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Is An Options-Based Market Flash Crash Imminent?
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:
- 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.
- 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
http://www.sec.gov/comments/s7-02-10/s70210-283.pdf
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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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.
http://www.silverdoctors.com/
We have been harping about the damage HFT does to every market before anyone had even heard of HFT.
+1
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.
OT
Query;
How many Obama wars does it take for a staunch democrat's head to explode?
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.
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!
Who cares about your bet if the casino is demolished?!
http://dont-tread-on.me/who-cares-about-your-bet-if-the-casino-is-demoli...
@ 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 zerohedge.com becomes only the 2nd site I give money to... You guys have my email...
Checklist of 'Oh Shit' -
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”
Report: Radioactive tritium very close to Los Alamos fire, about half a mile away — Lab would be the last to tell you if there was a serious problem (VIDEO)
Cooling pump fails at New Jersey nuclear reactor, plant shut down — Remains in ‘hot shutdown’
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.
Maybe Soros???
Soros Tells Reuters: "We are on the Edge of Financial Collapse"
http://www.reuters.com/article/2011/06/26/us-europe-soros-idUSTRE75P0NW2...
I remember back then when people were still calling HFT a 'conspiracy theory'.
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.
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
Outstanding post ZH.
does anyone know where we can watch the vote in real time?
I'm sure CNBC Europe, just hit mute
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?
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.
Youre assuming survival of the greatest world depression?
And this type of...er...trading?...creates value, benefits the greater good and does God's work in what way?
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.
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!~
ORI
http://aadivaahan.wordpress.com/2011/06/28/thoughts-and-a-heads-up/
Seriously?
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.
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?
YesM, full agreement. It's a little beyon dsemantics too.
http://aadivaahan.wordpress.com/2010/07/24/value-vs-price/
ORI
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)
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.
You have to remember that this kind of..... er,,,, trading adds liquidity to the market. Where've you been?
Learning is good. Thanks 0 hedge.
Long July Molotov cocktails - short July ECB credibility. If only it could be so.
Great post TD.
Skynet acting up again?
Of course. The entire edifice is an total fraud.
http://www.youtube.com/watch?v=e2Xs-pzRyi8
There are no markets. There are only interventions:- Adrian Douglas, GATA.
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.
Maybe next time the SEC will blame mmorpg players...
http://en.wikipedia.org/wiki/Corrupted_Blood_incident
Amazing get, Tyler! I'm impressed. BTFD, Bitchezzz! It might be a real whopper!
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.
Gold is OK too.
Desperation is a stinky cologne. Stack your silver, people.
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..."
Known as The Geek Bailout.
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.
http://www.bloomberg.com/news/2011-06-28/greek-rollover-plan-needs-no-de...
Thanks carbonmutant.
Gold is very OK
Please don't say roll-over. Greeks get very excited when someone say roll-over.
LOL!
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.
[Seems the minute you've got it figured out, you're wrong.]---blunderdog
When it comes to creativity, Picasso's got nothin' on bankers.
ALTER TABLE ...
Makes you wonder if the electronic brains have been hacked. repeat. wonder if the electonic brains have 010101010101010101010
High Yield bond exodus:
http://ftalphaville.ft.com/blog/2011/06/24/605331/behold-the-high-yield-...
stockcharts.com AFBIX
http://ow.ly/5sD6t
(Another one to look at PHBRX)
duplicate post
Soviet communists never doubted party itself, only particular glitches/elements within it.
Here, its HFT and similar malpractices. If only we could purge markets from those black sheep, this whole religion, together with its mystifying terminology and practices, would make sense.
For a very long time Catholic church held mass exclusively in Latin. Not understanding what those powerful priests are saying builds stronger faith/fear>control of ordinary people who have to work and feed kings and clergy (professional "market" parasites nowadays).
Its all scam.
Soviet communists never doubted party itself, only particular glitches/elements within it.
You have no clue.
Goatboy from Narnia? Nice! Your screen/book namesake changed my life! Imagine that.
ORI
I guess for the worse since you also ended up here.
I am sorry.
For the better in ways you cannot imagine! Strange as that may sound.
And I'm sure you agree it's good to be here! ;-)
ORI
Good for you. I really cannot imagine.
I see ZH as a sort of epicentre of everything I want gone.
So, I am coming every day hoping to see huge title: "Its finally over, bastards hanged themselves".
Highly unlikely considering how deep in shit we are.. it will have to break violently.
Banksters in trouble is when flash crashy type things happen.
I saw this first-hand in my IB platform for the past two days in ES options.
The ask suddenly went into a loop of n+1 for a series of calls and puts I was watching and did not stop incrementing until the market normalized.
Also, as someone who trades options actively, there simply was no market during the flash crash and wouldn't be in a similar melt-down/melt-up scenario in the future. The market went bidless and askless for the entire period. The small spec has a hard enough time making a two-sided liquid market in equities, so the effect on options is devastating. You'll be lucky to find a single buyer and seller pair for a specific option contract when the OI is typically measured in hundreds or thousands.
Actually, options would have no effect in a market where the broad market is bidless. Algos trading stat differences wouldn't really touch the market as there is no liquidity to make the arb trade, which assumes that you can get on several cancelling positions.
Market maker wouldn't be making a market in options either as he's A. either assuming market won't move so can take on your position as is within existing inventory; B. doing conversions/reversals to accomodate your position; or C. offloading existing position onto you
Since spreads get pretty bad in large moves, you have to hedge with underlying. Underlying isn't very liquid in a market crash, so not much option trades either.
The only existing positions you have kicking around are retail positions and they do not move the market. Hence I don't think the options matter much in a complete bidlessness.
There may be a hedging update argument that goes something like this:
You have option positions with long delta, short vega; underlying starts to drop. Gamma kicks in and adds more hurt, now you have more positive delta. Crap! gotta get rid fo some deltas. I know! short the underlying. It can be said that this can create a positive-feedback hedging loop. However, the issue with this argument is that it works within reason, say you're talking about +/- 20 point move on SP500. Liquidity is still very good even if the price is falling. If you're dropping 50 points all of a sudden, that matters less as it's hard to get even remotely good fills.
I take several issues with napkin calculations:
1. you can fire off quotes in parallel, so if it takes x to send to 1 exchange, it will still take x to send to 9 exchanges given a cluster of 9 systems for example.
Second, you don't really care about bid ask to the same degree as you care about traded contracts. Bid/Ask around trade time is more valid than bid/ask around quote stuffing, since these are not intended to be traded in my opinion, more of a network saturation test. But in another way, it's good as it forces people to prioritize which data they would drop.
3. $2 per option cancelation fee? Are you sure?
4. When you subscribe to a datafeed, you can subscribe to each individual contract. There' no reason why you want to have real time data on 60% OTM options. Trades are somewhat slow. Think that $1.01 illiquid stock.
5. These systems can easily lose money if someone decides to play with them buy sending a stream of large market buy orders only to reverse it later.
deleted
This is probably one of the most important posts I have read on ZH in the last mth or so, the option market desperately wants a major sell.
If the bet is right, Greece hits the yes/no vote trade volatility and from already major equity meltups US close/Asia open. A HFT inspired flash crash is likely regardless of any vote, I am thinking it will ping pong off risk trades stocks, FX, warrants etc.
of course there is the EUR/CHF....Orly?
Any sane group of humans would never have allowed trades to progress beyond the physical (human) level.
Want to solve the problem?
Make the time between trades one minute. That's right. One minute. You have to think for 59 seconds about the next trade, and that is time enough for the rest of the world to bet against you. If you are monkey'ing around, you'll get squashed. If it is a real trade, then good luck.
Of course, we'd have to restore the rule of law too, but you have to start somewhere.
When glorified calculators programmed by PhD goons control the "markets" you don't have a market, and you don't even have a casino.
Keep it up Tyler.
I'm (so) glad I'm not in all this options stuff. I'd be grey-headed and couldn't sleep at night.
You high-strung gunslingers, go ahead and knock yourselves out. I'll sit here flipping a silver coin, loving that silver sound, watching ya'll battle it out.
I know it's not HFT, but look at the one minute charts for Spanish 35 and Italian 40 indices from mid yesterday to early today, to see just how manipulated everything is. The two look more or less identical.
O.K. Spain is physically near to Italy, BUT they are two different indices, supposedly.
Anybody - is there a live vid/cam for the greek vote?