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How A High Freak Algo Halted Bond Trading For 5 Seconds During Friday's Payrolls Release

Tyler Durden's picture





 

It's just sad now: with every passing day bringing new (and previously unseen) cases of high frequency trading algo-generated market halts or crashes, that none of the regulators are willing to take a stand against this market scourge that we have written about for nearly 5 years now, is a clear indication that the HFT lobby is firmly in control of what were once "capital markets" and that the retail investor is once again, the sacrificial lamb. But while it was one thing for the high freak thugs to control marginal price action through momentum ignition, quote stuffing, hide not slide, flash trades, and all the other well-known manipulative techniques which seemingly are too complicated for the SEC to figure out, in equities where things get really bad is when HFTs start crashing, or at least halting, the bond market at key market inflection points such as during the most important monthly data release, the payrolls release. This is precisely what happened on Friday, when as Nanex clearly shows, a momentum ignition algo sent the ZF (5 Year T-Note future) soaring and resulting in a 5 second - an eternity in today's nanosecond age - trading halt during the actual release of the BLS report.

How this kind of manipulation continues without penalty, and how this same party can keep getting away with this  - recall from June, "Here Is Today's 482 Millisecond NFP Leak, The Subsequent Gold Slam And Trading Halts In Treasurys And ES" - is just too mind-numbing to consider any more.

Here is the criminal action from Friday, in pretty charts, courtesy of Nanex:

On January 10, 2013, about 8/10ths of a second before the Labor Department released the widely anticipated Employment Situation Report, trading activity exploded in Treasury futures, sending the prices much higher in less than 1/10th of a second. The buying activity overwhelmed the 5-Year T-Note market causing a stop logic circuit breaker to trip and shut down trading for 5 seconds. During the halt in 5-Year T-Note futures, the news was officially released in Washington, D.C. - meaning that anyone wanting to trade on that news, would have to wait until the halt was lifted almost 4 seconds later (4,000,000 microseconds in high frequency trading lingo).

This isn't the first time that Treasury futures have been halted (see also 08-Nov-2013 and 07-Jun-2013); however, before June 2013, this was an extremely rare event.

2. All Futures Trades - showing that trading activity before news release was higher than after news release!

3. March 2014 5-Year T-Note (ZF) Futures. Zoom of Chart 1.

4. March 2014 T-Bond (ZB) Futures.

5. March 2014 10-Year T-Notes (ZN) Futures.

6. March 2014 2-Year T-Note (ZT) Futures.

7. March 2014 2-Year Minus 5-Year T-Note (TUF) Futures. This contract also halted for 5 seconds (due to the halt in the 5-Year leg).

8. March 2014 Ultra T-Bond (UB) Futures.

 

 


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Mon, 01/13/2014 - 14:37 | Link to Comment HedgeAccordingly
HedgeAccordingly's picture

Probably PIMPco doing their biz- http://hedge.ly/1irIT2k

Mon, 01/13/2014 - 14:45 | Link to Comment Hippocratic Oaf
Hippocratic Oaf's picture

How can regulators and the SEC stand against something they have no fucking clue of what it is?

Seemed to have worked in the CDO/CMO mkt when SEC was told everything is ok.

Oh, that's right........only worked out for GS, JPM, BAC, C etc..........

Mon, 01/13/2014 - 14:51 | Link to Comment TheCanadianAustrian
TheCanadianAustrian's picture

Sorry, but I have to fall in with the camp that says that HFT is a non-issue. These HFT algos are competing against each other. They're not extracting wealth from buy-and-hold investors as many seem to believe. They're simply extracting wealth from each other. The ones that succeed at the HFT game get richer. The ones that fail at HFT go broke. HFT doesn't extract wealth from ordinary investors any more than professional poker players extract wealth from the poker game in your garage.

Mon, 01/13/2014 - 15:04 | Link to Comment redpill
redpill's picture

How can you claim that?  Of course it is competing and extracting wealth.  HFT is not adding value to the system, therefore it's only removing it.   Essentially it frontruns/skims every transaction regardless of whether it's a retail investor or another HFT algo.  More activity, more churn, the only purpose that serves is to make incremental trades at a pace that cannot be matched by the individual investor.  They compete against each other as well, but that isn't the point.

Mon, 01/13/2014 - 15:12 | Link to Comment TheCanadianAustrian
TheCanadianAustrian's picture

Speaking strictly from a libertarian perspective, what possible justification can there be for government regulation of HFT?

Mon, 01/13/2014 - 15:21 | Link to Comment redpill
redpill's picture

Speaking strictly from a libertarian perspective, what possible justification can there be for government regulating armed robbery?

Mon, 01/13/2014 - 15:52 | Link to Comment TheCanadianAustrian
TheCanadianAustrian's picture

How are the two even remotely comparable? Trading is a consensual act between two willing parties, regardless of how frequent or automated it is. Armed robbery is just plain nonconsensual.

To answer your rhetorical question, speaking strictly from a libertarian perspective, the justification is that the government's role is to promote liberty as enforce private property ownership rights.

Speaking from an anarchist's perspective, there is no justification for government regulating armed robbery either. But I'm pretty sure you'll have a hard time finding an anarchist that supports the SEC.

Mon, 01/13/2014 - 16:35 | Link to Comment asteroids
asteroids's picture

My fellow Canuck, we live in the real world. Have you been hit in the head with a hocky puck? We must rely on markets that are free and honest. Otherwise, we degenerate into the middle ages and bartering. The "boyz" with HFT and other fuckery have created institutional theft. In their minds if we ain't them, then we are muppets to be killed at every opportunity. Either change the system, be smarter, or don't play.

Mon, 01/13/2014 - 17:44 | Link to Comment redpill
redpill's picture

You're right, they aren't comparable. The armed robber is far more honest.

Mon, 01/13/2014 - 15:10 | Link to Comment philosophers bone
philosophers bone's picture

Why would you make the assumption that they are competing?  Isn't it entirely possible (probable?) that the bank algos have been designed to simply implement "wash trades" (you sell to me today, then I'll sell to you tomorrow for a little more or a little less or the same price) which drives up brokerage commissions and bank revenues, increases stock exchange trading revenues?  In addition to juiced up revenues, you get the added benefit of the appearance of an actual "market".  And when the SEC comes knocking (work with me here), you can claim that "the algos did it".

Mon, 01/13/2014 - 15:23 | Link to Comment redpill
redpill's picture

Indeed, once the foxes break into the henhouse why would they eat each other?

Mon, 01/13/2014 - 15:27 | Link to Comment TheCanadianAustrian
TheCanadianAustrian's picture

"Why would you make the assumption that they are competing?"

Me and a friend can collude and execute trillions of trades per second with each other. That doesn't magically make us wealthier.

 

"And when the SEC comes knocking (work with me here), you can claim that "the algos did it"."

Then one can argue that the existence of the SEC is the real problem, not the existence of the algos.

Mon, 01/13/2014 - 15:34 | Link to Comment philosophers bone
philosophers bone's picture

"Me and a friend can collude and execute trillions of trades per second with each other.  That doesn't make us wealthier."

True, until you've convinced a third party that there is a very vibrant and robust market for the securities, so they decide to purchase from you and your friend.  Then they can't sell and you and your friend are wealthier.

Mon, 01/13/2014 - 15:56 | Link to Comment TheCanadianAustrian
TheCanadianAustrian's picture

Convincing someone to buy your overpriced assets is the goal of literally every investor in the world, whether it's high frequency or not.

Tell me, how has the person who bought their DOW at 8250 and watch it go up by 100% been made poorer, exactly? Are you suggesting that all HFT-influenced markets in the world are collectively undervalued? If not, you can't claim that buy-and-hold investors have been victimized by HFT.

Even if your argument is that HFT creates "too much" liquidity and causes people get a hard-on for the markets and overvalue them, that STILL doesn't prevent a competent buy-and-hold investor from identifying an overpriced DOW and exiting the market with a healthy profit. The only victims are those of their own making.

Mon, 01/13/2014 - 16:09 | Link to Comment philosophers bone
philosophers bone's picture

One of the stated objectives of securities regulation is to foster efficient capital markets and maintain market integrity.  Market manipulation (which includes activity which creates the false appearance of an interest in a security) is prohibited.  It doesn't matter who buys or sells at which time, if the markets are not real markets, then the participants are making decisions without full information.  It doesn't matter if we can come up with ad hoc examples of certain investors benefitting financially as a result of the manipulation.  If you think it through logically, for every person buying into an artifically low market, there is someone selling into an artificially low market, and vice versa.  On top of the analysis of who profits and who loses, the fact that the integrity of the market is compromised hurts everyone in the long run, since efficient capital markets that participants can trust is a good thing (so the argument goes...), otherwise people will not participate.

Mon, 01/13/2014 - 14:38 | Link to Comment Ignatius
Ignatius's picture

Let me guess.  This shit didn't happen so much when it was just pit trading, right?

Mon, 01/13/2014 - 14:40 | Link to Comment TeamDepends
TeamDepends's picture

Bots flipping our burgers and making our markets.  What's next, a "virtual currency"?

Mon, 01/13/2014 - 15:38 | Link to Comment tekknik
tekknik's picture

lol, so thick it's almost palpable

Mon, 01/13/2014 - 14:44 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

"How this kind of manipulation continues without penalty, and how this same party can keep getting away with this..........is just too mind-numbing to consider any more."

When it serves the State's 'interest' anything is possible. When it serves 'national security' everything is possible.

Mon, 01/13/2014 - 14:59 | Link to Comment doctor10
doctor10's picture

The real elephant in the room here. Wonder how much longer anybody will play with them?

Mon, 01/13/2014 - 14:47 | Link to Comment disabledvet
disabledvet's picture

the investigation into the manipulation of currencies is going to be HUGE. that Treasury market is a PLANET...so whoever is massively short and demanding "instantaneous price discovery" be declared null and void fighting gravity but INERTIA. (And that is heart...soul of Sir Isaac Newton's GENIUS.) You wanna 55 billion for a single natural gas drilling and processing and distribution platform? I can't even begin to imagine "the gaseous giant that lies underneath."

Mon, 01/13/2014 - 14:50 | Link to Comment Atomizer
Atomizer's picture

Unplug the computer and reboot system. Call IT department for alibi

 

Mon, 01/13/2014 - 15:02 | Link to Comment MedicalQuack
MedicalQuack's picture

What I ponder too is what's going to happen when the news agencies starting cranking out their Jounobots to report the news?  I have written about it and NYU professor Siefe in a new book will be talking about it as well.  Really, WTF...automated bots reporting news to give the bots on the market something to trade with...geez..

http://ducknetweb.blogspot.com/2013/12/quantitated-justification-for-bel...

Forbes supposedly has 6 bids of people wanting to buy their media news and it comes with a Journobot which they have been open about but it produces some of what you read over there.  So like here we us humans talking, but how about when the bots even control all the news chatting on the web too?  I'm not going to sit there write a comment to talk a bot!  The bot will just come back and tell me I'm wrong if I don't agree with the news article...lol:)

So in addition to the HFT bots we can these bots to the game next....yuk! 

Mon, 01/13/2014 - 15:15 | Link to Comment Atomizer
Atomizer's picture

In the future, you'll learn about a crackdown of firings at a major search engine firm.

Mon, 01/13/2014 - 15:14 | Link to Comment BuddyEffed
BuddyEffed's picture

" in equities" 

Was that a typo, where it should have been inequities?  Or double entendre?

Mon, 01/13/2014 - 16:17 | Link to Comment withglee
withglee's picture

Delay each order a random number of seconds. Poof! The problem vanishes!

Do NOT follow this link or you will be banned from the site!