The Story Of The Berserk Nat Gas Algo Just Got Really Strange

Tyler Durden's picture

We have already posted two articles on the case of the berserk "fractal" nat gas algo which caused a mini swoon in Nymex gas (NG) prices last night, preceded by some very abnormal trading patterns (discussed here and here). However, per additional observations on what happened, courtesy of Nanex, this very odd case is about to take a very disturbing detour into the downright surreal. Per Nanex: "It's almost as if someone is executing a new algorithm that has it's buying/selling signals crossed." In other words, either an HFT firm has hired some intern to code their algorithms without having even the faintest understanding of finance and economics (possible but unlikely), or as we have long speculated, we have now officially entered a bizarro market... though much more than just sarcasm: this is now a market in which buy and sell signals are confirmed to have been flipped. Nanex' conclusion is spot on: "Most disturbing to us is the high volume violent sell off that affects not only the natural gas market, but all the other trading instruments affected by it." Translated: the entire market now trades on flipped signals.

From Nanex:

The following charts show trade, trade volume, and depth of book prices and relative sizes for the July 2011 Natural Gas futures trading on NYMEX. Depth of book data is color coded by color of the rainbow (ROYGBIV), with red representing high bid/ask size and violet representing low bid/ask size. In this way, we can easily see changes in size to the depth of the trading book for this contract.

Depth of book is 10 levels of bid prices and 10 levels of ask prices. The bid levels start with the best (highest) bid, and drop in price 10 levels. Ask levels start with the best (lowest) ask, and increase in price 10 levels. The different in price between levels is not always the same. It depends on traders submitting bids and offers. In other words, depth of book shows the 10 best bid prices, and 10 best ask prices.

In a normal market, prices move lower when the number of contracts at the top level bid are executed. The next highest bid level then becomes the top level, and the 3rd level becomes the second and so forth. A new level is then added below the previous lowest level. On our our depth charts display, you would see this behavior as a change in color of the top level bid from the red end of the spectrum towards the violet end.

On June 8, 2011, starting at 19:39 Eastern Time, trade prices began oscillating almost harmonically along with the depth of book. However, prices rose as bid were executed, and prices declined when offers were executed -- the exact opposite of a market based on supply and demand. Notice that when the prices go up, the color on the ask side remains mostly unchanged, but the color on the bid side goes from red to violet. When prices go down, the color on the bid side remains mostly unchanged, but the color on the ask side goes from red to violet. This is highly unusual.

Upon closer inspection, we find that price oscillates from low to high when trades are executing against the highest bid price level. After reaching a peak, prices then move down as trades execute against the highest ask price level. This is completely opposite of normal market behavior.

The amplitude (difference between the highest price and lowest price) of each oscillation slowly increases, until a final violent downward swing on high volume. There also appears to be 3 groups of these oscillations or perhaps two intervals separating these oscillations. It's almost as if someone is executing a new algorithm that has it's buying/selling signals crossed. Most disturbing to us is the high volume violent sell off that affects not only the natural gas market, but all the other trading instruments affected by it.

 

 

 

 

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CPL's picture

baddly programmed.

 

Garbage in...garbage out.

monkeyshine's picture

I postulate this is "predictive trading algorithms" trying to get ahead of the actual bids/asks with their own asks/bids.  It is absurdist, to say the least.  But it is the next logical step to colocating your trading servers on the exchange floor to get the jump on bid/ask signals, is to actually send bids and asks to the floor in anticipation of the signals. 

Doesn't get any faster than executing a trade BEFORE the other side shows up to trade with you lolol...

Re-Discovery's picture

+1.

(Re-read comment thread and this is what I said below.  Game theory.)

Ahmeexnal's picture

Max Cohen finally did it! He found the 216 digits!

 

http://www.imdb.com/title/tt0138704/

snowball777's picture

Give that man a Black & Decker cordless!

monkeyshine's picture

hehe!  I was kind of tongue in cheek but yes it does make sense.  Provocative, e.g. provoke the other guy into a fight he can't win (tsung tsu).  Or as the other poster, fiction writer guy said, it may be deliberate to obfuscate and/or trick others. 

But it does indeed make sense, the HFTs get faster and faster, at some point they have to act before. And now that I actually think about it, it is possible esp if they see patterns in other HFTs they may learn their models (or, their owners stole the program code and counter program knowing that if they zig the other will zag, so they zag first, then signal the zig to enduce the zag).

Good stuff guys!

Bananamerican's picture

"remember these, who shake the trees

to make the wind blow"

-me

jeff montanye's picture

very good; i saw no immediate source.  great metaphor for the bernanke's juicing up the stock market because a rising stock market is a sign of an improving economy.

Fish Gone Bad's picture

The Bernankster is probably sitting in the dark, oscillating between feelings of grandeur and outright paranoia.  One moment, "I am the angel of death..."  and then 10 minutes later, "People are lucky to even speak my name...."  followed by "I am the angel of death..." (continuously)

Bananamerican's picture

your comments brought it back to mind...

from a poem i wrote when i was 27....damn, i've hated Corps for a loooong time, lol

Thomas's picture

This will become a Tacoma Narrows moment someday soon...

http://www.youtube.com/watch?v=j-zczJXSxnw

Sokhmate's picture

pre-tralgos, short for pre-tralgorithms - a la pre-cogs.

mophead's picture

The author of the algo is still using Vista and having USB issues.

max2205's picture

I don't know about you guys but these all look like vaginas to me

GeoffreyT's picture

Whoa, max2205... you just blew my mind.

That said: not to brag, but I've seen a reasonable number of vajoojoos in my time, and even when I squint, and with a totally blurry bad right eye... I don't see it, man.

A failure or imagination on my part - the world would be a better place if commodity charts were full of pictures of the 'furry pie'.

On the subject of 'front bottoms', @JoeRogan (an unsung genius, by the way) is trying to disconnect the 'c-bomb' from the female genitalia... to this end he wants to popularise '#cunty' as a non-genital-related adjective (and hashtag). Ladies' bits are a thing of wonder and beauty (and a joy) and so we have to break the link between those and our beautiful language's most powerful insult.

 

Ah... it's like those 'Magic Eye' pictures... I see  the 'ginas now.

ColonelCooper's picture

+10 on the Joe Rogan.  He's like the Doug Stanhope or Jimmy Norton that your parents actually allow in the house.

snowball777's picture

He's the Gen-X Eddie Haskell.

LowProfile's picture

...our...language's most powerful insult

...Investment banker?

johngaltfla's picture

Ben? IS that you? PUT DOWN THE BOTTLE.....

Racer's picture

Thank you ZH..............if only others would show up the deceit  like you do

Rynak's picture

Years ago, i discovered an interesting pattern. I at first didn't understand why it repeated in civilization over and over.... the deeper i did dig, by following the cause-effect chain backwards, the lower i got..... until i tracked it back, to the most generic things of all: Relationships and logics.

Without explaining the whole theory, here's a little crashcourse: There are two stable patterns in relationships. One of them is mutual equivalence. One example of this is truth - the blueprint matches perception, and the perception matches the blueprint. So, equivalence.

The other stable pattern, is the inverse - not opposite - of just that. To explain it with maths as an example: Let's say, you have a formula. The formula has an error... an untrue value. There are two ways how you can make such a broken formula work: 1. Correct the error. 2. Add a second inverse error, that compensates the first error.

What i'm trying to hint at, is that very often, there are two setups that can work.... one of them is what most people would consider "right", "true", "consistent", and so on.... the other is to do the total inverse of just that. For example, this is also why lies so often are the inverse of truth.... by inverting everything, it still internally seems to be in balance and consistent.

Until today, i expected to find those two patterns in a lot of things.... but i never expected this insanity to go as far, as it being implemented in software, on the open market. Or to phrase it more metaphorically: We now no longer just have lying humans.... we also have lying computers.

mr. mirbach's picture

the  Schrödinger's cat argument

 

Rynak's picture

Trivia: What is a dichotomy, considering my above post? :)

Better don't think about that. The implications would render a good part of modern theories about physics invalid (NOT disfunctional - they do work... the way they work is just.... a bit "strange")... and show that the scientific method is incomplete.

CU1981's picture

"GOLD"MAN CUNTS theory of market guidence has proven correct. It's the next logical step ....

 

We have to be smarter: What's the next logical step ? The old double/triple cross ? ? ?

Monedas's picture

That's when they cut your dick off and you start your new life as a dyke ? Monedas 2011 "Making the complex understandable !"....R. Limbama

Urban Redneck's picture

Of course the sceintific method is incomplete.  What is represented on either side of the = sign is limited to what is known or thought to be known (imagined) in science, not necessarily what exists in reality.

E = mc^2

1 + E = mc^2 +1

(obnoxious truth that sinks theoretical physics) + E = mc^2 + (obnoxious truth that sinks theoretical physics)

Rynak's picture

Precisely :) Everything before the = sign is never verified. Phrased another way: If the result matches measurements, the theory is considered verified. However, as everyone who isn't totally braindead knows, there are all kinds of ways, how you can come to the correct result.

Thus, for scientific theories to not look totally arbitrary, there needs to another method, to decide if the way to the result (the formula itself) is considered valid. Since the advent of modern physics, this verification is no longer logical correctness of the theory (the concept). Instead, by now ONLY mathematical consistency matters. That is, the various formulae used in a theory, must be consistent: It is not allowed, to arbitrarily modify variables, depending on the situation (though, there are tricks how even this can be hidden). Furthermore, it must always be possible to rearrange a formula, without the formula stopping to work.

Or in short: The maths themselves must be sound, and results must match measurements. This is the current state of research in modern science. Besides of the usual stuff or reproducability, peer review, etc, no other checks are made.

But alas, this really isn't a very high requirement. This becomes more obvious, when you consider, that the maths are just a model of the theory, but not the theory itself. For example, the maths do not care what kind of variables are used and what they mean. To maths, C is just a number... it does not contain an explanation of what that is, and why it is supposed to behave the way it does.

Or in short: The conceptual rules and ideas, which the maths represent, are never checked. This for example allows theories, where things teleport around, may be at multiple locations simultaneusly, action at a distance, causal breaks, turning space into time, and time into space.... and so on.

What is the result? Well, the maths do work consistently and reproducable.... thus, one can use them to predict and control reality. The explanations behind all this... the theory.... may however very well be as far away from "understanding" as possible (remember the inversion pattern).

So, what modern physics provides to society, is power. Methods to predict and control things. What it however does not adequately - and with enough rigor - provide, is explanations and understanding.

Sure, one may argue, that we simply cannot check everything, and need to make interpretations based on nothing. Some even consider it impossible to create a structurally equivalent model of reality. This however does not explain, why one would INTENTIONALLY not use some checks that ARE available... like i.e., demanding logical consistency in theories. Not requiring this is especially suspicious, because.... now it comes: There is nothing one can do in a logically invalid way, that cannot also be done in a logically consistent way. If you're sceptical that this is true, then check it yourself. Try to come up with any logically errorneus concept, that cannot also be expressed in a logically consistent way and come to the same results.

A Nanny Moose's picture

Technically, the data never lies. The computer does exactly as the human told it. No more, no less.

Intel's little 80586 FPU bug being a notable exception.

Rynak's picture

Well, yes - they don't "lie" in the strictest sense. But then again, humans also do not lie in the strict sense, most of the time when they deceive themselves - because they made themselves to actually believe it. The reason why i do not buy that definition of "lying", is because such humans when faced with chances to reveal their misconceptions, prefer to defend them.

I guess, for computers one could argue, that they cannot detect their own errors, unless they are told so by humans. Still, the "structure" of how they act based on "anti-truth", is identical. So, even though they may not "consciously" do it, humans now make them imitate their own deception mechanics.

macholatte's picture

How About This:

Premise:  Everything John says is a lie.

John says, "I am lying."

            Is he telling the truth?

 

Contrariwise, if it was so, it might be; and if it were so, it would be; but as it isn't, it ain't. That's logic.
Lewis Carroll

Rynak's picture

It is a contradiction :) It just makes no sense. There is no result.

The problem is in the setup of this (logically broken) scenario. A practically more relevant scenario would be: John has been lying all the time. Thus, you mistrust him. Then, he makes two connected statements: "X is true. The previous sentence is a lie."

In this scenario, there are three aspects that matter:

1. He clearly identifies what according to him, is a lie.

2. We can therefore now rephrase his two connected statements, into one statement: "X is UNtrue"

3. How do we treat this statement of him? Can we verify it? If yes, then it doesn't matter at all if we trust him or not, because we know. If we cannot verify his statement, it comes down to trust.... do we trust this statement of him, even though he has lied in the past?

At this point, you may argue that i am circumventing your original argument. You may say "you're turning this from a logical scenario, into an interpersonal interaction.". Damn right, i do, on purpose.

Doña K's picture

What if.. all of us mortals got out of the stock market?

Zero volume? some trading between hedge funds and mutual funds?

Since we have been out of the market, we sleep better, the sex is better, we travel more and even the food tastes better, as we relish the extra time to ourselves.

boiltherich's picture

Unless they are talking about their Weiner yes?

anony's picture
Dave Bowman: Hello, HAL. Do you read me, HAL?
HAL: Affirmative, Dave. I read you.
Dave Bowman: Open the pod bay doors, HAL.
HAL: I'm sorry, Dave. I'm afraid I can't do that.
Dave Bowman: What's the problem?
HAL: I think you know what the problem is just as well as I do.
Dave Bowman: What are you talking about, HAL?
HAL: This mission is too important for me to allow you to jeopardize it.
Dave Bowman: I don't know what you're talking about, HAL.
HAL: I know that you and Frank were planning to disconnect me, and I'm afraid that's something I cannot allow to happen.
Dave Bowman: Where the hell'd you get that idea, HAL?
HAL: Dave, although you took very thorough precautions in the pod against my hearing you, I could see your lips move.
Dave Bowman: Alright, HAL. I'll go in through the emergency airlock.
HAL: Without your space helmet, Dave, you're going to find that rather difficult.
Dave Bowman: HAL, I won't argue with you anymore. Open the doors.
HAL: Dave, this conversation can serve no purpose anymore. Goodbye.
Share this quote

 

HAL: Just what do you think you're doing, Dave?
Share this quote
jbc77's picture

Zerohedge is the premier beacon of light in a world full of shit. ZH has been and still is my favorite site of all time. Where else can you be constantly enlightened. I don't know what I would do without this place....

ReeferMac's picture

Pull your hair out wondering why it seems like the whole world is against you?

Smiley's picture

This is insane.  Why are people still pumping money into the market?  It is the epitome of FUBAR.

alien-IQ's picture

you can still make money in the market if you are nimble...and never EVER hold anything overnight. Close out every day flat.

ursus.peracto's picture

Wrong.

 

You won't beat an Algorithm

GoinFawr's picture

"by CPL
on Thu, 06/09/2011 - 17:03
#1355692

BTW.

TADA!!! Magic trick done. Ass. Not a market maker. I trade against machines, I build them, put the shitacular software on them and I have an iron ring as a master engineer.

The math they are screwing around with is EASY to understand. Basic shit. Grade 7 math.

Would you like to see another magic trick? Just for you I put in a cock block trade for CAT btw since you like holding long. 1 stock @ 0 dollars. About what the company is worth. I bet the HFT's that helped you today, will be your worst nemisis tommorrow.

reply
flag as junk (0)"

Remind me never to piss CPL off (again), or at least stop me before I disclose any of my positions right after I`ve crushed him like a nut in my iron grip of reason.

CPL's picture

It's all fighting against 20 year olds with math degrees, no business experience and bad  game theory.  That's trading today.  Engineering also requires reverse engineering by watching how their trades go.

 

Unlike spalding, I'm not about to brag on gains or losses or even assist if it helps out.  It's a bad habit braggin on capital gains.  It's asking for the fates to shit in your cornflakes.

GoinFawr's picture

"Loose Lips..." and all that cal, gotcha.

Re-Discovery's picture

Except things traded by other markets, e.g. PMs.