Dear SEC, This Is HFT "Cheating" At Its Most Obvious. Regards, Everyone Else

Tyler Durden's picture




 

While prosecuting the wrongdoers is clearly not part of the new normal (see Sokol et al.), what Nanex found this morning beggars belief - both in its method of manipulation and clarity that our regulators are clueless. As they note, the high frequency traders (HFT) are at it again. Contorting the spirit of the rules, because those who wrote the rules aren't technically savvy. On January 4, 2013, we found another instance of HFT morphing their manipulative and illegal quote stuffing strategy in an effort to fly under the radar. Why they don't just stop this manipulative practice altogether tells us a few things. First, this isn't some coding error, this is sophisticated cheating. And second, because they are spending valuable programming time on this strategy, there must be some real economic advantage. Which mean a disadvantage to everyone trading against them.

 

Via Nanex, Seconds In a Microsecond World,

The Strategy

Each exchange has been setting limits for the number of canceled orders allowed per second. We know that one exchange has a limit of 300 canceled orders per second per stock.. It's rare to find 300 or more canceled orders in one stock in any one second from that exchange. But you will find tens of thousands of seconds where a stock has 299 canceled orders.

In the charts below, we show a new strategy they have cooked up: send a blast of orders (all immediately canceled) over a very short period of time, 100 milliseconds (ms) in this case, and then silence for the balance of the second. They know that exchanges measure the number of canceled orders on a per second basis, so that blast of orders sent in 100ms will be diluted by another 900ms of silence. But networks operate on a much smaller time-scale, microseconds. A microsecond is a millionth of a second.

If an exchange sets a limit of 1000 canceled orders per second, these nefarious HFT will blast a 1000 orders in 100 milliseconds (ms), followed by silence for the balance of the second. The exchange will only see 1000 orders in a second, which is at the limit, so no problem. But the network that carries those orders to other participants won't see it that way.

A network that can carry 1000 orders in a second, can carry only 1 order per millisecond (1/1000th of a second) before latency (delay) occurs. Which means blasting 1000 orders in 100ms will begin overloading the network and causing delays after just the first 100 messages. Which means 900 messages will arrive late to other traders (competitors) computers. Which is the whole point of this high technology warfare.

1. GWR - Bids and Asks color coded by exchange and NBBO (gray shading)
Note the pattern of quote blasts followed by silence. What is this all about?



2. GWR - Trades color coded by exchange and NBBO (gray shading)

 



3. GWR - Bids and Asks color coded by exchange and NBBO (gray shading)

 



4. GWR - Bids and Asks color coded by exchange and NBBO (gray shading)
The blasts occur 1 second apart. This is to get around exchanges limiting HFT to X quotes per second. Networks operate on milliseconds.

 



5. GWR - Zooming out, showing Bids and Asks color coded by exchange and NBBO (gray shading)
The quote rate on a 1 second interval is somewhat modest. Spread out between 6 exchanges, means each exchange won't see a problem.

 



6. GWR - Zooming out, showing trades color coded by exchange and NBBO (gray shading)

 



7. GWR - Tick Chart

 



Nanex Research

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Fri, 01/04/2013 - 19:49 | 3124193 Almost Solvent
Almost Solvent's picture

SEC porn, it looks like dicksucking chix 

Fri, 01/04/2013 - 19:56 | 3124209 Stackers
Stackers's picture

1000 monkeys typing on 1000 bloomberg terminals for 1000 years ...........

Fri, 01/04/2013 - 20:07 | 3124235 Cdad
Cdad's picture

Actually, I believe it is one of two things...or maybe both.

A. It is how the HFT guys set short positions.  You and I...well, we have to deal the that pesky bid and ask.  If this is correct, both GWR and SHW should tank in the the near term, and terminate their declines with inverse such action.

B. The market is so absolutely devoid of participants anymore, all these guys really have in the hunt for a Greater Fool to take them out of longs [in this case] is...the dumbest, helmet wearing algorithm in the room...and this is how they sucker that program into committing financial suicide.

So no...it isn't SEC porn.  What this is is massive theft...a type of crime that risks the integrity of the entire equity market.  So try to serious up for a moment if you can.

 

Fri, 01/04/2013 - 20:12 | 3124244 boogerbently
boogerbently's picture

....looks like there's fish along the bottom.

Fri, 01/04/2013 - 20:14 | 3124251 Enslavethechild...
EnslavethechildrenforBen's picture

I see Bernanke going down on Obama...

Fri, 01/04/2013 - 20:18 | 3124253 Michaelwiseguy
Michaelwiseguy's picture

The Octogenarians in Congress know their days are numbered by old age. They're all starting to drop dead like ugly old flies. We just have to keep up the offensive against their tyrannical legislation and wait them out till they drop dead like Inouye and Bird or just quit like Leiberman, Dodd, Frank, etc or be voted out of office by a miracle like Luger and Specter.

I have a quite few on my death watch list.

Fri, 01/04/2013 - 21:02 | 3124276 strannick
strannick's picture

Clueless/Corrupt Regulators?

Dont give the SEC all the credit...Meet the CFTC Commisioners.

Their names are Jill Sommers, Scott OMalia, Bart Chilton, Gary Gensler, Mark Wetjen.

Through either epic ineptitude (a generous appraisal) or most likely despicable corruption, these banker-enabling bureaucrats make the world a much worse place through the mispricing of commodities.

It wouldnt be too far of a stretch to say their malfeasance enables bankers to destroy the world through self-serving manipulative pricing of basically everything.

THey are the treasonous Redcoat/Benedict Arnolds of their day, betraying their office for lucre. Their complicity makes the corrupt world go round.

 

Fri, 01/04/2013 - 21:41 | 3124404 Enslavethechild...
EnslavethechildrenforBen's picture

Anyone that does not have the balls to pull out a gun and start shooting Redcoats should just shut the fuck up about being raped by them.

Fri, 01/04/2013 - 22:43 | 3124504 Michaelwiseguy
Michaelwiseguy's picture

Someone should make a video montage of all the consumer products that could be made in the USA, but are not.

Fri, 01/04/2013 - 23:05 | 3124532 Michaelwiseguy
Michaelwiseguy's picture

Any bets on how much the debt ceiling will be raised to? $18 trillion, $19 trillion?

Sat, 01/05/2013 - 00:40 | 3124665 chart_gazer
chart_gazer's picture

$20 trillion minimum

Sat, 01/05/2013 - 07:44 | 3124929 TwoShortPlanks
TwoShortPlanks's picture

I have no idea as to what the data is showing, and I couldn't care less. You don't have to be Einstein to realise that;
1. There are no criminal charges handed out to those who are doing what they are being told/allowed to do.
2. In light of, and following on from #1, the system is both expected to, and is intended to, implode, and to do so by looking accidental to the masses.

I'm not big on him, at all, but there's a reason why Pastor Lindsay Williams says his "elite friends have all moved to remote location", mainly to places very remote. This gives a strong signal that nobody knows a timeline, not even they.

They will collapse this system, whether you believe it or not is irrelevant to them. They want a New World Order and they will get it because they will never stop trying for it. They will eventually get it right.

An analogy: First Catch, First Graze, and Dangerous Space.
1. First Catch is the region between the weapon and where the munitions impacts upon the target.
2. First Graze is the region between the weapon and where the munitions impacts upon the ground.
3. Dangerous space is the region behind both the Catch and the Graze where there is a possibility that the munitions may hit you.

It is not just a matter of getting out of Dodge; you've got to get well clear of any knock-on effects when Dodge goes postal. This will be impossible however, to stay well clear of Catch and Graze would be a good start…Markets, Bonds, Cash, Stocks , Equities, Real Estate (other than a simple roof over your head).

That being said, I firmly believe that physical Gold WILL NOT hold a currency value when the lights go out in Europe and/or America. Gold will be hunted for, but not found readily. Only physical assets will be traded for physical Gold, nothing else.

So let the little bots do their thing and rape the markets, let all Central Banks debase, becasue if they do their job properly your Gold, will eventually go from physical, to mystical....and everyone will be running around speaking like Gollum.

Sat, 01/05/2013 - 07:55 | 3124938 TwoShortPlanks
TwoShortPlanks's picture

Everyone has this all upsidedown. It's not the Debt Ceiling that's the problem, they'll always jack the ceiling (what, they're goona vote no and get blamed for a collapse/recession/depression...no!), it's the Debt. Further, it's not strictly the debt, it's also the gap between Base Money and Bank Assets....which must be around $90 Trillion globally by now.

And how do you shrink that gap?......you monetize!

Sat, 01/05/2013 - 00:04 | 3124625 Doomer
Doomer's picture

Figuretively, of course.

Sat, 01/05/2013 - 01:41 | 3124723 Overfed
Overfed's picture

Not until you can see the whites of their eyes (Not before it is time. It is almost time)

Sat, 01/05/2013 - 11:26 | 3125118 YesitStrue
YesitStrue's picture

Commiting suicide is not a reasonable response to being raped. We must demand that the rapists are castrated.

Fri, 01/04/2013 - 23:23 | 3124567 WTFUD
WTFUD's picture

Big thumbs Up strannick!
Do i hear you correct? De taxpayer is paying to get fucked by dem! that's a " roasting " ain't it? That legal?

Sat, 01/05/2013 - 10:55 | 3125083 indygo55
indygo55's picture

Back in the days of Iraqi Freedom the Army made up a deck of cards witht the names and faces of the guys thery were hunting down. How about a deck of cards for this Financial Malfeasance Gang - Bernank as the Ace of Spades, The Timmay as the Queen of Hearts, and so on. Could include addresses, phone numbers, values,,,  It would give me focus.

 

Sat, 01/05/2013 - 16:53 | 3125663 DavidC
DavidC's picture

Already done, two or three years ago, I think it might have been WilliamBanzai7.

DavidC

Fri, 01/04/2013 - 21:25 | 3124370 ShrNfr
ShrNfr's picture

Frank wants to come back from the dead to be Kerry's replacement as MA Senator. Sorry you are now wiping the puke off your screen, I really am.

Fri, 01/04/2013 - 23:14 | 3124552 Clowns on Acid
Clowns on Acid's picture

Barney "he made me bite the pillow " Frank, wants Kerry's seat....

Sat, 01/05/2013 - 00:16 | 3124641 MsCreant
MsCreant's picture

No, Barney likes em young and is a bottom if I ever saw one. 

Fri, 01/04/2013 - 20:33 | 3124283 DCFusor
DCFusor's picture

A guy who can just print money going down on a guy who is just a puppet?  You have that one backwards.

Fri, 01/04/2013 - 22:33 | 3124487 El Oregonian
El Oregonian's picture

No, I believe it's Bari, he loves to bow/go down on others... Keep your chin up and save your reputation Boneher. If you still can, fool...

Fri, 01/04/2013 - 20:47 | 3124311 candyman
candyman's picture

funny, I believe this pattern is called a hummingbird fishfinder

Sat, 01/05/2013 - 03:12 | 3124775 silverserfer
silverserfer's picture

thats funny all i see is a litle shake and bake!

Sat, 01/05/2013 - 10:49 | 3125075 SokPOTUS
SokPOTUS's picture

It really does look like a fish finder, doesn't it.  And yeah, bottom-feeders is right....

Fri, 01/04/2013 - 20:12 | 3124246 Xibalba
Xibalba's picture

new mafia

Fri, 01/04/2013 - 22:22 | 3124467 cynicalskeptic
cynicalskeptic's picture

The Mafia never made as much money as these guys do - and the mob guys had to worry about going to prison, getting shot and lots more..  

Fri, 01/04/2013 - 23:51 | 3124604 WTFUD
WTFUD's picture

Unless you look at it from say, this perspective CySc;
whilst we goons were fed on Al Ca Seltzer ( never a dry eye in my house when a baddy got it, especially, Jimmy C ); the Real Mob in da House were fingering / poking you and yer missus wit exotic instruments

Sat, 01/05/2013 - 01:41 | 3124725 Element
Element's picture

relax ... just a very fat-finger

Fri, 01/04/2013 - 23:24 | 3124568 John Bigboote
John Bigboote's picture

Any president remotely interested in cleaning up this corruption would contract businesses like Nanex and ZH to provide consulting on how to identify the fraud and perpetrators (they would seek the technical advice to fill the knowledge gap eluded to by Tyler).

Obviously, Obama is not doing this and neither is anyone else who has any influence or power in our bullshit government.

It's an easy thing, but they are not interested for it will cause the entire ponzi to collapse if the light is shined upon it.

This corruption will continue until physically knocking down our doors is a life risking event for them. I know we can't be expected to inconvenience our lives until it is pretty much too late but hopefully when the time comes we will learn from history. I will:

“And how we burned in the camps later, thinking: What would things have been like if every Security operative, when he went out at night to make an arrest, had been uncertain whether he would return alive and had to say good-bye to his family? Or if, during periods of mass arrests, as for example in Leningrad, when they arrested a quarter of the entire city, people had not simply sat there in their lairs, paling with terror at every bang of the downstairs door and at every step on the staircase, but had understood they had nothing to lose and had boldly set up in the downstairs hall an ambush of half a dozen people with axes, hammers, pokers, or whatever else was at hand?…The Organs would very quickly have suffered a shortage of officers and transport and, notwithstanding all of Stalin’s thirst, the cursed machine would have ground to a halt!”
–Aleksandr I. Solzhenitsyn, “The Gulag Archipelago”

Fri, 01/04/2013 - 20:30 | 3124277 Cdad
Cdad's picture

You know...I should clarify:

Nanex most certainly ROCKS!...but ZeroHedge RULES!

Fri, 01/04/2013 - 21:25 | 3124369 Dr Benway
Dr Benway's picture

I wish Nanex performed house calls. The Australian stockmarket is critically ill but in denial, poisoned by both hightech and lowtech means. It needs radical surgery or euthanasia.

Fri, 01/04/2013 - 21:40 | 3124399 Cdad
Cdad's picture

I'm pretty sure Nanex has gun...and would travel.

Fri, 01/04/2013 - 22:48 | 3124511 nanex
nanex's picture

 

 

We've analyzed markets in or provided research for

 

Sweden

Norway

Japan

France

Germany

England

 

My response to adding Australia to the list?:

 

Send us a couple a plane tickets, or come and visit us in Chicago, and "she'll be apples!"

Sat, 01/05/2013 - 04:20 | 3124817 Archduke
Archduke's picture

kudos nanex. that's fantastic.

are the papers public? can we get them via FOI acts?

 

Also, I have to wonder if your recommendations were actually heeded or shelved?

for example, France's supposed EQT and HFT transaction tax is all bark and no bite.

are you at liberty to comment on this?

 

Sat, 01/05/2013 - 08:57 | 3124989 Zaydac
Zaydac's picture

"On November 11, 2011, by invitation of Her Majesty's Government, Nanex gave a presentation on the effects of High Frequency Trading at No. 10 Downing Street. Those in attendence included members of the Foresight team, prominent academics, the London Stock Exchange, members of the FSA, Treasury officials, and people from No. 10."

Over a year ago. No action... I'm not surprised. All vested interests there, not on your side or mine unfortunately.

Sat, 01/05/2013 - 09:43 | 3125013 francis_sawyer
francis_sawyer's picture

Isn't that a bit like 'Al Capone' getting a private seminar from Eliot Ness as to how the FBI does its business?...

Sat, 01/05/2013 - 22:23 | 3126312 mkkby
mkkby's picture

Well, if this article is anything like their presentation, no response is deserved.  All I see are blotches of color all over the place with no real explanation of what it means, followed by a conclusion which may or may not be supported.

I'd like to see Nanex be a better communicator.  Then we can complain that nobody does anything.

Sat, 01/05/2013 - 11:00 | 3125091 goldfish1
goldfish1's picture

Plenty of disinfo pricks on ZH.

Sat, 01/05/2013 - 17:13 | 3125734 Herd Redirectio...
Herd Redirection Committee's picture

I'd be more worried if we couldn't so easily identify them.  The real worry is that ZH itself sells (or has sold) out.

Fri, 01/04/2013 - 22:24 | 3124468 lasvegaspersona
lasvegaspersona's picture

but:

http://zolmax.com/jpmorgan-chase-reiterates-overweight-rating-on-genesee...

why would chase rec 'overweight if they are going down? / sarc off

Sat, 01/05/2013 - 00:19 | 3124642 MsCreant
MsCreant's picture

Cdad, 

"risks the integrity of the entire equity market"

No need to worry about that, it's gone. 

Sat, 01/05/2013 - 01:37 | 3124721 ToNYC
ToNYC's picture

Bids without Margin are fraudulent acts; math proves.

Sat, 01/05/2013 - 02:28 | 3124750 AgAu_man
AgAu_man's picture

Screw the SEC. Try '60 Minutes'. Anderson Cooper will tell you if it's straight or gay porn.

Sat, 01/05/2013 - 12:17 | 3125179 buckethead
buckethead's picture

I am among the ZH readers who have but a scant ability to decipher most of the technical analyses made here. Not necessarily a stupid person, but not literate in trading jargon, complex chart analysis, or even the most basic HFT concepts. (I do get that they can move markets with backing, speed and deception, but I don't see how any of that is illegal)

 

I would love to understand what the charts tell us, and how to read them. For many here, it is no more difficult than reading a book. To an obvious majority, it is over our heads. I won't try to cover my ignorance here, but I will read on in search of understanding in a language I can decipher. Others chime in with attempts at humor... often failing attempts to throw something against the wall to see if it sticks. We learn how we learn. (even when we get junked to oblivion)

 

Sat, 01/05/2013 - 17:21 | 3125758 Herd Redirectio...
Herd Redirection Committee's picture

They are trying to confuse both the market makers and the competition.  There are a number of algos out there competing with one another.   So to 'win' you have to be able to feed on the mistakes of the other algos, trick them into something stupid, if you will.  Delaying how quickly they receive quotes is one way, esp. when we are talking about algorithms operating on the millisecond level.  Mainly the quote stuffing is used (as far as I know) to flush out other algos, see if you can make them bite, so to speak.  Throwing out an empty quote, and instantly pulling it back out again, seeing if you can get the other algos to 'show their hand'.

Ultimately its crooked though because the entire market is algos, they provide quotes ONLY to cancel them, basically its high tech market manipulation, simple as that.

Sat, 01/05/2013 - 04:57 | 3124846 Western
Western's picture

Nope, the random walk theory collapses when you move to 3 dimensions.

Fri, 01/04/2013 - 21:30 | 3124382 SeattleBruce
SeattleBruce's picture

The problem is that financial crimes aren't sexy to enough people, and until that critical mass is reached, nothing, or not much, will happen.  Shoot $4T has evaporated since 2007 in the real estate markets, and real un and under employment is 20 to 25% in the US - and where is the outcry?  We need people convicted and a hue and cry for heads on a platter before anything will change.

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