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Revisiting May 6: How Quote Stuffing Made The Flash Crash Far More Severe Than It Should Have Been
Nanex is out with their latest analysis on what the market would have looked like on May 6 without the quote stuffing impact from HFT. If the market had in place a system such as that proposed by Nanex where there is a 50 ms minimum quote life (instead of the perpetual churning of bids and offers), 40% of quotes would not have been present during the Flash Crash sell off, and likely would not have tripped the NYSE's LRP trigger (if that was at an issue), neither would it have made NBBO arbitrage opportunities available. As Nanex shows in the second chart, the percentage of "fake" trades as a portion of total surges during the Flash Crash interval, yet eliminating those would have effectively cut the quote burden in half, making dilapidated exchanges like the NYSE capable of not losing control of the NBBO dissemination, not triggering its LRP choke points, and not providing a tremendous latency arb opportunity to subscribers of its OpenBook product.
Continuing Developments - Did Quote Stuffing Cause the Flash Crash?
Although quote-stuffing might not have been the cause of the flash-crash,
the crash certainly would have been much less severe (or might not have
occurred), if quote stuffing wasn't occurring. This is a subtle, but
important distinction.It is well known that many systems were
overloaded on
that day -- and approx. 40% of the quotes would not have been present if a
minimum quote life rule of 50ms was in place.We decided to run an analysis to see how much less traffic would be present if
the 50ms rule (which we recommended in our initial
Flash Crash
report) would have been in place:Methodology:
- Quotes and trades are summed for each reporting exchange for each
stock.- After 1 second elapses, take the difference between the quote count and
trade count for each reporting exchange for each stock. (since a quote that
generates a trade is certainly valid, you subtract them out for a true
"pure" quote count number).- If that difference is greater than 20 (there are 20 intervals of 50ms in
one second), then accumulate the amount that exceeds 20.- The dark blue line ("with 50ms rule") is plotted after
subtracting out the accumulated amount each second.
Source: Nanex.
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I am so stuffed
Electronic chits aren't as filling.
I am so stuffed.
That's what she said.
Three days after "The Flash Crash" I wrote a fictional piece which I posted on ZH depicting the crash as being caused by someone or some entity. While many enjoyed the piece, some brushed it aside as ridiculous to even consider that it could have been deliberately "caused". Instead, many wished to believe that it just happened as a result of HFT algos gone mad.
Maybe we should revisit my "fictional" piece. More and more people are beginning to recognize the reality that the HFT and too-big-to-fail banks, the Fed, the Treasury etc, are manipulating the market. And more are beginning to recognize that it just might be in the interest of the powers that be to take down the market just like it might be in their interest to take up the market.
Don't let this type of cognitive dissonance create a failure of imagination on your part. Step back into the world of 1995 or 2000 and think about how you viewed it then. Now step back into 2010 and take another look. We were pretty naive. In fact, how many of us would ever have imagined that over the past 10 or 15 years we would be where we are today? Is what I'm fictionally proposing, not how it was done but just that it could be done, that far out in left field considering how far out in left field we are today compared to 1995 or 2000?
I think not.
http://www.zerohedge.com/article/call-%E2%80%93-fictional-look-25-minute-market-crash
I just read your piece, it was brilliant. Thanks.
By RonPaul.com on May 6, 2010
Ron Paul just posted the following message on Facebook:
Bernie played chicken with Rahm/Dimon and had his ass handed to him on May 6th.
CD-
Do you have a twitter account that you link to your thoughts/postings? Cheeky has a good one that I follow but wondering about you?
Thx.
No I don't. Wouldn't know where to start.
No worries, just thought I would ask. It would be much easier to get all of my CD comments in 1 place; thanks for the reply.
If any member of the public just blindly gives their hard earned capital to the equity markets, in the form of 401k/IRA accounts, after witnessing the flash crash of May, then those "investors" have not seen reality for what it is. Should the HO move from omen to reality, perhaps those investors (the few left) will final cut off this cancer of Wall Street.
http://maxkeiser.com/2010/09/08/preview-of-max-keiser-interview-with-rincker-nl/
I wrote a small followup post on Paul Kedrosky's financial blog about a fictional future financial television show. Thought I'd share:
CUT - FADE TO SPONSOR LOGO
*2012 - MAKE IT YOURS* -- Brought to you by the SpendIT Card. Make it, Shop it, SPEND IT*
Camera cut to TROY, Wearing a suit that seems to be woven from individual steel threads.
"TROY HEADSTROM here, and we've got YOUR earnings in our pocket!"
(Cue laughtrack and catcalls)
"No seriously folks, here we are to give you the latest on the markets, or at least the bots who are trading them today"
TROY winks at the camera, fixing his gaze on another in short order.
"High Finance Trading reports after todays' close they'll be SUING their main competitor for CPU-Theft in the co-located server cloud they share. HFT reports a finance traffic analyst discovered the 'freeloading' after their latest bear raid on the micro-caps."
"GO get 'em boys! Keep the market running smoothly!"
TROY now runs in place, miming to the camera. Laughtrack soars in intensity, matching his antics.
"In other news, fledgling nano-bank BOING has been popped out of the listings after a recursive credit-worm was found in their initial offering. Hey now, at least send me a statement before I'm ROBBED!!"
TROY winks, and blows a kiss to an offscreen fan.
"There's more folks, but I forgot - I left my black box running!!"
TROY mugs to the camera, while the laughtrack soars to the animation overlay showing TROY chasing a black box tradiing computer, cables trailing like dark seaweed.
"Keep it locked here folks! MORE after these COMMERCE-ments!!"
Screen fades, TROY slumps to the ground holding a twitching black box cable...
APPLAUSE
Nanex certainly does some very detailed analysis. Thank you!
I would love to see their analysis of strange 180 degree change in after market vs. pre-market futures. As was reported on many times on ZH, the market would close down severely on a given day, and the futures in the after market, all the way to the end of the after market period would predict a negative open for the markets on the following day. Yet, when the pre-markets opened in the morning the futures were showing positive prints. This happened many times. While I have no problem understanding that traders would take up long positions after a down day in the markets, I do wonder why all these bulls were waiting till after the after markets closed to place their orders.
I think a detailed analysis of these events could shed some lights on the dynamics of market manipulation.
MT
Nothing to see here People, move along
The Market is fine, all your monies are belong to us!
It's what we all guessed, but its good to see it proven.
I'm still remaining of the opinion that the flash crash was a very classic post-bubble crash after a prolonged run up. There's no question that market structure including HFT facilitated the crash. But after a major bubble bursts, markets often crash unexpectedly for seemingly minor triggering events, after a prolonged run.
Unlike in the past, however, HFT and the Fed-Zombie Bank cartel have spooked away retail traders and investors in a very serious way. Not since the post-1929 world and the Pecora Commission hearings have investors reached their limit of disgust and fear. It took 40 years for Wall Street to seduce investors back, despite booming economic growth.
With your criticism, all you idiots are literally missing this rally! Bunch of bozos...
I would prefer to take this opportunity to screw up HFT completely (never let a crisis go to waste!), and a 50ms change does not solve HFT at all.
It might be more useful to add a randomized delay for having your quote filled, and a much longer time for a quote to stand. In fact, I'm not quite sure why it is good to allow quotes to be pulled at all.
Nice article thanks.
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