"Momentum Ignition" - The Market's Parasitic 'Stop Hunt' Phenomenon Explained

Tyler Durden's picture

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.

This is Credit Suisse, an entity whose incremental input we are confident will be very much welcome by Congress and the regulators, not some fringe, tinfoil hat blog.

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."

From Credit Suisse:

MOMENTUM IGNITION

What is Momentum Ignition?

Momentum ignition refers to a strategy that attempts to trigger a number of other participants to trade quickly and cause a rapid price move.

Why Trigger Momentum Ignition?

By trying to instigate other participants to buy or sell quickly, the instigator of momentum ignition can profit either having taken a pre-position or by laddering the book, knowing the price is likely to revert after the initial rapid price move, and trading out afterwards.

Likelihood and Rapid Price Moves

Momentum ignition does not occur in the blink of an eye, but its perpetrators benefit from an ultra-fast reaction time. Generally, the instigator takes a pre-position; instigates other market participants to trade aggressively in response, causing a price move; then trades out. We identify momentum ignition with a combination of factors, targeting volume spikes and outsized price moves - see Exhibit 18 for a example of this pattern in Daimler on 13th July, 2012:

To pinpoint momentum ignition, we search for:

  1. Stable prices and a spike in volume (Box 1 in Exhibit 18)
  2. A large price move compared to the intraday volatility (Box 2)
  3. Reversion (Box 3)

Though we cannot conclusively determine the intention behind every trade, this is the kind of pattern we would expect to emerge from momentum ignition. We use this as a proxy to estimate the likelihood and frequency of these events (further details are provided in Appendix 4).

Likelihood and Rapid Price Moves

As shown in Figure 19, we estimate that momentum ignition occured on average 1.6 times per stock per day for STOXX 600 names in Q3 2012, with almost every stock in the STOXX600 exhibiting this pattern on average once a day or more.

In addition, we note that the average price move is 38bps (but over 5% are more than 75bps, with some significantly higher – see Exhibit 20), and the time it takes for that move to occur is approximately 1.5 minutes (see Exhibit 21).

While 38bps may not sound like a big move, it is a bit more significant when compared to the average duration of these events (1.5 minutes) and the average spread on the STOXX600 (approximately 8bps).

Though not all momentum ignition events result in massive price moves, those that do can cause significant impact. Percentage of volume orders that would normally execute over hours may complete in minutes on the back of “false” volume ( one of the causes of the 2010 flash crash was a straightforward percentage of volume order). AES offers a variety of protections to help mitigate this kind of dislocation, including customised circuit breakers, active limits (that kick in when the stock decouples from a specified index) and fair value limits.

* * *

Much more on HFT being finally exposed by "credible" sources tomorrow.

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StoleYourMoney's picture

Welcome to the new stock market.

Biggvs's picture

Where's Beeks? Where in the hell is Beeks?

Nanex gives major props to ZH:

http://www.nanex.net/aqck2/4022.html

AlaricBalth's picture

Nanex also has a very good graphic of MIE's from 2006 to March 2012.

From Nanex:

"Momentum Ignition Events are caused by some HFT strategies which seek to cause short term market disruptions. We have discovered that these events are associated with a sudden widening of the NBBO in a large number of stocks. Each line shows the maximum number of symbols that experienced a sudden (within 1 second) increase in NBBO spreads during each 30-second period. See this page for an example of one of these events. Note the frequency of these events: before the birth of HFT in late 2006, they were very rare, yet today these events occur in almost every 30-second period of the trading day! "

http://www.nanex.net/aqck/2938.html

Pegasus Muse's picture

Since the subject is Parasites this piece is particularly on point.  Sickening.  Pathetic.  Fascist.

======

HSBC Management's Criminal Activity 'Above the Law' Because of the Importance of the Bank

http://jessescrossroadscafe.blogspot.com/2012/12/hsbc-criminal-activity-above-law.html

Texas Ginslinger's picture

If a stock market is like a casino, then algo driven high frequency trading is like a card counter at a blackjack table.

They have figure out a way to beat the house.

Who can say if the pre-market flash crashes reported here yesterday are by design, or otherwise..??

 

boogerbently's picture

HFT won't be "investigated" until all the gold is bought....cheap.

Radical Marijuana's picture

Yes, Pegasus Muse, the basic paradox is the central fact that society IS controlled by the best organized gangs of criminals. The vast majority of science and technology is employed to make them able to be BETTER at being dishonest, and backing that up with violence. The drug wars segued from slavery. If one looks into history, one will discover that the international bankers were behind driving the drug wars to flourish. Those who are the biggest gangsters, the banksters, benefit all the way around from there being more and more organized crime, laundering more and more illegal money. There is nothing new in discovering that the frauds are now automated, and that the biggest banks can break the law with impunity. The only thing new is that these phenomena are being amplified to greater astronomical sizes by the advances in science and technology. Therefore, the runaway organized crime that controls our governments is being made trillions of times BIGGER! As far as I can tell, after thinking and working on these problems for several decades, there is nothing which can be done which is realistic and practical. There is nothing worthwhile that one can do about this overall situation. The only thing we actually can do is wait and watch as this automatically gets worse, faster. Eventually this runaway fascist plutocracy juggernaut is going to turn most people into road kill.

WallowaMountainMan's picture

All Hail Nanex!

All Hail ZH, for without whom, yours truly would still be the all knowing ignoramus i once was...

ShorTed's picture

...Beeks!  That's awesome...Turn those machines back on!

Full CS report link:  http://www.scribd.com/doc/116761218/CS-HFT-DETECTION

The Master's picture

Primary Dealers finally realizing they need VOLUME to sustain their profits and that HFT is driving away retail investor participation.   This is long overdue.

tradewithdave's picture

Is this bail-in-able?.... or only bail-out-able?

http://tradewithdave.com/?p=14203

 

disabledvet's picture

Actually you should switch that around...as methinks you can only "bail in" these types of strategies. In other words "short sellers need not apply."

Whoa Dammit's picture

12 miles of dead squid wash ashore:

"The beaches of Santa Cruz County are littered with carcasses of thousands of Humboldt squid.

They don't see the shore very often, so it might just be that they don't understand what's going on around them, and they're just trying to get away and don't realize that if they swim towards the shore, they're going to run out of water eventually.

They had full stomachs, having feasted on smaller market squid."

http://www.ksdk.com/news/article/351801/28/12-miles-of-dead-squid-wash-a...

Phat Stax's picture

Calamari for everybody!  Happy Holidays!

youngman's picture

Must be the leftovers of the Goldman Sachs....Channakah party

The Joker's picture

Geo-engineering, at theatres near you.  Won't be long until you are the target.

Jason T's picture

mass hysteria, cats and dogs sleeping together, squid washing up dead on shores, birds falling from the sky..

 

shit, lets' call the ghostbusters!

Whoa Dammit's picture

It's meant to be an allgory. Sheesh!

punxsutawney phil's picture

Mass suicide by squid?  Is that why the $ is selling off?

mayhem_korner's picture

 

 

Reason #75 why market timing is a fool's errand.

Cursive's picture

Zero Hedge:  The Financial Media's 800 pound gorilla with a chainsaw for a penis.  All respect to TD for being first and foremost on this.  Hat tip to Joe Saluzzi as well.

Cognitive Dissonance's picture

Roger on Joe Saluzzi. I remember his early interviews on state financial TV (CNBC) where he was derided for his views on HFT. The early are always mocked.

Thank you Tyler and Joe for the courage of your convictions.

Bay of Pigs's picture

+1

You should have been there with GATA in 1999 when a few of us were saying the gold market was rigged. Most people thought we were a bunch of wingnuts (some still do).

It's been a very long slog watching this entire shit show fall apart. 

HeatMiser's picture

And what going to be fixed NOTHING. BLAH BLAH BLAH. NOTHING.

boogerbently's picture

If HFT is outlawed, only outlaws.....

silverserfer's picture

trade with confindece bitchez

SubjectivObject's picture

So let's all just give in and say nothing.

boogerbently's picture

.....thank you sir, may I have another....

Confundido's picture

Remember when at the fall of the Roman Empire peoples all over Europe buried their gold in their backyards, hoping that neither the appointed tax man nor the barbarian hoards would find it? That's where we're heading to! I would NOT like to be in the financial sector (but I am) and will surely not encourage my kids to seek a career in it. It's fate is worse than that of FB shares.

Racer's picture

Good enough reason to steer well clear of this fake con 'market'.

You would get more use out your money by burning it on a fire than by buying any shares from these sharks

The Joker's picture

Now you're talkin'.  Burn baby burn.

orangedrinkandchips's picture

Damn close to arbitrage for equities....bid it up, dump it......

 

Same shit happened in the late 20s before the crash....

Dollar Bill Hiccup's picture

But are the Banks making money off this?

That's the main thing.

Remember, a certain bank is in charge of money, which leads directly to profit at other banks.

Logic would dictate that the banks are making money.

Oh, and it's only short term noise anyway, no reason to panic the little buy and holder, right  ... ?

emersonreturn's picture

why did  J Tease release this?

dcb's picture

You need to provide link to these articles

Tyler Durden's picture

You need to click on the Glossary button and then this: Nodes of term High Frequency Trading

Cognitive Dissonance's picture

Only 245 articles with the tag "High Frequency Trading"?

You need to step it up bro. No wonder the SEC knows nuttin' about the subject.  :)

francis_sawyer's picture

So basically... using the '100th Monkey' principle... The Monkeys are on, like, 2 1/2 generations of evolution... The SEC ought to be along in due time...

fuu's picture

I still have a first printing of that book on my shelf.

Cunnial's picture

"...opportunistic tactics such as Guerilla and Sniper have been continually enhanced..." WTF! These a-holes have been playing to much Call of Duty...

NaiLib's picture

Well if your are interested in value investing. Look at small cap, individual companies. There are several out there valued far below the big indices. If not you can see good examples of this article in the DAX right now as I write, And Credit Suisse is not alone. They ususally work in pair with Barclays. In Europe that is.

NaiLib's picture

AND. Dont forget, The exchages make a lot of money out of these guys. They sell (!) special access to the markets. The ones that pay a little more will have shorter distance and time to the exchanges computer. YOu have to pay up in order to get everything , including news, ahead of the market,

NaiLib's picture

Well I guess it was Credit Suiss, Barclays and SocGen who gave me - 3 times on that one, :):)

SheepDog-One's picture

Entire marketplace looks like its just saying 'OK...so now what'? 

no life's picture

Bottle of Bollinger on that one..

Kina's picture

The SEC.

 

Surely either the most corrupt, or incompetent or captured regulatory authority in the USA (apart from the Senate).

 

Kreditanstalt's picture

No wonder everything is now correlated, volatility is next-to-zero and prices go nowhere for months and years on end...

 

mr. mirbach's picture

It would be very interesting to see a daily report of orders versus transactions. Do you think the SEC would wake up if the volume of orders on any given day were 25 trillion and completed tranactions were the average 70 million shares?