SEC Uses HFT Firm-Designed Tool To Find That HFT Doesn't Cause Flash Crashes

Tyler Durden's picture

Just when one thought the SEC has hit rock bottom in stupidity, corruption and porn-addiction terms, to paraphrase the beloved Dennis Gartman, it whips out a shovel and starts digging.

Today's case in point: a report by the agency that Mary Schapiro made into Wall Street's punching bag (and whose legacy her Morgan Stanley-friendly replacement is set to perpetuate) according to which "unexplained rapid price drops in single stocks have generally been triggered by human error, not nefarious trading activity or high-speed trading algorithms gone wild, an official at the U.S. Securities and Exchange Commission said on Tuesday."

Not HFT-driven flash crashes you say? Reuters reports:

"What we are seeing is the result of sloppiness, combined with a lack of checks and balances," Greg Berman [formerly of RiskMetrics] said at a Securities Industry and Financial Markets Association conference. "In this day and age, there should be no excuse for these types of mistakes, especially considering the significant negative impact that these events have on investor confidence."


Most rapid price spikes are caused by old fashioned human mistakes, such as "fat finger" errors, where a trader may accidentally add an extra zero to an order, or by portfolio managers accidentally requesting a large order be immediately executed rather than meted out in a managed flow, Berman said.


"Contrary to public speculation, these types of events do not seem to triggered by proprietary high-speed algorithms, by robots gone wild, or by excessive order cancellations."

Oh, so like Waddell and Reed was to blame for the flash crash, not the fact that some 70% of the tape is filled with empty quotes in which one algo tries to outsmart another algo, and instead of trading blast hollow bids and asks just to game the NBBO?

But just how did the SEC come up with this startling conclusion which flies in the fact of all the factual evidence we have presented over the past 3 years?

Berman heads up a new initiative at the SEC that analyzes market data using a platform launched in January called Market Information Data Analytics System, or MIDAS, which was developed by Red Bank, New Jersey-based automated trading firm Tradeworx.


MIDAS gives the SEC access to all orders posted on the national exchanges, including modifications, cancellations and trade executions of those orders, as well as all off-exchange executions, putting the regulator on even footing with the most sophisticated high-speed trading firms.


Traditionally when a problem in the market has needed to be investigated, the SEC has gone to the exchanges, the Financial Industry Regulatory Authority, and the firm that introduced the error, to diagnose the cause. But MIDAS allows the regulator to do its own assessment as well.

And once again, the conclusion:

The SEC has found that high-frequency trading tactics have not caused or amplified the mini flash crashes it has examined, Berman said.

This is Tradeworx:

So, to summarize, the SEC which admits it was clueless in analyzing the modern, fragmented market (yet which found definitively that the culprit for the May 2010 flash crash was Waddell and Reed, and nobody else, using what technology at the time, nobody knows), uses a platform developed by High Frequency Trading firm Tradeworx... to reach a conclusion that High Frequency Trading firms are innocent of every flash crash resulting from an HFT algo gone haywire...

That sound, dear reader, is your head just going splat.

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ziggy59's picture

Hmmm... The term crooks and liars, for some reason keeps showing up in my mind

ziggy59's picture

Should only happen for real to these assclown corrupt MoFos that have been allowed to continue this shitstorm and markets...

Frastric's picture


Cheeseus Sonofdog's picture

Absurd. Selling of stocks happens because other traders have been selling. Buying because others are buying. It's called trend. These HFT's are programed by traders with the same considerations. If the price moves a certain way it triggers stop losses or sell orders. If the SEC really believes what they wrote then they should get rid of the circuit breakers on the markets....

MeelionDollerBogus's picture

You're absurd.

These machines are designed to trade up and down to create volatility & churn, to get fee rebates on the # of trades per SECOND which no human can do, and to trigger orders to CANCEL that are not from HFT's which is ILLEGAL.

Cheeseus Sonofdog's picture

Then we should have flat markets in a tight range.

MeelionDollerBogus's picture

no, we should have volatile markets switching from tight ranges to sharp spikes. Like variable-rate dosing to test addictiveness or effectiveness of drugs on animals, you test the market's ability (humans) to tolerate the machine parasitic actions by making an approximate (but not precise) frequency of alternations from "flat" to "volatile" and within each regime of "dosing" you extract the maximum number of dollars which is the higher rebate for the higher churn paid by the exchanges to the HFT's for being "market-makers" (win or lose). In addition if they win trades that's extra money but if you lose x on a trade and gain x+0.0001 for the "market-maker bonus" you now have only ONE variable to be concerned with: how many times you can do that (small win) per millisecond (big win).

The dosing regime change is indicated from the concentrated quote-stuffing & conditional-order execution leading to cancellation of triggered trades of non-HFT's. The HFT's can be cancelled out in this way too BUT since they never miss a beat they merely re-introduce new trades the next millisecond and are unaffected.

It's the humans that are affected.

Atlantis Consigliore's picture  ScannersHFT Scam vs MF Global Scam


John, we re in HERE. with Bernanke.....

ebworthen's picture

The inmates are running the asylum.

MeelionDollerBogus's picture

The inmates are building new asylums to their own custom specs with assurances these will be the most efficient, honest & sane asylums known to mankind & annunaki alike.

MeelionDollerBogus's picture

Next up, The Independent Association Crack Dealers unanimously find that crack cocaine is not addictive.

any bets that Tradeworx got the SEC a hookup for private meetings with the girls of Vivid Video to arrange this project & conclusion?

Yen Cross's picture

 We need the Crack Dealers.  Honest cash flows couldn't be tracked without crack dealers<

monad's picture

General Asshole foiled the education of these twits. Twice, he says. 

Darkside's picture

BECAUSE the FRB of NY is probably the one doing the HFT. Control the Markets Control the MONEY

Could you imagine with the money they have The Systems They Could Build

Satan's picture

LOL! The SEC pay Tradeworx 2.5 million a year for the privilege of using MIDAS...that's almost as much as their various porn subscriptions...

FiatFapper's picture

wrap-arounds and brown envelopes; there's no depth to how low it goes.

BullyBearish's picture

MSM working overtime:

USA Today poll says that 98% of US population thinks that the US should invade Syria and remove Assad.

USA Today poll says that 79% of US population thinks that Ben Bernanke is doing a Great Job and saved the economy

USA Today poll says 68% of US population says Edward Snowden is a "traitor" and NSA surveillance is OK

USA Today poll just released says that 87% of US population believes the SEC's contention that flash crashes and other "trading anomalies" are just human error, not anything untoward or evil in any way. 

Hubbs's picture

now to find a statistically sound poll/sample to see if the population really believes this. If so then the govt isn't as dumb as I thought.

Fake_nation's picture

Not to mention "Edison", the big algo that's going to predict what all the other algos are doing:

HFT is all based on a desire to have a completely controlled economy, the fantasy on which such mechanical algos are built.

Fanatic's picture

You gotta love the hubris of Tradeworks calling it MIDAS (after the king that made everything he touched turn to gold). LOL.

Joebloinvestor's picture

Well, Toyota convinced everyone that its' cars don't go apeshit, except the ones that got killed.

Downtoolong's picture

You think this is outrageous? Wait until next week when they release a report co-authored by Dick Cheney and the NSA titled, “How Ed Snowden and the Chinese Caused Every Flash Crash Since 2007”.

22winmag's picture

This is nothing Dodd-Frank can't fix. Bring in the lawyers by the truckload.


Wait a minute, what the fuck exactly is Dodd-Frank except maybe a turd in a pissy punch bowl?

lasvegaspersona's picture

So all that Nanex data was just pretty colors?

t0mmyBerg's picture

i just love the exploding head.   that is all.

Money 4 Nothing's picture

As the fox fleeds the hen house with one in mouth.

Decimus Lunius Luvenalis's picture

Whoa, whoa, whoa....whoa.  You're telling me that federal government agencies may actually have been formed to protect the very industries they are meant to police?  That the public good rationale is a ruse, a facade?  That the good intentions of many employees within these agencies are being used and manipulated into plausible deniability in order to dispel criticism as mere conspiracy theory?  That those that would go to work each day enforcing rules are used as a smoke screen to cover the fact that the industries and the paid-for legislators vis-a-vis lobbying firms actually author legislation behind the rules rendering those civil servants impotent?   Wacko.  

Joe A's picture

I saw Scanners when I was a kid. It freaked me out. Cold sweat running down my back. Man, what a movie.

Joshua Falken's picture

Epic Fail


This is the moment, after everything else Obama has done freedomwise, that all of us free marketeers should truly know that the deck is rigged.