Quote Stuffing

Now that we can directly monitor the amount of quote stuffing in the NYSE courtesy of Nanex (an ability that the SEC apparently never will have), we know that every time there is a massive spike in hollow trade (as in without intentions to cross bids or asks, something everyone but the SEC and the HFT lobby believes should be a felony offense), the market is programmed to either rip of plunge. Sure enough, at just after 3:19 pm we saw an epic spike in empty packets on the NYSE, which set off red flags and immediately prompted us to observe the move in ES, which naturally confirmed that an HFT driven coordinated buy order (no block) was going through and pushing the ES well on its way to VWAP. Market manipulation no longer needs anything more than a coordinated packet stuffing dump, as what happened on May 19. Keep in mind: these work on both the upside and the downside- the reason why suddenly everyone hates HFT after loving it for over 2 years, is that while it provides volumeless levitation, it just as easily can serve as quicksand in a downmarket. That, however, does not make it right, and just as two years ago, when we first brought attention to the matter, so today, we claim that HFT should be abolished immediately by the imposition of a minimum active quote latency. That would eliminate all quote stuffing in a millisecond.

As the market dips to intraday lows, quote stuffing spikes as if on demand. Now the only question is did the market drop because of the spike in empty packets, or vice versa... We have an idea or two. So does Nanex. But not the SEC. Definitely not the SEC.

If: quote stuffing spike = true; then: market plunge. Over and over and over and over.

Almost as if someone is trying to kill this market... Almost.

In a recent article Nanex has shown that quote stuffing can slow down the updating of series of stock prices, bids and asks. The article was less clear about why one might do that. There could be arbitraging opportunities. One of the first games these clowns got into was latency arbitrage. HFTer offers a number of shares for sale at one price, and at the first sign of interest, pulls all of the offers and resubmits them at a higher price. The latency comes into play because as another player send his orders in to fill HFTer, and these orders all find their ways to the market via differing routes, each of which has a different latency (lag time)--so instead of all arriving at once, they arrive singly, giving HFTer time to pull the rest of his bids....Saturating the quotes on individual lines will change the time lags (latency factor) during the intervals the quotes are generated. For Thor to work properly, it has to estimate by observation the precise lag between sending an order and having it arrive on each market. Randomly changing the lags for the different lines would confound RBC's (and others) attempts at ensuring all its orders arrive on all markets at the same time. And curiously all of this comes just days after the CQS decided to increase the cross-system capacity for quote stuffing in the market from 750,000 quotes per second to 1 million.... Almost as if someone is urgently trying to recreate the market instability that sent the Dow plunging by 1,000 points in seconds.

About a year ago, we wrote an article titled "How HFT Quote Stuffing Caused The Market Crash Of May 6, And Threatens To Destroy The Entire Market At Any Moment" in which we advanced the proposal, first suggested by Nanex, that while High Frequency Trading was the primary reason for the May 6 flash crash, it was a specific aspect of HFT that permitted the Dow to drop 1,000 points in the span of minutes, namely "quote stuffing", or the process of blasting millions of bids and offers without and interest in executing a transaction, merely as a fishing expedition to isolate any "whale" orders and to front run them, making a few guaranteed cents in the process even as this materially distorts true market depth, liquidity and overall stability. And while we were not surprised that the toothless, incompetent and corrupt US securities regulator did take a passing interest in the issue, the topic of "quote stuffing" has finally attracted the interest of US prosecutors. From Bloomberg: "U.S. prosecutors have joined
regulators’ investigation into whether some high-speed traders
are manipulating markets by posting and immediately canceling
waves of rapid-fire orders, two officials said...Justice Department investigators are “working closely” with the Securities and Exchange Commission to review practices “that are potentially manipulative, like quote-stuffing,” Marc Berger, chief of the Securities and Commodities Task Force at the U.S. Attorney’s Office for the Southern District of New York, said today at an event in New York." But, the traditional red herring justification for this criminal behavior goes, they provide so much liquidity which would forever be gone if it weren't for the high freaks.

The push back against the HFT market-propping travesty is finally starting to gain steam...but for now only in Europe. After all, the Fed realizes all too well that it needs all the resources it can get in its bid (no pun intended) to keep stocks as artificially high as possible, of which the HFT upward biased feedback loop is a critical one (the PD POMO monetization circuit being a second one... and when both fail, there is always the Citadel dark pool direct purchasing channel). Reuters reports thet "Britain and France flagged on Thursday a looming crackdown on ultra-fast share trading that featured in May's brief "flash crash" freefall on Wall Street, alarming regulators and investors globally. French Economy Minister Christine Lagarde said a
form of computerized trading known as high-frequency trading (HFT) may
need banning in some cases." Lagarde, who has recently shown a willingness to be seen as not part of the Bernanke mold, told reporters that her "natural tendency would be at least to
regulate, to oversee it very strictly and after a cost-benefit analysis
of these methods, maybe to forbid it." Elsewhere, a European Parliament November 16 report on MiFID "Calls for the practice of ‘layering’ or ‘quote stuffing’ to be explicitly defined as market abuse." This is something Zero Hedge has been demanding for about a year now, and obviously something that the corrupt regulators at the SEC, headed by the galactically incompetent Mary Schapiro continue to pretend does not exist. Lastly, in an attempt to make the life of the NYSE easier, whose primary source of revenue, now that Chinese IPOs have been uncovered to be a pathological, unauditable scam, has collapsed, the target has now shifted to dark pools: "The proliferation of dark pools was a tragic error and I would like us to come back to it" according to Bank of France Governro Christian Noyer. The latest onslaught against dark pools is not at all surprising: after all the NYSE is pushing hard to preserve some semblance of relevance (and EPS) as it is now attempting to create "a global network of as many as 40 "liquidity hubs" in data centers around the world." All in all, this smells like the role of HFT right here in our own back yard is about to get seriously curbed. Add the fact that Prett Bharara is about to open at least one criminal case against a domestic HFT outfit, and the robotic permabid behind the market may soon be very, very scarce.

Today, the most fascinating fuck up in the stock market was not the flash dash in Renaissance Learning after hours, after the company announced it was handing out a $2 special dividend which based on some Keynesian version of mathematics resulted in a $9 surge in the stock price, but what is almost certainly a world record set in the churn of one of the most actively traded ETFs: the SPDR Select Sector Fund - Financials, better known as the XLF. As the linked Nanex data demonstrates, between the times of 14:25:18 and 14:27:20, someone sent out a total of 2,793,000 quotes on the Nasdaq exchange, an average of 23,275 quotes per second, and 23.3 quotes per millisecond! While we have not followed individual churn rates before, we assign today's quote bombardment in the XLF the world record (for the time being) in churning empty quotes. All joking aside, the SEC should immediately figure out who the offending party in this flagrant example of quote stuffing was, and politely ask just how it is that the entity could possibly expect that someone, anyone, could possibly trade on these 2.8 million quotes in 2 minutes, and if the intention was not to actually trade based on the massive quote packet (which is the only legal option, but that's a story for a parallel universe in which the SEC actually cares about the rulez), just what the actual intention of this world record in churn was?

In a landmark development for a return to market integrity, regulators are finally getting serious on this whole "HFT thing" after over a year of disclosures of their illegal and manipulative practices by Zero Hedge. Today, Finra announced it is fining Trillium Brokerage Services, LLC, $1 million for using an illicit high frequency trading strategy. So just what is this illicit high frequency trading strategy, that incidentally is used by the bulk of low latency market quote stuffers, er, participants? "Trillium, through nine proprietary traders, entered numerous layered,
non-bona fide market moving orders to generate selling or buying
interest in specific stocks. By entering the non-bona fide orders, often
in substantial size relative to a stock's overall legitimate pending
order volume, Trillium traders created a false appearance of buy- or
sell-side pressure.... This trading strategy induced other market participants to enter orders
to execute against limit orders previously entered by the Trillium
traders. Once their orders were filled, the Trillium traders would then
immediately cancel orders that had only been designed to create the
false appearance of market activity.... Trillium's traders bought and sold NASDAQ securities in this manner in
over 46,000 instances, resulting in total profits of approximately
$575,000, of which the firm retained over $173,000 and subsequently was
required to disgorge." But. But. But. They just provide liquidity damn it! Plus, just like gold, you can't eat HFT. So Finra is telling us now that HFT has market abusive potential? Egads! Does this mean that that the Goldman announcement from last summer's Aleynikov affair when Goldman lawyer Facciponti said that “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways”, that he was not merely kidding? Luckily, Goldman will no longer have a HFT division as it is spinning off all of its prop trading. Correct Messers van Praag and Canaday?

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.

And another one wakes up. Better late than never. We wish to remind the Senator that perhaps he should first follow up on why after the SEC "banning" Flash trading, DirectEdge and other exchanges still frontrun orders on a daily basis, and why flash trading continues to lead to, ahem, flash crashes. "U.S. Sen. Charles Schumer urged federal securities regulators to explore ways to slow some high-speed trading at times of market stress and to investigate strategies that have raised concerns of stock manipulation, including one known as “quote stuffing.” Schumer, a New York Democrat, urged the Securities and Exchange Commission to launch a formal inquiry into whether computer-powered trading firms’ rapid entering and canceling of stock orders, called quote stuffing, played a role in the so-called flash crash of May 6, and to more broadly reconsider these participants’ role in the U.S. marketplace."

It appears there is a pretty stark difference of opinions on market structure these days, with an increasingly greater majority seeing High Frequency Trading as the devil incarnate, while the HFT lobby, most typically in the face of one Irene Aldrigde, surprisingly defending the practices of the HFT practitioners. Regardless, today's incremental observation on High Frequency Trading fair market practices comes courtesy of Boris Schlossberg GFT Forex, who in a CNBC interview, discussing the massive surge in FX volume which we highlighted earlier, makes the following relevant observation on HFT: "HFT traders have been incredibly destructive to the equity market because they have essentially been doing nothing but frontrunning and quote stuffing." We wonder if Mary Schapiro was watching this particular interview.

If you poke them enough, it appears they do eventually wake up. After many months of rants by Zero Hedge on both subjects of quote stuffing and sub-pennying, it appears the SEC is finally getting involved. Of course, this being the SEC, which a year after saying it will ban Flash trading, still allows HFT frontrunning as a perfectly acceptable and encouraged practice on such exchanges as DirectEdge (and Nasdaq, although the latter has recently voluntarily recanted from abusing the public's, tee hee, trust in regards to frontrunning), we don't have very high hopes. Nonetheless, the fact that the HFT marauders are finally in the regulator's bullseye, will promptly make such occurrences as daily flash crashes hopefully a thing of the past. In other news, we are happy that the SEC is finally starting to catch up with this thing called "teknoulogee."

Now that nobody is left to trade except the Fed, the Primary Dealers and a few semi-sentient computers (and yes, be very afraid of Flash Crash like volatility to celebreate the second coming of Bernanke's Liberty 33 central planning committee), here is the daily quota of milisecond quote stuffing algorithms, focusing on V, DUG and TRN, from Nanex.

Recently we posted a required reading analysis by Nanex in which the market trading analytics firm presented irrefutable evidence of quote stuffing by HFT algorithms in tens of stocks, in which thousands of cancelled quotes would reappear each second with a definitive periodicity and regularity, around the time of the May 6 flash crash. Aside from the fact that it is illegal to indicate a quote without a trade intent, this form of quote stuffing is in fact manipulative when conducted by HFT repeaters in specific "shapes" as it actually moves the NBBO actively higher or lower, in cases pushing the bid/offer range up to 10% higher without even one trade ever having occurred, simply by masking a big block order which other algos interpret as bid interest and pull all offers progressively or step function higher (or vice versa, although we have rarely if ever seen the walking down of a stock over the past 18 months). It is as if the HFT lobby has been given the green light by the powers that be that it is safe to activate merely the bid-size quote stuffing algorithms, and not worry: the fact that the market is so one sided in its quote stuffing patterns is sufficient reason to worry of a concerted effort to push stocks higher, initiated from the very top, and effected by not only the Primary Dealer community but by the end-market "liquidity providers." Today, courtesy of Nanex we demonstrate that this type of illegal stock manipulation continues rampant to this very day, and the SEC still to fails acknowledge that it is precisely the HFT market participants that persist in destabilizing stock prices, which have given up responding to fundamentals and merely move up or down based on quote stuffing interventions by those who plead innocence and claim to only be providing liquidity. Well take a look at the millions in fake, and thus illegal, bids demonstrated below and tell us just how any of this manipulation is "providing liquidity" - the second the patterns break, the algos responsible for the churn pattern disappear, thus eliminating numerous levels of so called bid liquidity below the NBBO: break enough patterns and you have another flash crash as the market once again goes bidless.So while the SEC continues to pander merely to the interests of the market manipulation lobby, and is now doing it in more style than ever by refusing to answer to FOIA requests going forward, here is Nanex with yet more evidence that we no longer have a market, but merely a daily recurring crime scene.