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Is The Rambus HFT Fat-Finger A Precursor Of Things To Come?

Tyler Durden's picture




 

An intersting take on the recent violent move in Rambus stock, which may be explainabe by quirks in the HFT matrix, from Dennis Dick of Bright Trading.

 


HFT Market Making May Lead to a Crash

Rambus (RMBS) fell 30% today in a
matter of five minutes.  It immediately
bounced back.  The cause for this move
was speculated as a trader with a “fat finger”. 
A trader simply messed up and sold too much stock accidentally, causing
a swift and violent sell-off. 

The trades were later deemed erroneous and busted by the
exchange.

But what if the real cause wasn’t just a trader with a “fat
finger”, accidentally selling too much stock? What if it was something more
serious?  I believe it is. I believe the
real cause for this move is a major concern for our markets. The real cause may
have been high frequency market making gone bad.  Let me explain.

Market making is the practice of quoting both bids and
offers on the same security, in hopes of capturing the spread. Market making
has existed in our markets since the beginning. 
Traditionally it was done by floor brokers, floor traders and
specialists.  With the rise of the
internet in the last 1990s, new players emerged in the market making
practice.  Proprietary traders,
and E-traders began to play the game. 
This led to increased competition and tighter spreads.  But in the past five years a new player has
emerged, and this player has become dominant, knocking many of the competitors
out of the game.  This new player is the
high frequency algorithmic trader, and it’s not a person, it’s a computer.  70% of our daily volume is now done by
algorithmic computer systems.  Much of
this volume is market making.  Why has
the HFT computer become such a dominant player? 
It has to do with their edge.

High frequency algorithmic systems have been programmed to
step inside the NBBO (National Best Bid and Offer), and be the best bid and
best offer.  This puts the computer
system at the front of the line to be first for execution, and gives the
computer the best chance to capture the spread. 
Unfortunately, this practice is dominated by a few large firms, and they
have driven traditional market makers out of the market.  If a traditional market maker places a bid,
the computer automatically steps in front. 
In some cases, it steps in front by as little as 1/100th of a
penny (a practice called sub-pennying, which is
discussed on my website http://www.defendtrading.com).  

These programs are very predatory and step in front of the
NBBO on a constant basis.  This has
driven liquidity providers out of the market. 
Our proprietary trading firm, Bright Trading LLC, in the early 2000s,
used to account for 2% of the volume on the NYSE.  Now we account for just a fraction of
that.  Our 400 traders used to provide a
substantial amount of liquidity to the market. 
But due to predatory HFT market making practices, we now provide very
little liquidity.  We are now liquidity
takers.  The rational is simple, if we
place a passive limit order (providing liquidity), the
HFT algorithmic programs simply step in front of us.  If we do get filled on a passive order, it is
almost always because we are wrong.  You
are sub-pennied when you’re right, filled when you’re
wrong.  Hence, there is no point to us
providing liquidity.  Other proprietary
trading firms, floor traders, and specialists are in the same boat.  There is no way for them to compete with the
algorithmic programs, so they don’t place passive orders.

Without traditional market makers, willing to step up and be
the buyer of last resort, we risk having more incidents, like the Rambus incident.

Computerized algorithmic market making works in any type of
oscillating market, as the computer can keep flipping out of it’s
longs, and covering it’s shorts.  It
works in a trending market, as long as there is some type of choppy trade.  The problem lies, when the computer system
can’t flip out of the position. Most algorithmic systems are programmed with
some type of risk parameter.  If this
risk parameter is breached, the computer will dump it’s
position and cut it’s losses.  This is
what may have happened in RMBS today.  An
algorithmic system making markets on the long side, got too long, and was
unable to wiggle out of the position because of the follow-through in selling
pressure.  Once it was down so much in
the position (the risk parameter was breached), it dumped.  This simply added fuel to the fire.  That is why the sudden plunge to $16 happened.  If you check the chart, you will not see
this, because Nasdaq busted
all trades under $22.  But don’t kid
yourself, these trades happened, and we should be very alarmed, because it will
happen again, and it may happen to the entire stock market.

High frequency traders make markets on ALL stocks.  As they continue to take dominance, and as
more and more liquidity providers are driven out of the market by these HFT
predatory algorithms, the likelihood of a crash continues to climb.  All it takes is a little bad news, and a
breach in the HFT’s algorithmic system’s risk
parameters, and we’re in a lot of trouble.

This has happened before, it WILL happen again.

Rambus was ONE stock today. Imagine
if it was the entire market.

Dennis Dick, CFA

Bright Trading LLC

 

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Thu, 01/07/2010 - 18:56 | 186190 bugs_
bugs_'s picture

Happened to DNDN earlier - check April 28'th.

Interesting activity in options.

Thu, 01/07/2010 - 19:14 | 186207 Reductio ad Absurdum
Reductio ad Absurdum's picture

Whether it was a "trader with a fat finger" or a flawed computer program, why were the parties involved given a "do over"?? How can this be legal? Is there some legitimate reason for nullifying the trades or is this a case of insiders helping each other out? Anyone actually know the answer?

Thu, 01/07/2010 - 19:37 | 186236 Rainman
Rainman's picture

....machine malfunction voids all plays .

On the front of every slot machine in Vegas too.

Fri, 01/08/2010 - 03:54 | 186560 i.knoknot
i.knoknot's picture

i assume the parallels you imply aren't lost on most ZH readers...

Thu, 01/07/2010 - 19:38 | 186238 Cognitive Dissonance
Cognitive Dissonance's picture

Rest assured all we will hear about this is the trades were busted in the interest of a fair market, trust us we know what we're doing, go back to work on your terminal or we will audit your ass so thoroughly you won't be able to sit for a month, thank you very much.

Thu, 01/07/2010 - 20:19 | 186288 aurum
aurum's picture

trades can be busted anytime...as long as they believe the trade was outside the price that was warranted by market conditions.i had 80k go up in smoke with a busted trade on USD/AUD....with that being said i still believe dennis is right

Fri, 01/08/2010 - 01:31 | 186514 overbet
overbet's picture

The DNDN trades were more erroneous according to their criteria on their website but those trades were ruled to stand. My guess the DNDN trades just hurt the retailers and not the HFTs.  

Thu, 01/07/2010 - 20:36 | 186304 drwells
drwells's picture

That's how the "market" works in Amerika now. If we decide the price or number is too low, why we'll just mark it to something else. Works for houses, bank stocks, crappy loans, stock indexes, Trashuries, asset-backed securities, dollars, labor statistics, votes, the list goes on.

Fri, 01/08/2010 - 02:42 | 186540 Oracle of Kypseli
Oracle of Kypseli's picture

Once you have low volume in the market, a cash rich trading desk that has a large position in a smaller stock can start selling fast and furious. Once it reaches a point where many stops are taken out, they re-buy their positions. Most of the players with those stops may not have had enough time to react. Bingo! It can tale a few minutes it can take a half day.

It helps if you have someone spread negative rumors once you dumped it. Then you start buying. When the rumors are denied, you back-up the truck.

It happened to me when I had 30 contracts sorting the yen against the dollar 120/1 at the time. Because of travel (22 hours), I placed a stop at 117. Guess what, before the NY close the Yen strengthen to 117 for a few seconds and back to 120. The following day yen to 122.

The big boys did see 30 contracts sitting there with a stop at 117 and they went down and got them. Game over.

Read the book "Gamblers don't gamble"

 

       

Fri, 01/08/2010 - 04:22 | 186564 i.knoknot
i.knoknot's picture

+10

been there too. w/SRS last year.

post-mortem, i noted that the graph dove down, literally touched my stops then ran back away while i was at a meeting. low volume, etc.

while i know we all (superstitiously) think they are pickin' on us... (they are, really...) this swoop was *way* out of the norms for that window of time. Real or perceived gaming, i'm now out.

hell, if i were a market-maker and could see all those clusters of stops and limit orders... i'd do the same thing. unless it was illegal, of course.

i read the ZH article last week on S&P gains in the after-hours gaps, and am quite comfortable this market will crash the same way, and most folks' stops won't even be 'seen' by "the machine", let alone executed, until well after their precious funds are greatly reduced. all these non-realtime brokerage accounts with fancy web interfaces... toast.

at least FX is 24hr and can't gap quite in the same after-hours way.

Thu, 01/07/2010 - 19:14 | 186208 Grandpa Bear Hug
Grandpa Bear Hug's picture

Erroneous trades...how nice.

I guess my short positions would not be busted by the exchange when some "fat fingered" bull buys too much.

Thu, 01/07/2010 - 19:19 | 186216 jedwards
jedwards's picture

Dammit, I didn't think to download the ticks of RMBS, that would have been pretty interesting to see.

Fri, 01/08/2010 - 05:34 | 186575 overbet
overbet's picture

 

Thu, 01/07/2010 - 19:26 | 186221 Zro
Zro's picture

Is this similar to the ICE redaction of DXY trades that exploded higher a month or so ago? This seems to be a more frequent phenomenon.

For the stock market as a whole, wouldn't the trading curbs be triggered if a large move happened?

Thu, 01/07/2010 - 19:49 | 186258 deadhead
Thu, 01/07/2010 - 19:26 | 186222 Anonymous
Anonymous's picture

Its...

Thu, 01/07/2010 - 19:35 | 186234 merehuman
merehuman's picture

I am not a trader, in fact not in the market at all. But i read almost everything on zero hedge.

I notice more and more anger  in the posts recently  . When are you smart fellers gonna do something about this?

Asleep the sheep know not what to do about this. How do i fight the government when they make and break the law  as they see fit?

I am on the wrong damn coast. But seriously... Protest in the streets? you must be kidding! Checking the history, a lot of folks died. Write and call and be ignored.

My money is on you guys, you who have the money and the brains/talent/knowledge which most of us dumshits dont have.

If  WE have any power it rests we you. You boys and girls are the only and best chance we have.

There ought to be a way to use the market against them, and there probably is assuming we were willing for once to forego more profit.

I bet you all know the result of this criminal market continioning on this path.

What would happen if all traders quit?  Is there any way to create that? This wont wait till next election.

Thu, 01/07/2010 - 19:56 | 186264 MsCreant
MsCreant's picture

Sweetie, I'm a dumbshit like you. I keep posing the same question here. Somewhere they know that they are perpetuating the system by participating in it. A lot of them have cashed out and hold Cash and PMs as a form of protest and a way to starve the beast. But just like you are a carpenter and need your tools to earn money, these traders are in the same fix. "If I don't trade, then what will I do?"

And some of them are addicted to the adrenaline rush and could not stop to save their life, or their country.

I am also just tin hatted enough to wonder if there is a whole heap of stuff we don't know, like the governments are engaged in financial warfare. The too big to fails are Armies and the globe their chess board (the game of Risk would be better).

But they are not going to listen to us ask them to stop. They are worried they will lose their wealth if they do so and the next guy doesn't stop and wins the trade.

Obama said to buy stocks, and a few days later they started taking off. Knowing they have a "plan" and trying to game the plan is too tempting. Even with my modest Gold and Silver, that is what I am up to as well.

Meanwhile, I think you are right. This won't wait till another election.

Thu, 01/07/2010 - 20:18 | 186287 cougar_w
cougar_w's picture

I'd give even odds that the next US election will be a total clusterfuck, on a par with Mexico or Brazil, and will create enough market turmoil to convince some of the playerz to take their winnings.

And then it blows up.

The entire thing is a fiction, would take nay more than a feather to knock it off its wheels.

Your notion that some/all of this is economic warfare is interesting. I think one sign of this being true would be the imposition of massive, rolling punitive and corrective trade tariffs. Naval blockades were once routinely used as siege engines. Tariffs are little different. Messing with trade is the same as rolling out the big guns. Folk get tense. Real shooting is sure to follow. Much would be at stake if it reverted to economic warfare.

cougar

Thu, 01/07/2010 - 21:01 | 186329 SloSquez
SloSquez's picture

Yep, cougar.  You are correct, IMO, the oscillations will be wild.

Thu, 01/07/2010 - 23:05 | 186421 milbank
milbank's picture

I think in terms of this game, not to mention the next election, Obama is the Patsy.

Thu, 01/07/2010 - 23:25 | 186435 merehuman
merehuman's picture

I may be mistaken. Seems to me China in the 90s swamped us with their cheaper Earth minerals.

Our mines went out of business, a decade later it turns out they have most of these minerals on their piece of the earth and now wont let us have any! 

I think China has quietly been at war with us a long time. Now we keep pssing them of while we borrow their money and cheat them via inflation, sell them tungsten gold and insult them by lying.

Chinese dont take insults well, set great store by FACE which we have caused them to lose some.

Ms Creant, thank you for the reply. I am truly worried for our country. Having a grandchild just spurs me on to write here, hoping for a positive resolution, knowing there are only worse choices.

 

Fri, 01/08/2010 - 00:59 | 186501 Tethys
Tethys's picture

Interesting - I knew a Chinese fellow who believed that the US was using up the world's oil reserves while they were 'cheap', and sitting on a load of secret national reserves.  He believed that this was why the US government was so against companies looking for oil locally.

I wonder how far up the Chinese chain of command that belief goes.

Fri, 01/08/2010 - 12:39 | 186942 Anonymous
Anonymous's picture

The secret national reserve:

Gull Island, AK

-MobBarley

Fri, 01/08/2010 - 14:39 | 187200 Anonymous
Anonymous's picture

"WALRUS" : economic wargame against russia.
surprise result: China wins!!

http://www.politico.com/news/stories/0409/21053.html

Thu, 01/07/2010 - 21:34 | 186350 Miles Kendig
Miles Kendig's picture

The action is now so out of hand that those who do find themselves playing a multi-day game of risk need ever greater amounts of tweak to keep the flail alive.  Meanwhile, I am sure that there are folks still playing a good game of Go.  I'm just not sure that it's the Chinese that are since they appear to be as enamoured with hitting the glass bubble as everyone else....  Fact is that as time goes by it becomes harder and harder to hide what cannot be hidden to those that know.   If they only knew how they looked to the rest of us.....

http://www.youtube.com/watch?v=F8gB-_4-1EE

Sat, 01/09/2010 - 03:16 | 188155 MsCreant
MsCreant's picture

Works for the addiction aspect too. Your economy is on crack! Could be that easy.

Fri, 01/08/2010 - 03:40 | 186555 Hephasteus
Hephasteus's picture

It's simple. We are in an environmet that wants to kill. I mean so many companies are on the chopping block right now. They will DIE. You will see more corporate death this year and early next year than you can ever imagine. The probem is the powers that be in deciding to to keep what the world wants dead, alive will kill themselves in the process. It's all about losing faith. No matter how much you cherish and wish to believe you can make huge intertwined co-dependant social structures, you're going to lose your faith in that. Enlightened self interest will go on a killing spree very soon. It's ok to pretend it will turn around for a while. Once it get's apparent that it won't.... We haven't seen anything in the way of consumer lock down yet. The really scary stuff will come in a few more months. You think it's safe being big. It's like being radioactive. You can cast off tiny pieces of yourself to save the core. But it just makes you lose money faster. Gets you caught up in monentums you can't fight.

Sat, 01/09/2010 - 03:22 | 188160 MsCreant
MsCreant's picture

Sounds like all of us get to try out for Team Goldman, or JP Morgan. There will be no other team in town to work for. No nations, no locals, just giant corporations that you must be loyal to. They steal pensions and savings and want you to be grateful for it as they kill free enterprise.

Just venting.

But the business of can't fight em, it seems that even they define the terms of that fight. We need to get outside the box, big time, quick.

Sat, 01/09/2010 - 12:05 | 188388 Hephasteus
Hephasteus's picture

hat's exactly how it works. The lower self prescribes the treatment from the higher self. The treatment is not a cure. It's simply a prescription of how they want to be treated. Smug self satisfaction will get turned to dissatisfaction and action. It's that simple. You don't hog all the satisfaction and expect to get away with it forever. It's all coralling at this point. It's like physics. Every atom is able to give up it's higher shell electrons. You eventually get to a point where you stop being able to ionize the atoms. They just won't give up any more free electrons no matter how much you bombard them with energetic particles.

That's the exact analogy of what we are looking at. And you would think ok no problem. They are never going to change. They get to stay stable like this. Then you get to a situation where forces acting on things get too much for the situation and it sets up events that turn things to plasma that you don't think can be turned into plasma. These "things" are going to get ripped to pieces this year. There's always greater external forces than internal forces. Bring us the next titan. It's dissasembly time.

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

Fri, 01/08/2010 - 04:34 | 186568 i.knoknot
i.knoknot's picture

MsCreant: "I am also just tin hatted enough to wonder if there is a whole heap of stuff we don't know, like the governments are engaged in financial warfare. The too big to fails are Armies and the globe their chess board (the game of Risk would be better)."

+100

and *that* is the only way these seemingly rational people (BB, TG, AG, BHO, CONgress, SINate, etc.) might be sleeping at night, if *that* is what's really going on. the real game may be nothing like the the game we think we are watching, and the elites might be correct in their derisive chuckles about us suckers out here in sheeple-land.

i've got about three rolls of reynold's wrap on my noggin' with that very same gut feeling. seeing you, in particular, mumbling that, makes me feel quite a bit more sane. my friends think i'm nutzo, but tolerate me anyway.

Fri, 01/08/2010 - 08:21 | 186604 Argonaught
Argonaught's picture

No, you are nutzo.  ;)  Your list of those sleeping well is way to large for a conspiracy.  Do you believe that as freshment senators/reps show up in washington, they are told the 'secret' and all these rocket scientists are able to keep that secret?

There may be (probably is?) more than a whole heap that we don't know, but our government, or the great majority of it, is every bit as out-of-the-loop as we are.

Fri, 01/08/2010 - 14:58 | 187249 i.knoknot
i.knoknot's picture

sadly, i fear you are more correct than i want to believe.

ok alex, i'll take "more puppets" for $500

sigh...

Sat, 01/09/2010 - 03:51 | 188179 MsCreant
MsCreant's picture

More puppets it is!

The conspiracy isn't conspiracy per se. It is embedded in corporate structures, intinsic to the way it is profit driven only. It cares not for individuals and those caught up in them act to keep their jobs, but experience spiritual crises, maybe daily. The ones who are higher up don't experience this problem with conscience any more. They choose each other, who gets promoted, they make sure of it.

Now each (say US and China) is arriving at their structural shape, a kind of corporate socialism, by taking on the strategies of the other one. Saw a presentation on China recently that rocked my socks off. It was a study of their tobacco production and sales.  They are working to try and build more individualized feedback into their corporate structures from the fields on up to the top. They have processes in place which make it okay for workers to speak to management. It seems this is new and a big deal organizationally and culturally. At the macro level, they are allowing a strange kind of competition where, on one hand, the country is "the team" but on the other hand they compete to see which "company" can earn the most money. The winner's strategies/feedback is incorporated into other "companies" and they let it run awhile and evaluate it again. They are trying to get more "individualism" into their corporate structure, and we are eliminating it by eliminating the little guy.

I ramble here. The point is that our TBTF see what others are doing and admire the goodies they get out of having central control. China sees our adaptability and they are going after cultivating that trait without giving up too much control. This will look like conspiracy. Culturally, their practices are creepy to us. And ours to them. Bet some folks on their side of the fence see some of them as sold out when really they are acting more like us.

And these corporations/countries (it's like we are trying to form our China) go up against each other and it looks like politics and war to us. And it is, and it isn't. It is something else.

Maybe I described the blueprint for "God's work?"

Sat, 01/09/2010 - 04:21 | 188193 WaterWings
WaterWings's picture

+1

This read somewhat like a CogDis post. F'n great!

I always felt like the Chinese were enjoying Capitalism as much as they wanted - and then stopped when it didn't fit their tastes. Dipping their toes in the hot-tub.

I read sometime ago, maybe six months, that GS was buying up a lot of farmland in China. I thought at the time, "Those fuckers." And after reading recently that Soros is buying up productive farmland in Argentina I think, "Those fuckers."

Watching this horrorshow makes one realize that it is all unsustainable. Am I insane for imagining that there will be people starving to death in 1st world countries in the near future because of unsustainable policies? I mean, history (at least the version we generally agree is the "least manipulated") demonstrates that placing controls on individual choice always results in artificial famine, no? Isn't that how it always ends up!! Damn it all to hell! And the funny goddamn thing about the word "sustainable" is that it can be used in any glory-seeking context the destroyers want these days. Most people don't even now what sustainable means, it seems! They think it means, "You'll get a bag of free shit someday!"

Not that I want life-as-we-know-it to come to a screeching halt. What I want is for my future children to lose their virginity to their lovely virgin husbands/wives, and harvest golden wheat each year, watch their children grow old and have families of their own, sit around warm fires with warm drinks and tell stories of surviving hard weather and unforeseen hardship other than war, genocide, chemical weapons, torture, rape, and et fucking al.

Sat, 01/09/2010 - 12:49 | 188423 MsCreant
MsCreant's picture

+1 back at cha'. Lot of good nuggets in this post. Looking for bags of free shit is the problem (and it is shit to boot). Those farmland buys should terrify us, but more importantly, the locals. Someone is going to have to defend their claim to that land and it will get ugly.

I keep wondering, unsustainable (I agree) or inevitable? We have inflated population coupled with inflated standards of living. We could have wonderful lives with so much less. Inflated living standards keep us too busy chasing the means to the standard to stop and connect to one another. Which in turn makes us feel more alienated and alone, which in turn makes us crave more stuff to feel okay. Gotta go kiss ass, chase more paycheck, hate inauthentic trapped self, feel void, go BUY something, and have it all feel better for a minute. Intermittent reinforcement is the worst kind of conditioning to break.

Hope you are well. I see you as a dork, like me, who is a sponge soaking this economic stuff up. We can't contribute directly so much to that conversation, but we might have some insight into the "what next" that WILL need to happen. Maybe rescue workers waiting for Katrina to run through, hoping for the best, expecting to be overwhelmed regardless of our preps. Math and finite resources says there is no avoiding it. That people think peak oil is a myth, stuns me. Even if we have big hidden reserves, the idea that we should be diversifying so that we are not as fragile/dependent seem obvious to me.

Have a good weekend.

Sat, 01/09/2010 - 16:16 | 188615 WaterWings
WaterWings's picture

The level of willful ingnorance is astounding. I can only imagine that humans have always been that way, which is why so many always get trampled when heading for the exits. We have so many incredible resources and minds to cross-reference because of the internet - yet the same condition of naivite persists.

It's the "golden handcuffs" dilemma:

http://www.lewrockwell.com/north/north746.html

As you put it, too much time trying to get ahead, pretending that with all the turmoil around them the pot of gold is still at the end of the rainbow. And I do imagine that I will be overwhelmed despite my preps - chasing my own pot of gold.

Have a good weekend, too.

I am the dork!

Sat, 01/09/2010 - 23:28 | 188884 Miles Kendig
Miles Kendig's picture

Classics...  Thanx folks.

Fri, 01/08/2010 - 08:49 | 186619 Hacker
Hacker's picture

There are lots of things you may not know because you don't want to believe them. Once you know these things, then outrageous resource grabs by the elite start to make sense.

 

Peak oil

Population Overshoot

Climate Disruption

Resource Collapse

Fiat / Debt Overshoot

 

The US government is pwned and is facilitating the fleecing of the sheeple. The elite know that the gig is up soon and don't care about the long term because the only certainty is that long is ugly beyond belief.

Thu, 01/07/2010 - 20:05 | 186273 jedwards
jedwards's picture

I notice more and more anger  in the posts recently  .

 

You must be new around here.

Fri, 01/08/2010 - 03:22 | 186553 Hephasteus
Hephasteus's picture

LOL or he must be getting sensitized to it after a while.

Thu, 01/07/2010 - 19:53 | 186260 Anonymous
Anonymous's picture

I have noticed that most breaks will happen based on the size of the person who makes the erroneous trade, for example look at the stock UAUA went from 12-4 and then back to 12 on false bankruptcy rumors or DNDN from 25-4-28, how about STRN 5-12-5 orr GGC 7-46-20, there are literally a million examples of this, These trades were never busted. Then look at this move in RMBS 23-16-23 or the move we saw in GOOG last year when it went from 420 to 0 then closed at 390, amazingly these trades were broken and called erroneous, when clearly it was selling that forced mass liquidation amongst programs and large institutional holders both times, but one set of trades was broken and the other was not. If some dipshit prop trader is out there and gets some wacked out fills in a stock the nasdaq/nyse/arca could give two shits less. If goldman or getco or some large hedge fund gets the same dip shit fills all hell breaks loose and they rush to call the trades erroneous. It's literally a scam and if you can't see that then you are retarded.

Thu, 01/07/2010 - 19:53 | 186261 What_Me_Worry
What_Me_Worry's picture

That's not a problem.  When the market does a 25% dump because HFT leaves the building, the NYSE/NASDAQ will just cancel all of the day's orders and revert everything back to the previous close.

Problem solved.  Trade on!

This guy uses precise reasoning against HFT's.  Too bad those running the SEC apparently can't understand basic logic.  Maybe algos are running the SEC now too?  

Let's start sending our complaints to the SEC in binary.

Thu, 01/07/2010 - 19:58 | 186269 Bull v. Bear
Bull v. Bear's picture

01 100 0110 10 001 101010 01 01...

Thu, 01/07/2010 - 20:32 | 186298 SimpleSimon
SimpleSimon's picture

0100011001110101011000110110101100100000011110010110111101110101

If you want to send a FU to the SEC in binary

Thu, 01/07/2010 - 21:49 | 186372 Anonymous
Anonymous's picture

GS0100011001110101011000110110101100100000011110010110111101110101.com

Thu, 01/07/2010 - 19:55 | 186263 Anonymous
Anonymous's picture

The same thing happened to Dendreon (DNDN) back in April 28. It went from 21.55 on April 27 to 11.80 on April 28 (even lower during the day) and back to 22 on April 29. I remember nobody had a clue why that happened -- just a bunch of idiots going "huh".

Thu, 01/07/2010 - 20:05 | 186270 Racer
Racer's picture

and now... from www.igindex.co.uk

"Chart Pattern RecognitionOur new Autochartist tool helps you identify potential dealing opportunities."

so it is all patterns and swirls and forget fundamentals totally.

I do trade charts but I think it, well rather I thought... it essential to combine fundamentals and company earnings etc etc with the chart... but no longer. Welcome to the never ending pay out casino that is backstopped by the US taxpayers who toil like those that built the pyramids in Egypt for the dead pharaohs..

life hasn't changed in millenia has it!!!!

 

 

 

Thu, 01/07/2010 - 20:02 | 186271 Bull v. Bear
Bull v. Bear's picture

What else do you think the PPT is supposed to do, protect against massive buying...

Thu, 01/07/2010 - 20:12 | 186281 Anonymous
Anonymous's picture

Well Grandpa bear hug, just remember shorting is evil and propping up stocks is good.

Thu, 01/07/2010 - 20:29 | 186291 Zippyin Annapolis
Zippyin Annapolis's picture

From the Bright Trading website:

 

 

Bright Trading is one of the largest Professional, Proprietary Stock Trading Firms in the U.S., with trading rooms Nationwide (and Canada) with hundreds of traders. Formed in 1992 by two long time traders and friends, with the intention of providing the tools and capital necessary for serious traders to succeed. They have an expanding group of Remote Traders with individual managers.

 So let me get this straight we have a bunch of low tech franchised day traders craping on a bunch of high tech day traders (HFT). I mean like cry me a river.

 

Fri, 01/08/2010 - 00:37 | 186490 ganon
ganon's picture

I agree, they're just pissed off they missed the HFT boat. If Bright Trading had the talent/foresight they'd be riding the HFT wave. Sour grapes I say!

Fri, 01/08/2010 - 02:20 | 186535 overbet
overbet's picture

Bright traders use automated programs to enter thousands of orders simultaneously and programs to put on and take off trades. They do not do the collocation thing or compete in latency arbitrage. The real complaint is sub pennying and the warning being issued and is being mocked is by those that are ignorant or those that profit from the ignorant.  These meltdowns are happening more often and this market is fragile. It could drop 200 spoo points if the wrong news was released and they chain reaction began.  Do you think the HFTs are going to step in and provide liquidity? They arent stupid you know, they will more likely be hitting bids. You see the problem is unlike the old school market makers, HFTs arent required to maintain a market. They just step away until they can front run you again so this liquidity they provide is selective and it only occurs when it is a benefit to them and a detriment to you. 

Fri, 01/08/2010 - 06:50 | 186587 Zippyin Annapolis
Zippyin Annapolis's picture

Cry me a river life goes on--

Thu, 01/07/2010 - 20:27 | 186294 Anonymous
Anonymous's picture

Aha, so they know where are the stop is from the shorts.
Lot of traders are wondering the last 10 month
they feel..... something is wrong.....

Thu, 01/07/2010 - 20:31 | 186297 GoldmanSux
GoldmanSux's picture

1987-program trading. 2010-hft. Tell me what the end result differences will be?

Thu, 01/07/2010 - 21:29 | 186357 Miles Kendig
Miles Kendig's picture

Medium term roll risk for one....

Thu, 01/07/2010 - 20:34 | 186301 akjenlex
akjenlex's picture

While your suggestions may be true in regards to the systemic risks highlighted, I think something more nefarious was at afoot with rambus that day. The "fat finger" didn't happen once that day, it happened twice - the second time happening just before 2pm if i remember correctly. Rambus is about to start the largest antitrust trial in history and the market for the stock has always swung wildly during their previous litigation. The memory manufacturers they are suing have always gone to great lengths to delay litigation and a hearing was in session when the aforementioned movement occurred. IMHO, whether the marketmaker was human or had "intel inside", the funds that are pushing the stock around for swing profits at times like this are trying to push the stops out and would have overrun anyone or anything. Once is a mistake, twice is a strategy. What's their risk? If it doesn't work, they can just call up the nasdaq and have the trade cancelled if they don't make any money on it. I'm somewhat amused by the fact that it didn't work on the second attempt either - kinda hard to make that phonecall twice within a few hours.

Thu, 01/07/2010 - 20:34 | 186302 cougar_w
cougar_w's picture

So. What would happen if the market monitors really did break all sizable down-trades and blessed all up-trades?

The market would go up.

But on tiny volume.

The latter because you cannot take serious winnings in an up-market if it never goes down big. And when everyone is broke or nonliquid there is finite money to fuel the up-side, so it goes up but slowly.

So what would that imply?

It means money is being soaked into the market and cannot leave ever so long as profit taking is throttled.

Does that sound familiar? It should. It's called protecting our asses from hyperinflation by making sure QE fiat money given to playerz to play around with never ever but NEVER sees the light of day. Forever. Or at least until Ben has A Plan.

So now I ask you. Short of telling those playerz that they cannot sell except that they are then taken out and shot at sunrise ... how do you keep that money in the market forever?

You cannot. Greed of about 27 different varieties will work day and night to get that money out at a profit, and once out it is laundered and free to use for whatever purpose, is real money. And everyone is watching the next greedy bastard to not jump before he does, but at exactly the same time or nearly so. Because in a mass exodus the authorities won't be able to round up and shoot everyone, so someone will get away with it. The core belief of every gambler is that the other guy is going to lose.

This is going to be soooo interesting to watch.

cougar

Thu, 01/07/2010 - 22:34 | 186403 Missing_Link
Missing_Link's picture

Yes.  Soon, stocks will be over $1 billion per share.  No one will be able to buy or sell because those who could afford them will already be all in, and no one else will be able to afford a share, thus ensuring that there are no buyers or sellers.  Barney Frank will pass a law making stock splits illegal.  All trading will cease.

Thu, 01/07/2010 - 22:38 | 186406 MsCreant
MsCreant's picture

I just saw the movie "Snatch" this evening. Every gangster trying to cash in was dying.

Thu, 01/07/2010 - 23:37 | 186449 merehuman
merehuman's picture

Funny Lady. lol

Sat, 01/09/2010 - 04:45 | 188203 WaterWings
WaterWings's picture

Oh, no matter how much you liked it you have to prick a few minds in your "milieu" that have seen it, then watch it again. It's like 12 Monkeys: even better the 2nd time.

My brother and I sat there the first time, thinking, "Ha, a "tea cosy". What the F is that? I dunno me brother, but Brad Pitt was feckin' grate! Let us watch it again with the subtitles, me brother. Real 'orrorshow."

A month later we were swapping lines (not narcotics; young Mormon boys have no idea what the word "narcotics" even means) with other deviant deviants of "happy valley". What fun!

"You could park a fuckin' jumbo jet in there."

"Desert Eagle. Point-five-oh."

You show me how to control a wild fucking gypsy and I'll show you how to control an unhinged, pig-feeding gangster.

"Dags. Oh, you mean dogs."

Sat, 01/09/2010 - 04:47 | 188205 WaterWings
WaterWings's picture

Now I have to add a disclaimer that I've been drinking again and I'm feckin' glad you're not my feckin' employer you motherfecker'.

Fri, 01/08/2010 - 01:39 | 186519 Tethys
Tethys's picture

Damn, now thats an interesting thought.

So let's see if I got this right.  The Fed prints money and buys MBS from financial institutions.  The Fed also lends those financial institutions money at ridiculously low rates.  The institutions take all that money, park some at the Fed (to earn interest), keep some on their balance sheets, and put the rest into stocks.

When all this buying, along with the Fed probably pumping direct 'printed cash for shares' on the side, causes stocks rise to the point that the banks can afford to buy back the at least part of the MBS from the Fed and cover the associated losses, they sell off stocks and do so.  The resulting 'corrections' in the market drive the few remaining human traders into Treasuries, and wallah - liquidity removed, debt funded, world saved.

That train of logic probably derailed early on, but it almost makes sense....

Thu, 01/07/2010 - 20:39 | 186307 Anonymous
Anonymous's picture

Too much of this bashing HFT is by trading firms who are being squeezed out of their lucrative business - you said it yourself:

"Market making is the practice of quoting both bids and offers on the same security, in hopes of capturing the spread.

...

If a traditional market maker places a bid, the computer automatically steps in front."

What happens in this process? The spread falls.

And who benefits? The buyer or seller who is not a market maker.

A law (or something similar) against automated HF market making which seems be what you are fishing for would be a gain for you but a cost for all us buyers and sellers who are not market makers.

Fri, 01/08/2010 - 01:41 | 186522 overbet
overbet's picture

The scam is that it is places like GS and other broker dealers that are forcing all investors and traders to pay the spread by front running them in sub pennys. Only they are allowed to enter sub penny orders and they can step in front of you all day and you never get a fill. A law against sub penny front running or at least a level playing field where everyone can do it not just certain people. You have no idea how many times you missed your fill on a stock because you were being cut in front of. How do you think GS has such a high batting average? You place an order to buy stock and they cut in front of you by .0001. If they are wrong they hit you and cover. Your lame ass sitting out there is their insurance. If they are right (and you were right) you never see your fill. You are entirely uninformed. 

Thu, 01/07/2010 - 20:40 | 186308 virgilcaine
virgilcaine's picture

What keeps the Fed awake at night is the only asset rising would be the US Dollar, truly horrific.

Thu, 01/07/2010 - 20:53 | 186322 Anonymous
Anonymous's picture

LOL now the shorts know why they are toastet.
The computer know the stop/lost
In the last 10 months a lot of traders feeling there is something wrong.
They are out exactly where the stop was.
Maybe this market is more rigged then..............
...................................................

Bernanke to Blankfein:
Haha haha rofl: the shorts they have gone this rally.
Blankfein: Yep I love high tech.

Thu, 01/07/2010 - 21:02 | 186330 Caviar Emptor
Caviar Emptor's picture

1987 all over again? At that time they denied, yet admitted, yet denied that algos-gone-wild crashed the market. So they cooled it and added more muscle power. But the home truth is that algos probably hum along in uptrending markets, and puke when things don't go "the probable way". Like all risk-mismanagement in highly leveraged situations, all it takes is a black swan chick or two to take down the house.

Thu, 01/07/2010 - 21:03 | 186332 Anonymous
Anonymous's picture

A other main sign of the top ( Bull Market) is the shorts turns to bulls.
Alternatively they are absolut despaired.
So keep on guys. Don ´t change!!!!

Thu, 01/07/2010 - 21:04 | 186333 Anonymous
Anonymous's picture

Dennis seems to be whining that he can't compete with the firms that own the algo boxes. He should get off his landline and buy a computer.

Thu, 01/07/2010 - 21:05 | 186334 FreakuentFlyer
FreakuentFlyer's picture

i do not know much about credit markets, so i hope the arguments in those articles make more sense than the HFT bashing.

 

as far as the arguments in the article:

1. the evil HFT (pseudo market making) improves NBBO? is says right in the article. does that mean that not everythig about HFT is just pure evil, and some things might be only up to 70% evil?

 

2. the old MM were still trying to make money (or was it just their hobby?)

 

3. i suspect that these programs: run all day long; make a little bit of money most of the time; have risk parameters that are stock specific; and therefore do not hide after just one losing trade (since they already made some money).

 

4. for more evil examples, take a look at GGC and TRF price action cca August, and perhaps AIG, C etc. from the days when they made up 30% of NYSE vol.

 

5. long story short, i vote that this was a chain of events were someone entered a large/aggresive manual order, whose impact then got picked up by momentum algos (HFT or not), and then got followed by the MM/HFT algos.

 

6. if Bright guys are bright enough to distinguish order messages from these 3 types of participants, they should send their proposal to SEC - i'd hate to pay 10c wider spreads on 100% of the volume. unless that, off course is less than what these (NBBO improving) bandits steal from the public (which is not even trading, the last time i checked).

 

btw, busted trades on the ecns happen almost every day, and can be requested for any size or value. if the ruling goes against the filling party, it is assessed a $250 fee. i've seen successful busts against loses that were not much more than that - so i'm sure you can figure out it's not just for the protection of citadel/getco/ren villains.

Thu, 01/07/2010 - 21:13 | 186342 omi
omi's picture

Have you seen GMCR trade? that thing has 5-10 cent bid/ask spread with 0 liquidity.

One market order can shoot it's price up 20 cents easily.

Fri, 01/08/2010 - 06:53 | 186588 Zippyin Annapolis
Zippyin Annapolis's picture

50++

Thu, 01/07/2010 - 21:07 | 186338 omi
omi's picture

Busted trade didn't happen.

 

Did anyone catch huge volume of T and VZ options few days back? it doesn't seem like they showed up in OI later. Maybe they were exercised for a dividend. But there were over a million volume in one strike of T if I recall correctly.

Thu, 01/07/2010 - 21:34 | 186362 Rick64
Rick64's picture

Nothing to see here , keep moving.

Thu, 01/07/2010 - 21:53 | 186378 Anonymous
Anonymous's picture

I am a RMBS stockholder and have followed it closely for many years so may have some insight about what happened.

I believe what happened was not a "fat finger" or "program trading" but was a deliberate attempt to target stop loss orders. Exactly the same thing happened previously in 2006 with this stock. Perhaps due to complaints from shareholders who lost a lot of money in that instance the orders have been reversed in this instance under the pretext of "fat finger" when it was really manipulation that was going on both times. To understand these manipulations involves a bit of history which I describe below. These manipulations have not affected me as I am a long term holder and don't use stop loss orders, in part for the reason of what has happened here. So I'm not talking from my hip pocket but as an highly interested observer.

Rambus has been involved in many long running (10 years plus) and bitter court cases against the largest memory makers (Samsung, Micron, Hynix). These cases are followed very closely with shareholders attending the court sessions and reporting back on message boards.

In late April 2006 a Rambus vs Hynix patent case involving 100's of millions in damages the jury had been deliberating and was expected to return a verdict. Many naive shareholders had set stop loss orders in the event Rambus lost the case, not realising they would be sold out at panic prices far below where their stop-loss orders were placed. Along with a thin market this created the perfect opportunity for a hedge fund to dump a large block at market, dropping the price enough to set off a cascasde of stop-loss orders. Presumably who ever did this had a limit order far below market to buy the triggered stop-losses. There was much conjecture on the message boards that the jury had come back with a verdict against Rambus, but reports from shareholders at the court house said the jury was still deliberating. This caused the price to move back up close to where it was before the manipulation. Shareholders with stop loss orders in effect sold their shares at a price well below market losing a considerable sum of money or to put it another way the hedge fund who was responsible made a considerable sum of money.

On January 4, 2010 when the supposed "fat finger" occured Rambus had an important court date in the San Francisco Superior Court in front of Judge Kramer. This case involves Rambus suing the memory makers in an anti-trust action where the damages may be up to approximately $12 billion dollars ($4 billion dollars automatically trebled). The trial is scheduled to commence on January 11, 2010 but there was the possibility the case would be delayed as it had many times before resulting in a sell off. Again many shareholders, especially those not around in 2006, had set stop loss orders stting up the same circumstances that lead to what happened in 2006. In my opinion, this is indeed what happened with a large block deliberately sold at market to set off a cascade of stop loss orders. Fortunately for the RMBS shareholders with stop losses the trades were reversed even if the reason given is probably not correct.

Fri, 01/08/2010 - 04:47 | 186571 i.knoknot
i.knoknot's picture

i'm inspired to ask, who else could this happen to?

i think anon is exactly right, but *it does not matter* if he is, as anyone trusting a stop-loss as their only safety-net is looking at the same story.

BTW, this very technique is how i figure the HFT folks are triggering both limit orders and stops in *both* directions, functionally using 1% bursts of heavy trading to trigger 10% swings in the underlying.

 

Thu, 01/07/2010 - 22:08 | 186388 Anonymous
Anonymous's picture

I think though DNDN was a bear raid. the reason for it there was somebody who predicted it on the Yahoo board and I saw the post myself,including the time it will happen. I believe around 12 PM and right before the ceo announces the result of certain phase trial. And whatever happen to their promising drug?For some reason there is always controversy with this company,and a lot of "conspiracy theory".

Thu, 01/07/2010 - 22:11 | 186391 Anonymous
Anonymous's picture

Simple question: Do they bust option trades during the same time frame?

Thu, 01/07/2010 - 22:28 | 186398 Anonymous
Anonymous's picture

While the argument that HFT lower the spread in the benefit of the buyers and sellers might be true,but the counter argument would be that those HFT are also keeping the prices of stocks high. Since they collect fraction of pennies from the exchanges in discount for volume,they can trade between themslves all day long and not sell even if there are bids. Just look at how lately C stayed at $3.15 the day of their (sale,issuance,conversion,just pick your choice). most probably,competing MM would have sold it for a lower bid I am almost sure. So the whole design was made with purpose of keeping the market high,enriching the underwriters(since they are also the MM),and not because GS and company suddenly decided to become philanthropist and give some of their profit to the pensioners(we all know by now how much it cost to return some of those pensions)...

Thu, 01/07/2010 - 22:46 | 186410 ShankyS
ShankyS's picture

Dennis - great post thanks a bunch  - one problem - The'll just bust all the trades and put Humpty Dumpty back together again in one of those oops-my-bad moves. these assholes are capable of anything to protect this market.

Thu, 01/07/2010 - 23:00 | 186417 Anonymous
Anonymous's picture

hahahaha - a day trading firm tries to blame HFT, which is basically putting day traders out of business, and people take this seriously?

Thu, 01/07/2010 - 23:53 | 186465 the grateful un...
the grateful unemployed's picture

even when there were market makers, the bid dried up. according to where your broker sends the order, online broker, any exchange, they will pick your stop loss off. on the other hand if you put an order to buy in you might get filled, but on the occasion when you set your bid at some odd number well below the current bid/ask, and the market hits an air pocket, and hits for an odd number of shares, for your odd price, and its not YOU, then you know the system stinks. mostly the system stinks, but daytraders have to know how this works, or you wont be a daytrader for long. stop losses do not work.

 

Fri, 01/08/2010 - 01:46 | 186525 Anonymous
Anonymous's picture

When everybody dont make stop/lost in the computer, they don t know where the stop/lost is. Yust for defense.

Fri, 01/08/2010 - 01:47 | 186527 Anonymous
Anonymous's picture

Isn't that the idea? To get all the dumb money's stop losses hit?

Fri, 01/08/2010 - 07:49 | 186596 Anonymous
Anonymous's picture

the fed has the red button, it won't let that happen.

Fri, 01/08/2010 - 10:02 | 186698 TruthHunter
TruthHunter's picture


"It happened to me when I had 30 contracts sorting the yen against the dollar 120/1 at the time. Because of travel (22 hours), I placed a stop at 117. Guess what, before the NY close the Yen strengthen to 117 for a few seconds and back to 120. The following day yen to 122.

The big boys did see 30 contracts sitting there with a stop at 117 and

they went down and got them. Game over."

 

They drive the price down  allowing no one but themselves to

buy at the lower price.

So  thats price fixing  and a fraud...

But its easy to get away with if extort, bribe,  and blackmail judges and regulators.

After all, THEY are "doing God's work."  With that god, the end justifies the means

 

Fri, 01/08/2010 - 12:46 | 186957 Anonymous
Anonymous's picture

Goldman Sachs is of course, openly Satanist.

They worship Lucifer.

In fact, you cannot enter the Goldman Sachs order without pledging allegiance to Lucifer.

Every employee of Goldman Sachs has been personally sodomized by Lucifer at least 3 times.

Keep that in mind next time you're looking at one.

-MobBarley

Fri, 01/08/2010 - 12:59 | 186983 NGC 6888
NGC 6888's picture

I don't see the implied connection were human market makers prevent systemic collapse and potential HFT problems are worse than human market making chicanery.  Market collapses and broken trades have happened and will continue to happen in both systems.  Perhaps a tweak in the current market systems is better.  It's like what is worse:  paying $2000 in commission on a trade and getting out at the same price and using a heavy telephone and subsidizing the wealth of a glorified clerk or paying $5 for a trade using lightening fast connection and losing your ass to a computer programmer somewhere.

Sat, 01/09/2010 - 13:59 | 188488 Anonymous
Anonymous's picture

If you can't take the heat, don't use limit orders. Just because you covered and were wrong doesn't mean it's fraud, it's called you are an amateur. Also did markets never do this before HFT? A person making a market isn't going to puke? Ever hear of 1987?

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