Quote Stuffing

Instead of uttering one more word in a long, seemingly endless tirade that stretches all the way to April 2009, we will this time let such dignified members of the credible, veritable status quo as Credit Suisse, who have released a two part primer on everything HFT related, with an emphasis on the broken market left in the wake of the "high freaks", which is so simple even a member of congress will understand (we would say a member of the SEC, but even at this level of simplicity its comprehension by the rank and file of the SEC is arguable). As Credit Suisse conveniently points out "market manipulation is already banned", but that doesn't mean that there are numerous loophole that HFT can manifest themselves in negative strategies that have virtually the same impact on a two-tiered market (those that have access to HFT and those that do not) as manipulation. Among such strategies are:

• Quote Stuffing: the HFT trader sends huge numbers of orders and cancels
• Layering: multiple, large orders are placed passively with the goal of “pushing” the book away
• Order Book Fade: lightning-fast reactions to news and order book pressure lead to disappearing liquidity
• Momentum ignition: an HFT trader detects a large order targeting a percentage of volume, and front-runs it.

A few days ago, Credit Suisse did something profoundly unexpected: its Trading Strategy team led by Jonathan Tse released a report titled "High Frequency Trading - Measurement, Detection and Response" in which the firm - one of the biggest flow and prop traders by equity volume in both light and dark venues -  admitted what Zero Hedge has been alleging for years (and has gotten sick and tired of preaching), and which the regulators have been unable to grasp and comprehend: that high frequency trading is a predatory system which abuses market structure and topology, which virtually constantly engages in such abusive trading practices as the Nanex-branded quote stuffing, as well as layering, spoofing, order book fading, and, last but not least, momentum ignition. While we we cover the full report in the next few days and all its SEC-humiliating implications, it is the last aspect that we wish to focus on because while all the prior ones have been extensively covered on these pages in the past, it is the phenomenon of momentum ignition that goes straight at the dark beating heart of today's zombie markets: momentum, momentum, and more momentum, in which nothing but stop hunts and even more momentum, define the "fair value" of any risk asset - i.e., reflexivity at its absolute worst  (in addition to Fed intervention of course), where value is implied by technicals and trading patterns, and where algos buy simply because other algos are buying. Behold robotic stop hunts: HFT-facilitated "Momentum Ignition."

Just in case anyone wanted to know what not to say to defend the absolute horrific mess of self-aware vacuum tubes and errant algos, formerly known as "the market", here is a great primer from Credit Suisse's trading strategist Phil Mackintosh.

Back in the summer of 2010, when the SEC was still desperate to (laughably) scapegoat the May 6 Flash Crash on Waddell and Reed, in an attempt to telegraph to the public that it was in control of the HFT takeover of the stock market (an attempt which has since failed miserably as days in which there are no occult trading phenomena have become the outlier and have resulted in the wholesale dereliction of stock trading by retail investors), we first presented and endorsed the Nanex proposal that the flash crash was an "on demand" (either on purpose or by mistake) event, one which occurred as a result of massive quote stuffing which prevented regular way trading from occuring and resulting in a 1000 DJIA point plunge in minutes  (the audio track to which is still a must hear for anyone who harbor any doubt the market is "safe"). It turns out that in the nearly 3 years since that fateful market crash, not only has nothing been done to repair the market (ostensibly broken beyond repair and only another wholesale crash, this time without DKed trades, and bailed out banks, could possible do something to change the status quo) but the Denial of Service (DoS) attacks that HFT algos launch, for whatever reason, have become a daily occurrence as the following demonstrations from Nanex confirm beyond a shadow of a doubt.

Back in 2009 Zero Hedge was first the only, and shortly thereafter, one of very few non-conformist voices objecting to pervasive high frequency trading and other type of quantitative market manipulation in the form of Flash Trading (which has recently reemerged in yet another form of frontrunning known as "Hide not Slide" practices) quote stuffing, and naturally latency arbitrage: one of the most subversive means to rob the less than sophisticated investor blind, due to an illegal coordination between market markers, exchanges and regulators, which effectively encouraged a two-tier market (one for the ultra fast frontrunning professionals, and one for everyone else). A week ago we were amused to see that the SEC charged the NYSE with a wristslap, one for $5 million dollars and where the NYSE naturally neither admitted nor denied guilt, accusing it of doing precisely what we said it, and all others, had been doing for years: namely getting paid by wealthy traders, those using the prop data feed OpenBook Ultra and other paid systems, to create and perpetuate a two-tiered market, all the while the regulator, i.e., the SEC was paid to look the other way. This action was nothing but a desperate, and futile, attempt to regain some investor confidence in the market. It has failed, and since said "enforcement" action has done nothing to restore confidence, expect to see more exchanges slapped with fines for actively perpetuating latency arbitrage opportunities for "some" clients. Well, since the SEC will be desperate to come up with more means of "restoring credibility" of both the market and its regulator, another exchange it may want to look at is the NASDAQ, which as Nanex demonstrates, may well have been engaging in comparable (most likely not pro-bono) latency arbitrage benefiting some: those paying for its direct feed aka TotalView, and thus not harming others, or those relying on the Consolidated Feed (UQDF) for data dissemination.

What do the following have in common? LIBOR, Bernie Madoff, MF Global, Peregrine Financial, zero-percent interest rates, the Social Security and Medicare entitlement funds, many state and municipal pension funds, mark-to-model asset values, quote stuffing and high frequency trading (HFT), and debt-based money? The answer is that every single thing in that list is an example of market rigging, fraud, or both. How are we supposed to make decisions in today’s rigged and often fraudulent market environment? Where should you put your money if you don’t know where the risks lie? How does one control risk when control fraud runs rampant? Unfortunately, there are no perfect answers to these questions. Instead, the task is to recognize what sort of world we happen to live in today and adjust one’s actions to the realities as they happen to be. The purpose of this report is not to stir up resentment or anger -- although those are perfectly valid responses to the abuses we are forced to live with -- but to simply acknowledge the landscape as it is so that we can make informed decisions.

Because as we showed today on not one but two occasions, humans no longer trade the casino formerly known as the 'stock market', we were glad to see that our old friend - the Whack-A-Mole algo - is back. As the following animated chart from Nanex shows, the algorithm is one which merely cycles in a broad, 10%+ sawtooth pattern blasting out empty quotes to feel the market in a test of other algos' responsiveness, and during a period of 6000 quote blasts, executes just under 20 actual trades. We will launch a catalog of all the various algos as we see them. After all, now that nobody else is left, it makes sense to at least make the acquaintance of all those robotic parasites that are the only entities left quote stuffing each other to death all the while, in true Knightian fashion, levitate the general market higher.

• Euro zone fragmenting faster than EU can act (Reuters)
• Wall Streeters Lose $2 Billion in 401(k) Bet on Own Firms (Bloomberg)
• Eurozone crisis will last for 20 years (FT)
• Chuckie Evans: "Please suh, can I have some moah" (Reuters)
• Quote stuffing and book sales: Amazon ‘robo-pricing’ sparks fears (FT)
• Situation in Egypt getting worse by the minute: Egypt parliament set to meet, defying army (Reuters)
• Chinese goalseek-o-tron speaks: China’s inflation eased to a 29-month low (Bloomberg)
• A contrarian view: "Barclays and the BoE have probably saved the financial system" (FT)
• Flawed analysis: Dealers Declining Bernanke Twist Invitation (BBG) - Actually as shown here, ST Bond holdings have soared as dealers buy what Fed sells: more here
• Obama team targets Romney over taxes, Republicans cry foul (Reuters)
• And all shall be well: Brussels to act over Libor scandal (FT)
• Bank of England's Tucker to testify on rate rigging row (Reuters)

We especially enjoy reading things that we disagree with, and that challenge my own beliefs. Strong ideas are made stronger, and weak ideas dissolve in the spotlight of scrutiny. People who are unhappy to read criticisms of their own ideas are opening the floodgates to ignorance and dogmatism. Yet sometimes our own open-minded contrarianism leads us to something unbelievably shitty.

The financial system is being regulated by clueless schmucks — many of whom would also castigate Zero Hedge as a “big fat hoax”, while ignoring grift and degeneracy within the financial establishment and the TBTF banks. In the face of such grotesque incompetence who can blame market participants for wanting a hedge against zero?

As High-Frequency-Trading rapes and pillages its way across global capital markets, perhaps it is no surprise that the country that gave the world 'Vikings' would be the first to stand up to the computerized hordes. In a breakthrough moment of clarity, The Financial Times reports, the Oslo Stock Exchange will issue punitive changes to traders if they send too many orders into the exchange that do not result in deals being done. This first-of-its-kind crackdown on 'Quote Stuffing' comes after the exchange has seen a surge in the number of orders flooding its systems and while the bourse does not quite go so far as to say HFT is "in itself necessarily negative for the market", it says the placement and cancellation frequency of trades has reduced the efficiency of its market. Bente Landsnes, chief executive of Oslo Bors, said: "A market participant does not incur any costs by inputting a disproportionately high number of orders to the order book, but this type of activity does cause indirect costs that the whole market has to bear. The measure we are announcing will help to reduce unnecessary order activity that does not contribute to improving market quality. This will make the market more efficient, to the benefit of all its participants." From September 1st the exchange will limit each trader to 70 orders for every trade executed and any excess of that ratio will be charged $0.0008 per order. We are sure the NASDAQ, wanting to make up for its SNAFBU, will be next in line to punish the pernicious penny-pinchers.

In what may be the gray swan indication that all hell is about to break loose, we read that one of the world's largest hedge funds, British Man Group with $58 billion in AUM, is about to launch High Frequency Trading - the same high volume churning, sub-pennying, liquidity extracting, stub quoting and quote stuffing parasite that crashes the equity, and as of recently the FX and commodity markets, into that most sacred of markets: US Treasurys. The official spin: "The Man Systematic Fixed Income fund, yet to be launched, will try to identify and profit from dislocations in liquid government bond markets." What this really means is that the final frontier of market rationality is about to be invaded by artificial momentum generating algorithms, who couldn't care less about fundamentals, and whose propensity to crash and burn at the worst of times, may end up costing the Fed all those tens of trillions it has spent to keep the Treasury market calm, cool, collected, and largely devoid of any volatility and MOVEment. But all that is about to change: "The unit is run by Sandy Rattray, who co-developed the VIX. VIX volatility index, also known as the "fear index", widely used to measure investors' perception of risk." As a reminder, the VIX index is only relevant when there are surges in volatility, something which we are confident Mr. Rattray will no doubt bring to Treasury trading momentarily. 

Just as market regulators were finally getting wise to the fact that they have no clue how how modern market works, what modern market topology is, or how High Frequency Trading impacts the stock market (think Flash Crash), here comes Certichron, the supplier of a time service center at a Savvis market center in Weehakwen, which says it has now mastered sub-nanosecond readouts which are now "compliant with the FINRA Order Audit Trail System and is likely to be compliant with any Consolidated Audit Trail that might be specified by the Securities and Exchange Commission." In other words, here come sub-nanosecond markets.

While reading Advanced Trading today we stumbled across the following curious excerpt:

Advanced Trading: You mentioned regulators and politicians are ignorant ...

[ITG's Jamie] Selway: I would say that their knowledge is incomplete.

Advanced Trading: Is this causing HFT to be scape-goated?

[ITG'S Jamie] Selway: Yes, there's a mixture of that. I am fond of saying I am not a huge regulations guy but I am a fan of regulations at an appropriate level that boosts confidence. I for one would prefer to be regulated by the SEC and not by ZeroHedge. So we have a team of experts and multiple agencies that are expert in regulations and know the markets and have the resources.

Here is our response.

Earlier today, we reported on the extended halt of the CME Globex crude market, which following an errant trading pattern, did not quite crash, but did the next best thing - go offline for a full 75 minutes. Why did this happen? Our initial speculation was that this "may have been an algo gone berserk in advance of what may or may not have been a block order.... Someone take quote stuffing a little too far today?" It turns out we were not too far off. Below is Nanex visualization of just what occurred in those seconds between 13:59:57 and 14:04:55 when "a blast of quotes corrupted a memory queue causing the software to believe the queue was full all the time." In other words just under two years after the May 2010 flash crash, another algo may have been the reason for the halt in one of the world's most important markets. At least this time there was no 10% "correction." How long until there is, and when it does happen again, will it be limited to just 10%? Oh, and whatever you do, most certainly don't expect this little incident to be brought up ever again by those in control, for any precautionary measure to be taken, or for the SEC to ever get involved. Any of those three would immediately imply something is very wrong with the market. And that's simply not allowed.

Update 3: Market reopens - "perfectly normal market"