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An HFT-Rigged Market: How A Rogue Algo Destroyed The BATS IPO

Tyler Durden's picture




 

Considering the rancorous debate currently going on between Michael Lewis (we will have more to say about it shortly), DirectEdge CEO William O'Brien and IEX employee and latest HFT whistleblower, Brad Katsuyma, on CNBC, we decided that this would be an opportune moment to remind readers how BATS, which currently owns DirectEdge, IPOed, or rather how it failed to IPO, when it crashed and burned in its attempt to go public on March 23, 2012, when a rogue algo destabilized the order book and promptly sent the indicative price from around $16 to 0... in less than a second - perheps the perfect testament to just what HFT really does.... and just so readers have an objective perspective of how "unrigged" the market truly is.

From March 27, 2012:

SkyNet Wars: How A Nasdaq Algo Destroyed BATS

Following the May 2010 flash crash, the investing public hoped that as part of its "exhaustive report", the SEC would find and hold responsible the various components of a broken market structure, be it HFTs, ETFs, stubbing and sub-pennying algorithms, and all the other knowns and unknowns we have covered over the years. Instead, in what would prove to be a move of cataclysmic stupidity (if sadly understandable - the SEC, like everyone else "in charge" is used to dealing with a gullible and simplistic public, which has no access to the real data and analysis, and whose opinion could be easily manipulated, at least until now), the regulator blamed and scapegoated it all on a Waddell and Reed trade (we wonder just what the quid pro quo was to get the asset manager to roll over and take the blame despite protestations to the contrary, at least in the beginning). The result was that the same investing public realized that market structure is so corrupt, and so robotically mutated, there is no place for the small investor in this broken market. Last week's BATS IPO fiasco merely confirmed this. And as usual, BATS (whose chairman Ratterman has just been demoted even as he stays on as CEO) decided to take the "passive voice" approach and blame it all on a faceless, emotionless, motiveless "software glitch". Just like that perfectly innocuous BSOD we have all grown to love and expect any minute. Only it wasn't. To get to the bottom of what really happened, in a world in which the SEC is far more interested in finding the latest discount internet porn stream than actually protecting the small investor, we relied on our friends from Nanex, who have time and again proven to have a far better grasp of what it is that really happens in the market than virtually anyone else. And if Nanex' interpretation of events is correct (spoiler alert - it was not a "software glitch") it takes SkyNet wars from the silver screen and to a trading terminal near you. What happened is that a malicious, 100% intentional Nasdaq algorithm purposefully brought BATS stock to a price of 0.00 within 900 millisecond of the company's break for trading! This is open SkyNet warfare.

The fact that the BATS exchange itself halted just prior to break only facilitated this (and could potentially be a case of malicious sabotage). But one thing is clear - as the data below shows, there is no doubt that an Intermarket Sweep Order originating on the Nasdaq exchange was unleashed to make a mockery out of BATS. It succeeded, and in doing so may have destroyed not only BATS chances for going public, but ultimately ruined the firm's credibility. Who would stand to gain from this? Why exchanges such as Nasdaq and NYSE of course, which already are scrambling for revenue, and in the aftermath of the failed Deutsche Boerse merger, it means that any dirty trick in the book to extend and pretend is now fair game. Such as the algo that crashed BATS.

We fully expect that in keeping with its galactic stupidity of yore, the SEC will do nothing to address this situation which is nothing short of exchange warfare using rogue and malicious algorithms as agents of war. Further, in doing so, it will once more destroy any latent "credibility" that the stock market may have created with the retail investor following the 4 month ridiculous and centrally planned melt up (we doubt there is much faith to lose - as we pointed out last week, Joe Sixpack no longer wishes to be the big boys' patsy). Oh well - if the market and its regulators wish to make "investing" solely a provenance of central banks, ultra fast algorithms, and Primary Dealers, so be it. They can play in their sandbox all they want. Just don't expect the trillions in "money on the sidelines" but mostly in savings accounts, where it may earn 0% interest, but at least it won't be vaporized courtesy of some vacuum tube, to ever come back to stocks. Ever.

As for the forensic reconstruction of what truly happened to BATS, below we provide a spreadsheet (the excel can be downloaded here), of every single trade post the BATS IPO

20120323.BATS.TandQ

In Nanex' own words:

Start at line 192 -- these weren't stale quotes from Nasdaq by any means. These were highly accurate and precisely updated quotes from a sophisticated algorithm programmed to take BATS's price to 0. You can see the BATS trades just before the algo on Nasdaq starts up. In other words, after the BATS trades print, everything is fine (except of course for BATS' system). Nasdaq's system is just fine. So is CQS (the SIP). That algo did its job with the precision of a master watch maker.

 

The data and charts make this abundantly clear. The trade(s) that shut down Apple would be considered stale/bad quotes. But not those 500+ trades on Nasdaq.

Nanex' verdict:

It had to be someone who's machines are directly connected to Nasdaq because they used Intermarket Sweep Order orders.

And visually:

Look at the timing! There are many quotes lasting less than 1/10,000 of a second in there! (10 quotes/millisecond). And note the almost perfect 45 degree line in log-scaled blue line below.

 

Had to be from same algo. Way too perfect. Way. Too. Perfect.

 

If BATS' system hadn't failed, this algo would have likely been obscured.

Alas, BATS did fail, and the result was last week's epic embarrassment for BATS which already cost the CEO his chairmanship, and the firm hundreds of millions in fresh equity, but also which destroyed any hope that the retail investor may be coming back to what is now a permanently and terminally broken market.

 

*  *  *

And For the chart porn addicts, here is a step by step forensic view from Nanex of how a stock exchange is permanently prevented from going public.

 

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Tue, 04/01/2014 - 13:38 | 4614236 Four chan
Four chan's picture

nice hft clash on cnbc just now.

Tue, 04/01/2014 - 13:46 | 4614279 Dollarmedes
Dollarmedes's picture

The HFT "debate" is another red herring. I mean, it's a good thing to get rid of it, but the biggest firms have already moved on to the next scam. I'm sure that won't be discussed on CNBC.

Tue, 04/01/2014 - 13:50 | 4614287 toys for tits
toys for tits's picture

Besides, everyone can read the calendar and aren't going to be caught up in the AF joke.

Look at the new all time highs for evidence of this moronacy.

Tue, 04/01/2014 - 13:50 | 4614292 Dollarmedes
Dollarmedes's picture

In support of that view, I will say that I find it suspicious how the consensus has shifted overnight: 60 Minutes, Brad Katsuyma's book, CNBC...they all seem to be jumping on the bandwagon at the same time. Coincidence, no doubt.

Tue, 04/01/2014 - 13:52 | 4614298 BTCTalks
BTCTalks's picture

Looking for a scapegoat ahead of the planned crash?  HFT firms make lovely sacrificial lambs...

Tue, 04/01/2014 - 15:39 | 4614727 Joe Davola
Joe Davola's picture

For the "rogue" algorithm programmer, they might look at the students who didn't plot functions x^n on a log scale and I deducted points from in the class I TA'd a few years back.  They were none too happy with my grading, although they likely learned a valuable lesson.

Tue, 04/01/2014 - 19:22 | 4615418 dannyboy
dannyboy's picture

The fact that there were trades executed at 0 shows just how absolutely rediculous the entire system is.

Tue, 04/01/2014 - 13:55 | 4614315 Dollarmedes
Dollarmedes's picture

Excuse me, Michael Lewis' book.

Tue, 04/01/2014 - 13:51 | 4614293 BTCTalks
BTCTalks's picture

That was the best CNBC piece I've seen in a very long time.  I'm actuallly going to watch it again later.  Did someone call O'Brien a waaahmbulance?

Tue, 04/01/2014 - 13:40 | 4614241 mrdenis
mrdenis's picture

This makes Christies lane closing look like childs play ....................

Tue, 04/01/2014 - 13:40 | 4614242 Bill of Rights
Bill of Rights's picture

Vietnam to ban gold bullion at country’s borders

http://tuoitrenews.vn/business/18725/vietnam-to-ban-gold-bullion-at-coun...

Tue, 04/01/2014 - 13:42 | 4614254 buzzsaw99
buzzsaw99's picture

It had to be someone who's machines...

 

who's machines?

seriously?

who's?

 

Never go full retard.

Tue, 04/01/2014 - 13:43 | 4614260 Kaiser Sousa
Kaiser Sousa's picture

the dude who is the head of BATS was just on CNBC with Lewis and the Japanese guy thats started the exchange to combat HFT assholes...

talk about a complete fucking cocksucker mother fucking piece of shit...the anchors let him constantly interrupt  Lewis and the Japanese guy as he was trying , quite desperately i might add, to both disparage the others and defend the pilaging he and all of wall st. has been engaged in.

i would have punched him in his fucking sociopath face...fucking hate CNBC...

Tue, 04/01/2014 - 13:47 | 4614280 Waterfallsparkles
Waterfallsparkles's picture

Thou do protest too much.

Tue, 04/01/2014 - 13:53 | 4614300 fonzannoon
fonzannoon's picture

I think they did a decent job of letting them all go at it. It's a bummer that they did not have the bad guy dude clarify his initial answer because once the Japanese guy got pissed he pinned bad guy in the first 3 seconds, exept no one understands this stuff enough to know it.

I was talking to someone offline today who made a great point. I own RGR. Yesterday, on no news, the stock was down big. Today, on no news, the stock is up big. Here is how that person summarized it.

"they squeeze retail until retail starts panicking thinking the technical collapse can only be bad fundamental news and they are too far out of the loop to know, so they panic and call their broker and tell him to dump RGR for no reason whatsoever because the chart was destroyed on a whim. Thats the crime, thats how shareholders are stolen from. Who cares about the fact that after they were fooled into selling, they could have sold for $59.02 instead of $59.00?"

This penny scalping shit misses the big picture on so many levels.

 

Tue, 04/01/2014 - 14:19 | 4614403 Bryan
Bryan's picture

This happens all the time.  Hedgies will start a rumor and it goes viral.  They profit from the move they created.  ... all the time.

Tue, 04/01/2014 - 19:26 | 4615436 dannyboy
dannyboy's picture

Sorry, starting rumours and trading off them however unsavoury is not the same as HFT's.

Tue, 04/01/2014 - 13:44 | 4614264 Philalethian
Philalethian's picture

Corruption and criminality are like a virus disease. It will continue to spread until the host is dead.

All this rouge and criminal evil is propagated and promoted for profits in the great agenda to take down America. All as well planed and it is all related to the almighty god, money.

Moar related information from Mr. Jim Willie about the race to take down America. 

"The entire USDollar foundation with the USTreasury Bond bank reserve structure is at risk is collapsing, as consequence to the desperate adventure and criminal activity conducted in Ukraine.."

http://news.goldseek.com/GoldenJackass/1394139780.php

 

Tue, 04/01/2014 - 13:51 | 4614283 Bunders
Bunders's picture

It is good to carry some powdered rouge in one's sleeve.

Tue, 04/01/2014 - 13:44 | 4614268 Waterfallsparkles
Waterfallsparkles's picture

It seems like the more they talk about how the Market is rigged the higher the stocks go.

Trying to instill confidence from anyone who watched 60 minutes?  I think so.

Tue, 04/01/2014 - 13:51 | 4614297 buzzsaw99
buzzsaw99's picture

of course. the moar people who know the market is rigged the fewer who trade. the fewer people that trade the higher the market goes. it isn't rocket surgery.

Tue, 04/01/2014 - 13:54 | 4614307 El Hosel
El Hosel's picture

Bill O'Brien of BATS is trying to make a case for lying cheating cry baby Banksters... Better put him on nail gun watch if he ever realizes how foolish he looked attacking Lewis and Katsuyama's honesty on CNBC. 

Tue, 04/01/2014 - 14:19 | 4614401 Kaiser Sousa
Kaiser Sousa's picture

"Better put him on nail gun watch if he ever realizes how foolish he looked attacking Lewis and Katsuyama's honesty on CNBC. "

exactly...his vitriol was a reflection of the desperation he and all the other banker/wall st. sociopaths exhibit when a threat to their fraudulent constructs r revealed and threatened...

all we have to do as a whole is withdraw from their ponzis and casinos...

BUY PHYSICAL GOLD AND SILVER...real money can end it all.

Tue, 04/01/2014 - 14:08 | 4614347 El Hosel
El Hosel's picture

"Restoring confidence", yes sir, anyone who is not confident that the markets are rigged is lying or not looking at them.

Tue, 04/01/2014 - 13:50 | 4614289 Stoploss
Stoploss's picture

If Nanex is not being used in the investigation, then this whole thing is all bullshit.

Swept under the rug as usual. Haven't seen the Nanex name associated at all with this.

Tue, 04/01/2014 - 13:54 | 4614306 Hindenburg...Oh Man
Hindenburg...Oh Man's picture

If that dude on CNBC has become face of high frequency trading (Bill?), in other words the huge dick sitting next to Katsuyama, then they didn't do themselves any favors--they look and sound really evil now. 

Tue, 04/01/2014 - 13:55 | 4614313 Philalethian
Philalethian's picture

You can fool some of the people some of the time, but you can no longer fool all the people at all. When will these clowns that perpetuate this corruption from the top down ever get it? It is easier to invest in peace, than it is into war and continual world destruction for profits.

http://news.yahoo.com/video/75-believe-stock-market-rigged-025500628.html

Tue, 04/01/2014 - 13:56 | 4614319 ThirdCoastSurfer
ThirdCoastSurfer's picture

"The result was that the same investing public realized that market structure is so corrupt, and so robotically mutated, there is no place for the small investor in this broken market."

 

To read or follow the travails of Brad Katsuyma, and then how firms like TD Amertrade sell access to individual investors pre-fill orders to firms like Citadel,  is to expose why the term "dumb money" refers to anyone stupid or desperate enough to submit an order through such a tading platform. 

Why there isn't a class action lawsuit against such trading platforms is beyond me. 

Tue, 04/01/2014 - 14:10 | 4614351 Yen Cross
Yen Cross's picture

  O/T but here we sit with 10s up almost 1.5% and the ES (with it's usual suspects) circle jerking itself up .5% when it should be in the shitter. Instead the yield gain in 10s is driving usd/jpy which is driving the algo driven equity markets on no volume.

Tue, 04/01/2014 - 14:11 | 4614361 Godisanhftbot
Godisanhftbot's picture

yawwwwwnnnnnnnnnn

 

old news

 

must be a new scam we dont know about yet, with all this hft noise hitting the tape

Tue, 04/01/2014 - 14:19 | 4614373 GhostInTheMachine
GhostInTheMachine's picture

Just out of curiosity, what programming language is used to write HTF trading programmes? I mean, this actually is a real question, does anyone have any idea? Thanx for anwsers in advance if anyone cares to share.

Tue, 04/01/2014 - 14:22 | 4614417 Bryan
Bryan's picture

I'm a programmer, but I don't know what language they use.  I would assume java or C# depending on the platform.  Geez, I could write a program like the BATS killer, easy.  Just pump and then kill lower and lower bids every couple milliseconds.  It's probably that simple; just protect with some security, maybe hide the origin of the bids, and voila.

Tue, 04/01/2014 - 14:51 | 4614530 Cthonic
Cthonic's picture

several quant shops used to hire a lot of c++ programmers. couple of specialized equipment providers use custom programmed fpga's (so something like vhdl/verilog as generated by supplier-specific design tools like altera's quartus or xilinx's ise design suite).  doesn't hurt if one knows how to write device drivers and network kernel code.

Tue, 04/01/2014 - 15:05 | 4614589 GhostInTheMachine
GhostInTheMachine's picture

@ Cthonic @ Brian

Thanx much appreciated.

 

Tue, 04/01/2014 - 15:28 | 4614680 Bryan
Bryan's picture

No problem.  By the way, I've spent a few years now writing auto-trading programs for various platforms.  I can tell you that, even with a computerized program that will enter and exit orders for you, you are still at the mercy of your data connection and of the broker filling your orders.  Co-location is key, and it costs a lot of money to get close enough to the exchange network to make a difference.  The HFT algos probably would not work if they weren't a few milliseconds ahead of other orders coming in.

Tue, 04/01/2014 - 16:23 | 4614909 GhostInTheMachine
GhostInTheMachine's picture

Thanx again

yup that's what I have heard. I guess you the right money will get you the access you need. Not for my pocket unfortunately:) 

Tue, 04/01/2014 - 14:38 | 4614485 Manipuflation
Manipuflation's picture

Well, a couple of our employees are going away to federal prison for a five years.  They decided to take on a side job.  It seems they got caught with 300 lbs of marijuana.  No, not 3 ounces, I said 300 pounds.  That is a lot of weed.  They were going for the big time score and they got narced out and hit with RICO.  They were good employees but they got a little carried away.

Fuck, now I do have to go plow snow in the winter that never ends here.  We are running out of employees.  We don't fire employees that show that kind of initiative but they don't do us a lot of good in prison either.

Crazy fuckers.  Now I will have to write a bunch of letters on their behalf. 

Tue, 04/01/2014 - 14:53 | 4614553 EndOfDayExit
EndOfDayExit's picture

I honestly do not understand what they're complaining about. Rogue algo? On what side? I'd say it was a stupid algo trying to unload shares at _any_ price, and no willing buyers at the bid other than some simple market maker algo, which was promptly reducing the bid after each fill. Okay, a good marker maker could/should have absorbed a lot more shares at a better price to stabilize this free fall, but I don't think they necessarily _have_ to do it.

Tue, 04/01/2014 - 14:54 | 4614557 soopy
soopy's picture

So who wrote the algo?

Tue, 04/01/2014 - 22:05 | 4615889 StychoKiller
StychoKiller's picture

Let's go with Robert Paulson...

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