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How Targeted Quote Stuffing "Denial Of Service" Attacks Make Stock Trading Impossible

Tyler Durden's picture




 

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.

And while none of this is surprising: after all why should the algos and their HFT-coding masters change their ways if the SEC still has no idea how to approach and regulate a market that is fractured beyond comprehension in the aftermath of Reg NMS and Reg ATS, what the below data also confirms is what we noted two weeks ago, namely that "stock market fragility is rapidly approaching "flash crash" levels."  The only question is whether anyone will even notice, or care about, the next inevitable 1000 point DJIA plunge...

From Nanex:

DoS Algo's Effect on Trades

While working on identifying and cataloguing the high quote traffic generated by Denial Of Service algo from 01-Nov-2012, we here at Nanex stumbled upon something interesting. Below is an image that shows the trades per second and quotes per second in Bank Of America (BAC) from 9:30-13:45 ET. Each data point represents any second that contained 1000 quotes or more per second in BAC.

The blue represents the number of quotes in a second, the orange represents the number of trades for that same second. When you graph them together using multiple axis, a distinct pattern emerges. For those seconds that contain abnormally high quote traffic, the number of trades drops dramatically.

And conversely, the seconds that contained a higher amount of trades appear when the quote traffic is less.

There might be a few reasons for this:

  1. Other HFT algos were smart enough to pick up on this behavior and pulled out during that time period.
  2. The various computational and network systems in place that route, analyze and do computations on this data can do nothing but handle raw quote traffic, so not as many trades can be processed during that time.

Below are similar graphs for the other securities that were affected:

  • Ford Motor Company (F)
  • Intel Corporation (INTC)
  • KeyCorp (KEY)
  • Morgan Stanley (MS)
  • Sirius XM Radio Inc (SIRI)
  • Yahoo (YHOO)

Note The data below was taken where the security had 100 or more quotes per second.

1. F - 333 seconds had 1,000 quotes or more. 40 of those seconds had 10,000 or more quotes per second.

Here is the entire day in Ford showing every second that had 100 or more quotes per second.

2. INTC - 242 seconds had 1,000 quotes or more. 61 of those seconds had 10,000 or more quotes per second.

Here is the entire day in Intel showing every second that had 100 or more quotes per second.

3. KEY - 386 seconds had 1,000 quotes or more. 347 of those seconds had 10,000 or more quotes per second.

Here is the entire day in KeyCorp showing every second that had 100 or more quotes per second.

4. MS - 140 seconds had 1,000 quotes or more. 89 of those seconds had 10,000 or more quotes per second.

Here is the entire day in Morgan Stanley showing every second that had 100 or more quotes per second.

5. SIRI - 110 seconds had 1,000 quotes or more. 62 of those seconds had 10,000 or more quotes per second.

Here is the entire day in Sirius XM Radio showing every second that had 100 or more quotes per second.

6. YHOO - 157 seconds had 1,000 quotes or more. 51 of those seconds had 10,000 or more quotes per second.

Here is the entire day in Yahoo showing every second that had 100 or more quotes per second.

The official word on the street is that this abnormally high traffic had a "modest impact", I think the data speaks otherwise. During those seconds where there were abnormally high amounts of quote traffic (10,000+ quotes/sec), the number of trades that were occurring simultaneously dropped significantly. In total there were 651 seconds (almost 11 minutes) of market time today that were affected. That's 11 min of potential future economic growth. These seemingly small increments of time eventually add up and serve to slowly erode the confidence of investors small and large.

 

 

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Sun, 11/04/2012 - 14:54 | 2946457 rehypothecator
rehypothecator's picture

Nanex - doing what government regulators are supposed to be doing, much better, more quickly, and at no cost to the general public. 

Sun, 11/04/2012 - 14:55 | 2946458 Tyler Durden
Tyler Durden's picture

They didn't regulate that... Sadly.

Sun, 11/04/2012 - 15:30 | 2946532 James_Cole
James_Cole's picture

I don't understand this hate on quote stuffing, it's Gods work. 

Sun, 11/04/2012 - 15:59 | 2946598 Manthong
Manthong's picture

Is Diebold using the same algos?

I was just wondering since votes are “calibrated” nowadays.

http://www.examiner.com/article/rnc-demands-states-re-calibrate-voting-machines-before-election-day

Sun, 11/04/2012 - 16:03 | 2946605 negative rates
negative rates's picture

There might be some other reasons, you'all and your graphs have gone nuts. This country is going to pizza's, get yours at your local subway.

Mon, 11/05/2012 - 06:57 | 2948077 nanex
Sun, 11/04/2012 - 18:53 | 2946941 SafelyGraze
SafelyGraze's picture

a real-life physical demonstration of injecting liquidity (via high-frequency shaking) into the coin market

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

note that many of the comments complain about "cheating" and  lack of "alarms" and "should have been kicked out" and "will go to jail one day"

but those are just from jealous people who weren't creative enough to have thought of this already

demo was carried out by GS interns

Sun, 11/04/2012 - 14:57 | 2946460 Joebloinvestor
Joebloinvestor's picture

This reminds me of the beginning of the AIDS crisis in America.

Sun, 11/04/2012 - 17:21 | 2946773 Fluffybunny
Fluffybunny's picture

You mean each day AIDS is mentioned over 1000 times in the media, the amount of sexual activity dies down to near zero?

Sun, 11/04/2012 - 15:00 | 2946470 ebworthen
ebworthen's picture

40X leverage algo style!

Sun, 11/04/2012 - 16:08 | 2946619 Ident 7777 economy
Ident 7777 economy's picture

 

 

Man ... if I had the ability to 'jam' the circuits, fill up buffers and queues, and alter the flow of trades for just a few critical seconds here and there, think of the things that I could -er- ... never mind ...

Sun, 11/04/2012 - 20:26 | 2947167 Everyman
Everyman's picture

You can.  A .50 cal Barrett rifle at 600-1000 yards on their cell towers should take 'em out.  Or you can shoot the electrical boxes, or the transformer stations close by.  HFT systems are highly complex, and there are a myrad of ways to take them out, whether to do it "physically" as I "dreamed up" or to do it as a some smart and intelligent broker, feed the main software some shinola data.  SOmewhere there has got to be a way, profit is the motive, hide the data there.....

One day somebody WILL have enough of the electronic HFT BS and matters of the 300 million WILL take precedence over the 0.1% that profits from HFT and does not realize the economic consequence.  If the governing will not the people WILL and it is completely legal, just read the Declaration of Independance.

Sun, 11/04/2012 - 15:02 | 2946473 Everybodys All ...
Everybodys All American's picture

Frontrunning which is illegal pure and simple. Where are the prosecutions?

Sun, 11/04/2012 - 15:07 | 2946484 ekm
ekm's picture

I have an "inevitable" feeling you guys have started to adopt my way of "inevitable" talking.

 

Conceptually HFT is a Pyramid Scheme, but at nanospeed. It's a NanoPyramidScheme.

For people to understand better, it's a NanoMadoffScheme.

Sun, 11/04/2012 - 15:09 | 2946490 resurger
resurger's picture

so when there is low trades, they start quoting high to move the price or something like that? And when the actual trades happens they stop quoting?

what does all that means, Are they trying to give an impression that the market is active or something like that?

Sun, 11/04/2012 - 15:16 | 2946506 Dead Canary
Dead Canary's picture

Cliff notes please.

Sun, 11/04/2012 - 15:31 | 2946509 ekm
ekm's picture

Electronic Trading is one thing, HFT is another thing.

An entity/person who buys or sells something, intends to hold the security for 1 hrs, 1 day, 10 days of forever. There's a human being behind the trade.

 

HFT works off of electronic trading. If nobody trades, HFT is dead. All they do is get inbetwen trades by use of latency amongst 13 stock markets. If they get stuck with few stocks, they just don't clear. They have zero inventory.

 

That's why QEternity is a CURSE for HFT because it removes tradeable assets from the market. The more stocks are removed from the base of the pyramid and stored in banks inventory, the worse the collapse of the pyramid, since all those HFT billions will be fighting over less and less and less and less stocks to get inbetween off of.

 

It comes to a point that the computers (not humans) see no point of bothering to trade and they simply just.............turn off. That's the crash.

 

As Janet Tavakoli says: HFT did NOT cause the 2008 crash, but it magnifies the crash to unbelieavable proportions. By the same logic, QEeternity will be the cause of the INEVITABLE crash. HFT will make sure it becomes a CRATER.

Sun, 11/04/2012 - 15:38 | 2946549 Yen Cross
Yen Cross's picture

 Thx. Tyler &  EKM. That was enlightening.

Sun, 11/04/2012 - 16:01 | 2946588 ekm
ekm's picture

Thx a lot YEN CROSS.

 

To use a metaphor, HFT is like Mafia.

Mafiosi are armed with guns and go where law is absent and demand extortion from businesses.

Same for HFT. HFT are armed with nanospeed computers and go where law is absent and demand extortion from the bonafide traders.

 

Sun, 11/04/2012 - 15:15 | 2946504 virgilcaine
virgilcaine's picture

Distorting the price for certain algo's to benefit.

Sun, 11/04/2012 - 15:41 | 2946557 Atomizer
Atomizer's picture

When the people you elect to manage US Constitutional Laws become unable to access their own bank accounts, it will be deemed as terrorist act. Unfortunately, a long laundry list will follow these perps. They’re all skating with sleepless nights and how they’ll dodge breaking the law to become rich over a currency which has no value.

 

I’m not advocating hacking, but if you should see major figureheads go from riches to rags in a millisecond… you’ll know a very distinct message was sent. The message is, no one is really interested in stealing your worthless Federal Reserve debt notes. Principles and society goals are far more important!

 

My post is merely speculative, yet informative.

Sun, 11/04/2012 - 15:43 | 2946560 LongSoupLine
LongSoupLine's picture

when viewing all this, i simply don't understand why there are billons in mutual fund outflows every weeek for years now, not to mention CNBC viewership flashcrashing.

Sun, 11/04/2012 - 15:51 | 2946581 Quinvarius
Quinvarius's picture

And sadly, that is bullish.

Sun, 11/04/2012 - 15:58 | 2946574 buzzsaw99
buzzsaw99's picture

HFTs don't want to trade/own anything they just want the commish from quote stuffing. The lake of supposed liquidity they provide is a mirage. http://www.youtube.com/watch?v=FG1NrQYXjLU

Sun, 11/04/2012 - 19:09 | 2946969 Perpetual Burn
Perpetual Burn's picture

Yes, this is true. HFTs are also the exchanges best customer. 

Sun, 11/04/2012 - 15:53 | 2946578 Quinvarius
Quinvarius's picture

If they made these fkrs eat the losses they take instead of cancelling the trades maybe they would have some motivation to stop what is obviously hacking of the system.  But no.  Arrogance and changing the rules as needed are all that the ponzi crowd understand.  They are a bunch a friggin idiot babies.  Admitting there is a problem is worse than the fact it exists because all they have is confidence with no substance.

Sun, 11/04/2012 - 16:23 | 2946668 Atomizer
Atomizer's picture

When a monetary system creates counterfeit money to drive a globalized market, its failure always comes to an end. Printing new counterfeit money to pay off old counterfeit money slowly catches up in time. The growth cycles eventually seizes up.

 

Every time a new fuckstick tells the committee, after this existing monetary collapse, we’ll get it right next time around.

The Matrix- Why am I here?

Sun, 11/04/2012 - 17:12 | 2946760 DutchR
DutchR's picture

If i ever have a daughter i will call her nanex, i will never understand her but she sure does look beautiful.....

Mon, 11/05/2012 - 06:47 | 2948072 nanex
nanex's picture

Best. Comment. Ever.

Sun, 11/04/2012 - 17:20 | 2946771 Itch
Itch's picture

Gif not working...

Mon, 11/05/2012 - 06:48 | 2948074 nanex
nanex's picture

It was a large file and ended up DoS's the site that hosted it. Irony.

Sun, 11/04/2012 - 18:01 | 2946829 q99x2
q99x2's picture

Then if the SEC won't do anything about it the corporations should take responsibility and move the trading in their respective stocks in house and off the exchanges.

Sun, 11/04/2012 - 18:19 | 2946865 Clowns on Acid
Clowns on Acid's picture

It's not just the speed or orders / trades, it is the insisight via special Order types and insight into the Order (institutional, commercial, or retail) that the HFT guys get. Few other market participants get access to ths information.

Hey market makers always got this info, poj tis that the HFT guys are not techinically market makers, therefore can pull out at anytime, and do not have the responsibility of maintianing an "orderly market".

It really is a lot simpler than it seems. That is why it is incredible that the SEC is still light years away from understanding what the real issues are. The question becomes, "Does the SEC really want to understand, or are they just that low brow".

Sun, 11/04/2012 - 22:32 | 2947541 StychoKiller
StychoKiller's picture

It's difficult to get someone to understand something, when they're being PAID NOT to understand it!

Sun, 11/04/2012 - 18:20 | 2946868 ptolemy_newit
ptolemy_newit's picture

" states to correct the problem by fixing and re-calibrating the machines before Election Day."

all /every machine, system and prcess has a Cpk that can be measured.  so if the chads don't fall it is obvious that the Ckp score is low.  so how easy is it to calibrate the Cpk (very easy). and very easy to place the poor Cpk machines in the states that you need them.

GWB win in Fllorida was fixed!

dont vote, dont vote

Sun, 11/04/2012 - 22:35 | 2947551 StychoKiller
StychoKiller's picture

Calibration does NOT apply to software, TRANSPARENCY does!  NO single corp (like Diebold) should be allowed to use proprietary software for something like this.

Mon, 11/05/2012 - 06:48 | 2948073 Money 4 Nothing
Money 4 Nothing's picture

Funny.. I never got the wrong ammount of cash out of a Diebold ATM, but it can't calculate a single vote for shit.

Sun, 11/04/2012 - 18:48 | 2946920 Lumberjack
Lumberjack's picture

Let's talk a bit about the SEC. They ran cover for the mortgage fraud (as did others) and delayed the Bernie Madoff prosecution as they were handed all the evidence on silver platter (repeatedly) years before anything happened. So, who should be trusted? The FBI or SEC? (Whitey Bulger comes to mind), and what about the energy sector? Who will be willing to submit evidence regarding the green fiasco?

 

Stay tuned.  

Sun, 11/04/2012 - 20:39 | 2947209 insanelysane
insanelysane's picture

The FBI gave Whitey immunity for all past, present, and future crimes including murder. The SEC has given Corzine, JPM, and Goldman the same immunity for financial crimes.

Sun, 11/04/2012 - 19:25 | 2946951 NuYawkFrankie
NuYawkFrankie's picture

Yet another example of out-of-control Quote Stuffing -

 

I think, therfore I am / Et Tu Brute / To be or not to be / I'm the Decider / I'll be back / I am not a crook / Who's on first / What - me worry? / I'm shocked, shocked to find that quote-stuffing is going on at Rick's / Who let the dogs out? / Hasta La Vista Baby...

Mon, 11/05/2012 - 06:41 | 2948067 Monedas
Monedas's picture

I didn't have SEX with that woman .... things got crazy and wild and I came on her dress !

Sun, 11/04/2012 - 19:15 | 2946986 chump666
chump666's picture

Nanex is doing a f*cking incredible job analyzing this HFT infested market.

Thank you ZH.

Sun, 11/04/2012 - 21:11 | 2947302 Downtoolong
Downtoolong's picture

Add these stocks to the list of ones that I will never trade or invest in. Enjoy your phony liquidity you fools.

 

Sun, 11/04/2012 - 22:35 | 2947553 Whiner
Whiner's picture

Tyler, limited reading comprehension here (public schools ). Give me a hand. Your first sentence finishes at not quite 200 words. Brain hernia following side bar cul de sacs. Help me.

Sun, 11/04/2012 - 22:38 | 2947562 Mediocritas
Mediocritas's picture

Yep. Guaranteed profit from exploitation of asymmetric network latency. When necessary, manipulate network latency in your favor via quote stuffing. 

This is what you get from a "massless" system. No inertia, no expense to quote means the noise to signal ratio quickly maxes out to the physical limits of the network. It could be fixed very easily by introducing mass to the system but isn't because exchanges are profiting from NOT supporting a properly functioning market.

 

Sun, 11/04/2012 - 22:52 | 2947600 brown_hornet
brown_hornet's picture

Whiner- Its the thought that counts.

Mon, 11/05/2012 - 06:45 | 2948070 Monedas
Monedas's picture

Monedas Law:  Every opportunity to steal will be seized !

Mon, 11/05/2012 - 11:25 | 2948580 Being Free
Being Free's picture

 We gotta take these bastards. Now we could do it with conventional weapons, but that could take years and cost millions of lives. No, I think we have to go all out. I think that this situation absolutely requires a really futile and stupid gesture be done on somebody's part!”

A number of decades ago when I was in college one of the on-campus dorms was a then brand new group of four high-rise buildings called “The Quad”.   In designing the buildings the engineers used common design standards that did not include all of the top floor toilets being flushed at the same time.  They underestimated the devious ingenuity of a bunch of 18-21 year old boys residing on the top floors who speculated, based on hearing of similar events elsewhere, that if they all flushed their toilets at exactly the same time they could cause a rather nasty flood in the lowest floor(s).  Of course they tried it and it worked.  They were roundly disciplined by the university but held in high esteem by most of the student body.

Isn’t there something like that that we could do to the HFT algos.  We all have electronic access to the market; what if thousands of individuals all placed orders a set% away from the market in a single strategic stock at the same time and then canceled those orders; repeat at predefined price and time.  Wouldn’t this impact the data flow into the algos and cause them to go at least a little bonkers?  I for one wouldn’t mind fucking with them but have no idea if something like that would do anything.

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