How Algos Orchestrate "Momentum Ignition" Chaos

Tyler Durden's picture

Via Nanex,

On December 26, 2012 at 11:02:59, the market suddenly exploded with activity (SPY dropped below 141.88 - a low set 12 days earlier on December 14). Approximately 3,800 March 2013 eMiini futures contracts (S$P 500) were sold during that second. Nanex thought the sudden explosion in activity warranted a closer look.

What they found was fascinating. It appears the entire market-wide move may have been carefully orchestrated. One thing for certain is that our regulators will never be able to see the big picture if their analysis tools (MIDAS) only looks at equity data. Analyzing price moves in futures and options is crucial to understanding market-wide moves in equities, and visa versa.

Basically, this momentum ignition strategy is based on several principles.

  1. When the markets suddenly move, spreads immediately widen, and momentum based strategies will follow along in the same direction. Which means you will  built in buyers(sellers) to trade out of your position.
  2. When a stock's NBBO (national best bid/offer) is about to shift to a new price level (down in this example), the last buy orders at the old high bid price are the least desirable, and it is advantageous to execute against those bid prices. Furthermore it is an advantage to be first in the queue with sell orders at the new $100 ask.

    For example, lets say the bid is $100 and the ask is $100.01, and it is about to change to a bid of $99.99 and ask of $100. The ask becomes the previous bid. Executing the last remaining buy orders at $100 will allow you to resell at the new ask price of $100 and capture a rebate (which could offset the taker fee for executing against the $100 bids).

    Stocks (e.g. MSFT, CSCO, BAC, JPM, AAPL) that are members of big ETFs (e.g. SPY, IWM and QQQ) will generally follow along with price changes in those ETFs, and these ETFs in turn are greatly influenced by trading in eMini futures (e.g. ES, TF, YM). When the price of the futures or ETFs suddenly drops, the NBBO's of many large cap stocks will shift to a new price level. The same thing will happen to options on the stocks and ETFs.

  3. Speed of light means information doesn't travel instantly. Stocks trade in New York and eMini futures trade in Chicago. These two locations are about 800 miles or 5 milliseconds apart. Which means machines trading in NY won't know what happens in Chicago for 5ms and machines trading in Chicago won't know what happens in NY for 5ms. This means that arbitrage based strategies are always behind by at least 5 ms. and therefore become another group that will buy (sell) from you when you exit your position.
  4. When market activity explodes, exchange matching engines will get out of synch on a very short term basis. Same with data feeds. Futures may get delayed vs. equities, or vice versa.

The basic strategy is (assume the market will drop in price):

  1. Execute against all but a few remaining buy orders at the prevailing bid price in MSFT, CSCO, BAC, JPM, AAPL and other stocks that move with SPY.
  2. Buy put options and sell call options on these stocks and ETFs.
  3. Prepare to place sell orders at the old bid price so that you are first in line.
  4. When all but the last few buy orders in your set of stocks remains, execute against them, and simultaneously sell SPY and ES futures in Chicago. This will take a few $100 million in capital.
  5. Once the market is moving in your direction, start trading out of the position. Because many systems are at various states of overload, you can use this to rapidly oscillate prices in futures and ETFs and fill momentum following HFT algorithms. See charts here for an extreme example that illustrates these oscillations.

Momentum ignition events happen all the time. See this page more details, including an animation that shows where and when these events have occurred since 2007.

December 26, 2012 at 11:02:59

Now let's take an a real-world example that happened on December 26, 2012 at 11:02:59. We'll start by comparing 4 charts: SPY, ES.H13, all NMS Equity Trades and all Option Trades, for one second of time beginning at 11:02:58.600.


From the charts above, it is not clear whether the activity started with ES.H13, so we'll zoom in on 135 milliseconds of time, starting at 11:02:59.360


From the charts above, it looks like activity started in ES.H13 at 11:02:59.420, and in SPY about 4 milliseconds later. But chart 3 shows activity in some NMS stocks also at 11:02:59.420. It takes about 5 milliseconds for information to travel between NY (where stock and options trade) and Chicago (where the emini futures trades). The timestamps are from the exchanges, so it's possible they might not be perfectly synchronized, though there's no excuse for that in today's high frequency trading world. One millisecond is 1,000 microseconds.

Let's look closer at the chart of all NMS Stock Trades.

All NMS Stock Trades - 1 millisecond interval chart showing trades color coded by exchange.
Some of the active, known symbols have been labelled. Note many large cap stocks show activity starting the same time as the eMini. Also note how SPY, IWM, and QQQ are the last ones with trades. You don't want to tip anyone off that activity is about to explode.

Now let's look closer at the final drop, by zooming in on 135 milliseconds of time, starting at 11:02:59.450


Circling back to the first chart, when we looked closer at SPY for a 25 millisecond period of time beginning at 11:02:59.424, we noticed something interesting. Note the trades from EDGX (blue diamonds). Now let's take a closer look in the chart below.


In the chart below, we show bids and asks from a few exchanges to remove clutter. Here, we show just EDGX (blue), BATS (pink) and ARCA (red). Here is a link to Excel Spreadsheet of all SPY trades and quotes between 11:02:59.424 to 11:02:59.450  This spreadsheet shows just updates to EDGX trades and quotes and is sequenced in the order they likely occurred.

From the spreadsheet and/or the chart below: the bid from EDGE remains at 141.93 and we see several quote updates from EDGX that don't change the bid or ask price or size. These appear to be generated after a trade executes at EDGX at 141.93 (but the trades get reported late, so they aren't in sequence with these EDGX quote updates). You need to keep the price from dropping until the last possible moment: surprise is key.

Nanex Research

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Michaelwiseguy's picture

Zero Hedge should start an online WH petition.

The mainstream media is engaged in Sedition of the US Constitution and deliberately engaging in Social Engineering of the American People 24/7/365. The people must demand a new FCC regulation requiring TV news to carry an hourly warning label, warning people of their psychological social engineering practices.

strannick's picture

Regulators only look at data? The CFTC Commisioners have been looking at silver smackdowns for years, with an open silver investigation and still ignore it. Stupidity or corruption. Im betting door number 2...

Dr. No's picture

Just put a skull and cross-bones image on stock quotes like they do for Cigs.

Cognitive Dissonance's picture

"One thing for certain is that our regulators will never be able to see the big picture if their analysis tools (MIDAS) only looks at equity data."

That's because they, or more likely their masters, don't want to see the big picture. Can't find what you aren't looking for or can't see.


"Now let's look closer at the final drop, by zooming in on 135 milliseconds of time, starting at 11:02:59.450"

I think I need a new watch because my digital only has hours, minutes and seconds if I push that stupid little button twice.

max2205's picture

I am usually taking crap when this happens

illyia's picture




XtraBullish's picture

Brilliant analysis!


Now just BTFD and have a Scotch.


and NEVER underestimate the replacement power of stocks within a Fed-engineered inflationary spiral. Long live Zimbabwe!

Dr. No's picture

I actually find this fascinating.  We rarely get a glimpse of cutting edge technology being applied.  When we do, I marvel at the engineers and project managers who identify the problem and execute a plan to solve it.  The goal is to make money, these Algo developers are at the pinnicle of their field.  Hat's off to you guys.

My only complaint is the common man, through effective marketing, believe they have a "seat at the table" and continue to think they are investing when the toss money at stocks.

Tenshin Headache's picture

The "common man" is leaving/has left the market. It's hard to maintain the illusion when even CNBC can't hide the mounting concern.

Dr. No's picture

"Investment" in stocks is still wide-spread through the use of 401Ks and such.  People continue to think they are planning for retirement by investing X% pre-tax into a mutual fund.  Once again, hats off to the brainwashers, but sucks for these worker sheep.

Element's picture

In Australia superannuation is not voluntary, it's a mandatory employer-based contribution. So the wolves have a captured-flock with which to extort endless fees, and now HFT pirates as well! "...aaaaannnd ... it's gone!"

The only way to get your money out of the shark-tank before ... ha, yeah ... 'retirement', ... is to be unemployed or seriously ill for long enough to obtain a government release agreement letter to present to the superanuation fund, to make a withdrawal on 'hardship' grounds. Not sure if this is still the case, but the upper limit was 10k max withdrawal, and is taxed at 21% on the way out, so you get less than 8k back in your bank account - thanks for playin!

Fucked in every orifice - enjoy!

dvsteenk's picture

it still is manipulation - hats off for that?

ATG's picture

Sold QQQ puts and bought SPY calls.

Happy New Year...

SuperDeDuper's picture

I did.  I really really tried to follow those charts with the dots and lines and milliseconds, but i simply could not, so i kept scrolling.  I think the point is, someone with a really fast computer and a lot of money controls the markets to be messing around with millisecond trades.  Meanwhile, i'll sit in front of my 2009 HP computer and press the sell button on a stock and hope i sold within a few cents of the last quote amount.  lol. 

Dealer's picture

Awesome reporting. 

SuperDeDuper's picture

On a side note, any second now we should be expecting some sort of rumor about the meeting with Obama, Reid and Boehner.  My guess is that a report from a bird outside a window with pen and paper just returned to the news desk and said 'they were all drinking scotch and a stripper was giving lap dances'.  So then, the market rallies.

youngman's picture

You no longer need to know Economics or basic business principals.....just programming/software....what a joke..

ekm's picture

Following Mr Hunsader in Twitter must be a daily routine.

If anybody on ZH does not read his tweets, that person can be considered uneducated.

Dr. Engali's picture

Neo: Do you always look at it encoded?
Cypher: Well you have to. The image translators work for the construct program. But there's way too much information to decode the Matrix. You get used to it. I...I don't even see the code. All I see is blonde, brunette, red-head. Hey, you a... want a drink?

Nobody For President's picture

Perfect response, good Doctor.

I am feeling...sloooooooooooooowwwwwwwwwwwwwwwwwwwwwwwwwww.

Is it too late for the blue pill?

dvfco's picture

That makes me think:











Ah shit, some people can tell a joke and some can't.  As the t-shirt says, there are 10 kinds of people in the world.  Those who understand binary code and those who don't.

Say What Again's picture

Can this chaos be initiated by humans?

What would happen if enough people (i.e. humans) start adding to the bid OR offer and then cancelling the orders?  If everyone rides the bid, the robots will drive the market up (for no fundamental reason).  Then they can do the same on the other way down.

Dr. No's picture

I am positive the big market makers "filter" bids/orders based upon preference.  Your orders for example are held until their drinking buddy needs a buyer.  They just do this on a massive scale.  The more humans in the market, the more fleece to be sheared.

Say What Again's picture

I have direct access to most of the market centers (e.g., ARCX, NSDQ, EDGX, EDGA, BATS, CDRG, NITE, etc..), so my broker isn't holding anything.  What I need is direct access to FLOW info, and a few dark pools.

Clowns on Acid's picture


Fantastic work by Nanex. I am sure that the SEC is all over this analysis...ahem. The real issue is:

  • The Exchanges are "For Profit" corporate structures now. They make money on volume and market data sales.
  • What do the HFT firms need to make money (based on their speed of execution advantage)? Volume and historical market data.
  • The virtuous cycle has been closed.
Smuckers's picture

So this is what a fat finger looks like....

TraderTimm's picture

I've been thinking about High Frequency Trading and its impact on the market for some time now. Zerohedge having the best analysis of the subject, and for that I'm very grateful.

In the "old days" before the rise of electronic trading, I used to watch the S&P 500 futures constantly, charted and did data analysis of prices for various trading ideas and just for fun. Although the price data cumulatively represented a standard distribution with some "tail" outliers, the way in which it traded has changed radically, though I couldn't put my finger on it.

After reading through some reference materials regarding distributions, Pareto, etc., I came upon a reference to Power Law distributions, which I had read before, but something about it and HFT immediately gelled for me.

The reference is from Barabasi - "Linked: The New Science of Networks":

Random and Scale-Free Networks

The degree of distribution of a random network follows a bell curve, telling us that most nodes have the same number of links, and nodes with a very large number of links don't exist. Thus, a random network is similar to a national highway network, in which the nodes are cities, and the links are the major highways connecting them. Indeed, most cities are served by roughly the same number of highways.

In contrast, the power law degree distribution of a scale-free network predicts that most nodes have only a few links, held together by a few highly connected hubs. Visually this is very similar to the air traffic system, in which a large number of small airports are connected to each other via a few major hubs.

Where Barabasi says networks, you could very well substitute "trade volume" as node influence. And that is where it hit me - we're in a system that is increasingly transitioning to the automated strategy, HFT, dominating trade volumes. Yes, very obvious, but stick with me here. What that means is in a power-law dominated network -- if ANY node drops out, it has an ENORMOUS effect on the rest of the network.

High Frequency Trading is creating a power-law distribution that is an inherently fragile system. (Few nodes are responsible for most of the trading volume.)

This also explains why HFT being a liquidity provider is at best provisional, and at worst - a single point of failure in the system.


Nobody For President's picture

TT it is posts like yours, and Tyler's stuff from Nanex, that keep me on ZH. Just incredible, clear-eyed analysis of our so-called markets that is as close to truth as one can get these days.

Keeps my brain from going total retro fried.

OldE_Ant's picture

A very important observation.  Thanks TraderTimm.  I read a number of analyses of HFT suggesting it provides important liquidity.   I call it an out and out  obfuscation of the real markets.

Long ago I did a search on the software providing most of the underlying trade routing.  The goal was to determine what would be required to determine ALL market participant positions in REAL TIME.   Participants meaning designated account numbers (which one would then make public all traders/accounts that traded greater than a certian total $$ amount in a year/quarter).    What I learned was that the current trading platform already has the hooks to track buyer/seller accounts and they simply need to be enabled.    In fact this is still true today.

Back in 2007 when I first did this research I found the SEC BRUT/FIX protocol spec document.

The important Not required/UNUSED hooks that solve the transparent market issue (which already exist in the software spec) are found on page 19

50 SenderSubID Not required

57 TargetSubID Not required and UNUSED

116 OnBehalfOfSubID Not required and UNUSED

129 DeliverToSubID Not required and UNUSED.

Compare to ISE/FIX spec documents.

Where 116 and 129 are removed, added are 22, 48 (security ID) which also are Not required.  50/57 still not reqired.

Based on my analysis it seemed very easy to make fully transparent markets by turning ON those IDs associating unique account IDs with all bids and trades.   It seems someone else already had the idea yet to date it is not reqired by law to disclose unique tracable account #s with trades at the routing level opening up IRT full market position disclosures vs. the BS of waiting for end of month or quarterly position reports and changes.  It made me wonder if these not required fields were already filled out and someone already had IRT access to all account positions as of 2005.

Realize when I say transparent I say by unique account identifiers.  Only the big players would have to disclose their unique account numbers so the small fry can know which large account is doing what.   There are a couple of things I would add to the tags to make things more transparent (i.e. account positions in security being traded) so as to ease the amount of tracking work but the above would be a fantastic start.

Oh and notice all short sales are already marked on the order routing book orders.   Us schmucks just don't get to see ALL the order tags IRT.

Final note.  If playing in the global markets means I have to disclose my positions to all participants IRT I don't see the problem.  Privacy here is a term used by those in power to disguise their illegal shenanigans vs. the rest of us who really wouldn't care if everyone knew that account #xyz held positions A,B,C.   The privacy issue only comes up when #xyz connects to Joe Smith Sixpack..

thanks again Timm.   I await the flames on this post..

End of Line

soopy's picture

why would you "2. Buy call options and sell put options on these stocks and ETFs." if you expect the market to drop?

Tombstone's picture

In 2011, the fertility rate dropped to 1.9.  We need at least a rate of 2.1 to maintain population growth.  The number of single persons has exploded as marriage has become a thing of the past.  This does not bode well for the future of investing.  Throw in the lack of confidence in government and financial institutions and you have a recipe for a severe decline in wealth creation.  But what can you expect with all these socialists running the country?  The tide is turning against market participation so much that perhaps the pros will have fewer sheep to shear and will have to battle each other for survival.  Ah, income redistribution; isn't it great?

Element's picture

Is this the Friday humor thread? ... not sure ...

dvsteenk's picture

If I understood well, and this I presumed has been the strategy of HFT firms since they started operating, the HFT manipulations in equity prices are not aimed at making money out of these trades. The real goal is driving carefully placed bets in derivatives (futures, options, ETF, turbos, sprinters, etc.) or leveraged FX products into the money by short-term manipulation of the underlying components by means of algos and a substantial amount of destabilizing purchase power (a few hundred million dollars). They also collect rebates, but that's peanuts in comparison to what they gain with their market-forcing bets that always win.

There were two elements that don't stick in the explanation of the rebate capturing strategy in the article above:

"For example, lets say the bid is $100 and the ask is $100.01, and it is about to change to a bid of $99.99 and ask of $100. The ask becomes the previous bid. Executing the last remaining buy orders at $100 will allow you to resell at the new ask price of $100 and capture a rebate (which could offset the taker fee for executing against the $100 bids)."

* How can they know before it happens that it "is about to change to a bid of $99.99 and ask of $100"?

* How can you buy at $100 when the ask is still at $100.01?