

Al Gorerhythm's picture

There are no markets. There are only interventions:- Adrian Douglas, GATA.

randocalrissian's picture

I guess this means all of my profitable animal spirits trades tomorrow will be canceled so they can buy more abstract chips for the HFT bots.

camoes's picture

Maybe next time the SEC will blame mmorpg players...

gwar5's picture

Amazing get, Tyler! I'm impressed.  BTFD, Bitchezzz! It might be a real whopper!

zorba THE GREEK's picture

 It's their game. They don't want an even the playing field. The only way to beat

 them is not to play their game. Buy physical, unleveraged, silver and hold on.

 They can effect the dollar value of silver over a short timeframe, but they can't

 change the number of ounces you owe. Ounces will be the true measure of

 wealth, not dollars or any other fiat currency whose fleeting value is based on

 some arbitrary number agreed upon by fools and jackals.




XenoFrog's picture

Desperation is a stinky cologne. Stack your silver, people.

DeadFred's picture

Is there any reason the down-then-up nature of the last flash crash will repeat itself? I can already hear the announcement, "After this totally unforeseeable event we find the need to initiate QEIII..."

Al Gorerhythm's picture

Known as The Geek Bailout.

carbonmutant's picture

French Greek Rollover Plan Depends Upon No Cut to Credit Rating to Default

Fitch Ratings will “very likely” deem Greece in default if the European Union goes ahead with a plan to get private investors to roll over their Greek bonds as part of the Greek rescue.

zorba THE GREEK's picture

 Please don't say roll-over. Greeks get very excited when someone say roll-over.

blunderdog's picture

Given considerations like these, plus the recent proclaimation from Meredith Whitney that Friday is going to be a day of reckoning for the muni market, I find it difficult to imagine just how any dire prognostications could come to pass.

Seems the minute you've got it figured out, you're wrong.

But's an exciting time to be paying attention.  Glad I don't get vacations any more.