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"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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Fri, 12/14/2012 - 11:50 | 3062758 StoleYourMoney
StoleYourMoney's picture

Welcome to the new stock market.

Fri, 12/14/2012 - 12:09 | 3062793 Biggvs
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

Fri, 12/14/2012 - 12:29 | 3062838 AlaricBalth
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

Fri, 12/14/2012 - 12:31 | 3062888 Pegasus Muse
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

Fri, 12/14/2012 - 12:35 | 3062905 Xibalba
Xibalba's picture

algo's win. 

Fri, 12/14/2012 - 12:46 | 3062950 Texas Ginslinger
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..??

 

Fri, 12/14/2012 - 12:50 | 3062957 boogerbently
boogerbently's picture

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

Fri, 12/14/2012 - 13:25 | 3063076 Radical Marijuana
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.

Fri, 12/14/2012 - 18:59 | 3064856 WallowaMountainMan
WallowaMountainMan's picture

All Hail Nanex!

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

Fri, 12/14/2012 - 14:16 | 3063321 ShorTed
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

Fri, 12/14/2012 - 13:19 | 3063054 The Master
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.

Fri, 12/14/2012 - 11:52 | 3062763 tradewithdave
tradewithdave's picture

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

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

 

Fri, 12/14/2012 - 12:41 | 3062928 disabledvet
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."

Fri, 12/14/2012 - 11:53 | 3062768 Whoa Dammit
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...

Fri, 12/14/2012 - 11:59 | 3062784 Phat Stax
Phat Stax's picture

Calamari for everybody!  Happy Holidays!

Fri, 12/14/2012 - 12:09 | 3062811 youngman
youngman's picture

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

Fri, 12/14/2012 - 12:27 | 3062876 The Joker
The Joker's picture

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

Fri, 12/14/2012 - 12:23 | 3062859 Jason T
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!

Fri, 12/14/2012 - 12:56 | 3062989 Whoa Dammit
Whoa Dammit's picture

It's meant to be an allgory. Sheesh!

Fri, 12/14/2012 - 13:36 | 3063120 punxsutawney phil
punxsutawney phil's picture

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

Fri, 12/14/2012 - 11:54 | 3062771 mayhem_korner
mayhem_korner's picture

 

 

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

Fri, 12/14/2012 - 11:54 | 3062772 Cursive
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.

Fri, 12/14/2012 - 12:04 | 3062800 Cognitive Dissonance
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.

Fri, 12/14/2012 - 12:12 | 3062819 Bay of Pigs
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. 

Fri, 12/14/2012 - 11:55 | 3062775 HeatMiser
HeatMiser's picture

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

Fri, 12/14/2012 - 11:57 | 3062781 mayhem_korner
mayhem_korner's picture

 

 

Just don't play.

Fri, 12/14/2012 - 12:52 | 3062977 boogerbently
boogerbently's picture

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

Fri, 12/14/2012 - 13:51 | 3063153 silverserfer
silverserfer's picture

trade with confindece bitchez

Fri, 12/14/2012 - 12:08 | 3062810 SubjectivObject
SubjectivObject's picture

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

Fri, 12/14/2012 - 12:51 | 3062968 boogerbently
boogerbently's picture

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

Fri, 12/14/2012 - 11:59 | 3062785 Confundido
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.

Fri, 12/14/2012 - 12:00 | 3062789 Racer
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

Fri, 12/14/2012 - 12:31 | 3062891 The Joker
The Joker's picture

Now you're talkin'.  Burn baby burn.

Fri, 12/14/2012 - 12:02 | 3062794 orangedrinkandchips
orangedrinkandchips's picture

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

 

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

Fri, 12/14/2012 - 12:03 | 3062798 Dollar Bill Hiccup
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  ... ?

Fri, 12/14/2012 - 12:04 | 3062799 emersonreturn
emersonreturn's picture

why did  J Tease release this?

Fri, 12/14/2012 - 12:04 | 3062802 dcb
dcb's picture

You need to provide link to these articles

Fri, 12/14/2012 - 12:12 | 3062822 Tyler Durden
Tyler Durden's picture

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

Fri, 12/14/2012 - 12:50 | 3062958 Cognitive Dissonance
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.  :)

Fri, 12/14/2012 - 13:00 | 3063004 francis_sawyer
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...

Fri, 12/14/2012 - 13:07 | 3063021 fuu
fuu's picture

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

Fri, 12/14/2012 - 12:08 | 3062808 Cunnial
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...

Fri, 12/14/2012 - 12:08 | 3062812 NaiLib
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.

Fri, 12/14/2012 - 12:12 | 3062821 NaiLib
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,

Fri, 12/14/2012 - 12:42 | 3062937 NaiLib
NaiLib's picture

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

Fri, 12/14/2012 - 12:18 | 3062834 SheepDog-One
SheepDog-One's picture

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

Fri, 12/14/2012 - 12:20 | 3062840 no life
no life's picture

Bottle of Bollinger on that one..

Fri, 12/14/2012 - 12:20 | 3062841 Kina
Kina's picture

The SEC.

 

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

 

Fri, 12/14/2012 - 12:21 | 3062844 Kreditanstalt
Kreditanstalt's picture

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

 

Fri, 12/14/2012 - 12:34 | 3062897 mr. mirbach
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?

Fri, 12/14/2012 - 12:35 | 3062902 illyia
illyia's picture

Another fine exposure posted by ZH.

Thanks, Tylers.

Fri, 12/14/2012 - 12:36 | 3062909 Right Wing Nut Job
Right Wing Nut Job's picture

Does anybody else recognize the similarity to Benford's Law in these?

Fri, 12/14/2012 - 12:36 | 3062913 Village Smithy
Village Smithy's picture

Together ZH and Nanex have provided enough proof over the past 2 or 3 years that this exists. Anyone who trades has watched it grow. Why have the regulators allowed it to happen? Because as long as the cheating f____s move the markets generally up with this shit then Ben phones Mary Shapiro and tells her to let it ride.

Fri, 12/14/2012 - 12:40 | 3062926 bnbdnb
bnbdnb's picture

The last few weeks, it seems this little game has stopped working.

Fri, 12/14/2012 - 12:50 | 3062964 Budd aka Sidewinder
Budd aka Sidewinder's picture

Where is John Conner when we need him most?

I wish Anonymous would hack into all the sell side robots and turn them into Pong machines for a week.

WWJCD

Fri, 12/14/2012 - 12:51 | 3062973 babylon15
babylon15's picture

Their conclusion is completely fictitious and unscientific.  How can they possibly come up with a conclusion for who is buying or selling when?  Many things have changed since 2007.  Couldn't I publish the same research and just blame it on the Fed instead of HFT?  I could say it's Bernanke causing the price to move this way.  I don't believe that's the case.

 

Anyway, this research is wrong for another reason.  The successful HFT strategies do not even cross the spread, so how could they cause volume to INCREASE?  It's totally absurd.

 

My opinion now is that Credit Suisse just sucks and has been outcompeted by smaller firms who can sell market-making services to the world at a bigger discount.

Fri, 12/14/2012 - 12:52 | 3062980 vote_libertaria...
vote_libertarian_party's picture

To stop it would be one simple rule.  Charge one penny per trade posted.

 

But TPTB don't want to stop it.

Fri, 12/14/2012 - 13:04 | 3063011 Jayda1850
Jayda1850's picture

But, But they add liquidity. sarc\   Can't wait for this whole, sad charade to finally come to an end.

Fri, 12/14/2012 - 13:23 | 3063068 GNWT
GNWT's picture

Exactly...

I am an old fashioned tape reader, which today is a matter of watching computer ticks...

You can feel the momentum shift on the screen as if someone is trying to slow or speed up

a car, when the market begins it HFT move, it feels like surfing at Surfrider...

And then there is AAPL, if you follow the ES and AAPL 5 minute you can feel where they conflict and that is where the market bangs heads...then they get in sync and it is back to the beach...

Easy money and yes, set your stops when a pol talks so a bit less than normal returns, but the money is on the table...and stop complaining...if you can't find an edge don't trade, but a real trader adapts like a bug attacked by a new antibiotic...adapt, as the tao says, the only constant is change.

As long as the principle of the 45 degree angle, bottom left to top right and vice versa is repealed, plenty of money for all.

Still, don't know what the fuss is about, the HFTs paint beautifully angled 5 minute charts as precise as the DAX, IMHO.

 

G

 

Stay liquid my friends...

Fri, 12/14/2012 - 16:19 | 3064080 mkkby
mkkby's picture

The swings on a 5 minute chart are too small to wastte time on, unless you're taking outsized positions -- which is bad money management.  Go ahead and pick up pennies in front of the steam roller.  You'll get crushed just like all the other old time know it alls, who are just kidding themselves.

Fri, 12/14/2012 - 15:17 | 3063688 myptofvu
myptofvu's picture

"The instigator takes a pre-position; instigates other market participants to trade aggressively in response, causing a price move; then trades out."

So a Pump and Dump only faster

Fri, 12/14/2012 - 16:34 | 3064206 one_fell_swoop
one_fell_swoop's picture

Umm this is nothing new, traders have been doing this since the dawn of time.  

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