"Timestamp Fraud": A Rigged Market Explained In One Simple Animation

Tyler Durden's picture

The topic of High-Frequency-Trading quickly dissolves into a smorgasbord of mnemonics and 'inside-baseball' technical terms - just complicated enough to lose everyone that matters or should care about its implications. Despite the fair-and-balanced defense from the mainstream media business channels (sponsored by the belief in the status quo fair markets that 'America the free' is known for), the fact is that HFT does front-run (perfectly legal under the umbrella protection of Reg NMS) order flow, but there may be one more wrinkle - one which would cement the Michael Lewis (accurate) allegation that the market is rigged.

Because if as Nanex shows below, there is in addition to everything else the element of timestamp fraud involved in the distribution of NMS "compliant" trading data for Direct Feed-to-SIP matching purposes, this means that not only is the market rigged, but its rigging goes from the very top all the way to the lowliest algo.

What's worse, the rigged system is so embedded there is nothing anyone can do about it, until it just collapses under its own weight: think May 2010 HFT-created flash crash, only without the mirror-image bounce. 

Via Nanex,

Direct vs SIP Data Feed

The animation below shows how a trade or quote sent on an exchange makes its way to the SIP (Securities Information Processor) and a Direct Feed used by High Frequency Traders (HFT). Reg NMS requires that an exchange (A) send data to the SIP (C) as fast or faster than it sends that data to direct feed subscribers (B). Here's the relavent text from Regulation NMS:

Rule 603(a)(2) requires that any SRO, broker, or dealer that distributes market information must do so on terms that are not unreasonably discriminatory. These requirements prohibit, for example, a market from making its "core data" (i.e., data that it is required to provide to a Network processor) available to vendors on a more timely basis than it makes available the core data to a Network processor.

This is the same rule that NYSE broke and was fined $5M by the SEC in September 2012. We have a nice write up summarizing this fine as it applies to the SIP. Unfortunately, this practice continues at other exchanges. In the animation below, note that the information sent to the SIP has to travel significantly farther distances (40 miles vs 1000 feet), on a slower network (1 GBps vs 40 GBps) with a protocol that adds more latency (TCP vs UDP) than the same information sent to the direct feed. Sometimes this latency on the input side of the SIP shows up in SIP data as fantaseconds (a term we coined to describe trades printing before quotes). See this well documented example.

Timestamp Fraud

The animation also shows something that many aren't aware of: the original timestamp gets stripped, and replaced with a fresh timestamp when the SIP transmits it to a subscriber! Watch the timestamp in the box get stripped when it enters, and replaced when it leaves, the circle labeled "SIP Tape A". Keeping original timestamps is crucial for constructing audit trails, or for detecting system delays, which is why it's integral to this solution which allows HFT and non-HFT to coexist.

Understanding the Animation

Reg NMS requires that exchanges provide core data (trades and quotes) to the SIP as fast or faster than direct feeds. In the animation above, that means a trade or quote originating at an exchange (labeled A) must arrive at the SIP (C) no later than it arrives on a direct feed (B).

The animation starts with a trade (or quote) in the symbol "F", timestamped by the exchange at exactly 9:45. One network sends it to direct feed recipients (B) which are all 1000 feet away, and the other network sends it to the SIP (C) which is about 40 miles away. When the trade arrives at the SIP, the timestamp is removed and aggregated with trades from other exchanges (not shown). Finally, at the point where the SIP transmits the trade to a SIP subscriber (blue circle) it gets a new timestamp based on the SIP clock (which could be ahead or behind the original exchange's clock).

This new timestamp, in effect, will hide any delays between the exchange (A) and the blue circle from SIP users. During the flash crash, delays of over 30 seconds occurred in many stocks and were impossible to detect, because of the altered timestamps. Had the original timestamps from the exchange remained, everyone, not just High Frequency Traders, would have been aware they were trading on stale data.

Sending data faster to HFT is against regulations. Period. Changing timestamps is just plain wrong, and one could argue that SIP subscribers are being denied the true timestamp that HFT enjoy. Keep in mind that nearly all brokerage reports on trade execution quality use the SIP and therefore, an altered timestamp.

Nearly 40% of trades are priced based on the SIP - this include practically all retail trades and most dark pools. Even Goldman Sach's Dark Pool is executes based on SIP prices. When SIP prices lock or cross (due to slow input from one of 13 exchanges or even FINRA), it causes internalizers (retail trades) to stop trading until the condition is resolved: a phenomenon made clear during the flash crash.

Furthermore, speed differences between the direct feed and the SIP can lead to other undesirable market behaviors, such as momentum ignition, which have become quite common (we detailed one market-wide momentum ignition event here). Simply put, when prices suddenly move, those who can act earlier (HFT using direct feeds), will profit at the expense of those who cannot, such as internalizers and Dark Pool that are based on the SIP. With nearly 40% of trading based on the SIP, the profitability of this manipulative strategy can be great enough that the cost of inducing price shifts (momentum ignition) is worth the economic and regulatory risk.

Additional Reading

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
DoChenRollingBearing's picture

Yep, 10-4 re fraud.  The more I see about HFT, the more I too am convinced it is (or will be illegal).  But, when the HFT-ers go on trial, it will just be a smokescreen covering up the much bigger crimes:

by the Fed and the Banksters.

90's Child's picture

A simpler animation would be to just put the subscriber 'gettin fucked'.

knukles's picture

Damn them pesky time stamps.
We gotta outlaw time stamps in the name of honesty, self-regulation, liquidity, fair dealing, openness and freedom of speech. 

MeMadMax's picture

Yea, but what I don't get is if the HFT moves on a trade wouldn't the same animation apply but with the HFT being the "A" Exchange instead?

So, how is the HFT able to get a trade in to the NYSE before the "A" exchange original trade??????????

NoDebt's picture

I think you missed the point.  The HFT is trading at exchange A, they don't care about the SIP or the NYSE.  They just trade at A where they are plugged in fast and direct.

Everyone else is looking at the data feed from the SIP.  The SIP data is several thou behind but they RE-TIMESTAMP the data based on when they receive it (slower and further away). 

Anyone looking at the SIP THINKS the trade executed .002 seconds after it actually did, due to the RE-TIMESTAMPING that happens when it hits the SIP.  They're looking at STALE data.  But they don't know it.  It could be .002 seconds old, could be .2 seconds old, could be 2 seconds old or 20 seconds old.  No way of knowing.

If the SIP/NYSE had maintained the the ORIGINAL timestamp at least those looking at that data would realize how stale it was (and presumably be able to adjust their behavior accordingly).  But they have no way of knowing how stale it is.  So they get monkey-hammered.  Over and over and over again.


nanex's picture

Well said.



MeMadMax's picture

NoDebt: Thank you. A "layman terms" explanation for those of us that are not trading junkies =D

Rising Sun's picture



US goobermint using HFT as the excuse for the collosal fuck up - endless Fed printing.


Hey Fed, no jobs, no housing recovery, no GDP growth - what the fuck Yellen?????

ArkansasAngie's picture

"What's worse, the rigged system is so embedded there is nothing anyone can do about it."

Horse shit.

There is a lot that can be done.

Market holiday anybody.

CLean house -- Wall STreet and DC

Winston of Oceania's picture

We can and most have stopped gambling there. I think the whole book was an evil plot to lure the public back into the casino while they opined about how misunderstood the liquidity'ators are.

knukles's picture

Troof dat...
Everybody seems to think that becasue somethiong is as it is at the moment, not outlawed, skirts regulations, or things called "social" programs, that they're untouchable.
Heaven forbid somethings done proper with the masses in mind, or bad e=decisions reversed.

Or seeing photos of Nazi Pelouzi washing immigrant's feet.
Fuck me!
We have arrived at a real Orwellian Theater of the Absurd.

KickIce's picture

Well said, they seem to be able to trace every penny I spend yet can misplace billions in the cases of the likes of Rumsfield and Corzine.  It's a shame we can't change that "timestamp" back to 2008 and put these bastards out on the street where they belong.

philosophers bone's picture

Angie, I'm on a permanent "market holiday" and it's awesome!  We need to promote the "market holiday" concept.  Maybe crank Green Day's song "Holiday" on the way to ATM to take out $1,000 and spend it at the coin shop.  Shit, I just inspired myself - I might go do that right now!  $20 silver what a no brainer!  Thanks.

Emergency Ward's picture

Built-in random delays from 300 to 3000 milliseconds.  But what the fuck do I know -- the masters of the universe would find away around that too by cracking the delay algorithm.

Simba: All right, it worked!...

Simba: {Arrogantly} I ... am a genius.

Nala: Hey, Genius, it was my idea.

Simba: Yeah, but I pulled it off.

Disney's "The Lion King"

Seize Mars's picture

More institutionalized fraud and lies.
Increasingly the question is, how can we get the government to actually enforce the law, or more fundamentally, how do we get the government itself to obey the law?

dracos_ghost's picture

So how is this any different at IEX with their 350ms time delay? Except that it's guaranteed timestamp fraud.

Mediocritas's picture

In the example above, the timestamp is altered after the trade has executed. Agents (robot or human) watching the flow will see trades printing with a bogus timestamp and be unaware that the actual trade executed at a time earlier than stated.

IEX, on the other hand, holds up quote propagation. Their delay happens before execution, not after. The IEX delay has nothing to do with the timestamp alterations being reported here by nanex because the IEX delay is implemented before a time can be stamped.

intric8's picture

"This is the same rule that NYSE broke and was fined $5M by the SEC in September 2012"

How about prosecuting the people IN the nyse who were responsible for the infraction? No consequences, no personal accountability!

WTF_247's picture

That is EXACTLY why this continues.  And will until the people have had enough.

Corporations are people but the people in the corporations are not.  They have learned that fraud and abuse to make money are totally fine because the cost of doing so is only a small fine.  They never lose their jobs.  They are never prosecuted.  The company is never hindered in any way other than a minor fine. 2008 only reinforced this - and big time.

Other than murder for hire or blatant tax evasion/fraud, I cannot think of crimes that companies cannot commit that would get anyone involved in trouble.  All would be a fine to the company and "keep on truckin', good buddy".

Put it this way:

The laws only apply to the masses, the little people.  If you or I did ANY of the behavior that HFT does manually we would already be in jail.  There would be no negotiations between lawyers and getting off with a small fine.

intric8's picture

"The laws only apply to the masses, the little people"

Thats precisely why we should all be terrified. You dont have to look far to notice that private citizens rights are being stripped away year after year while big government is being awarded even more powers and the rights of big corperations are being expanded.

Ive always felt that since corperations are people, many politicians literally represent just one or two people. If this practice continues, america will not be recognizable a decade from now. It will morph into 'the "corperate" states of America'. Its an absolute outrage, and every career politician needs to be thrown out of office to fix the problem.

I do think most of us want our government to be competent, non-ideological, pragmatic, even-handed and wise. Is that so much to ask for?

Winston of Oceania's picture

Shows the sad state of affairs in how the sell side acted so defenive on the subject regardless of where you watched.

ebworthen's picture

"Location, location, location."

Makes a big difference if you're 1,000 feet from the Firehouse versus 40 miles.

No wonder so many "houses" are getting burned to the ground.

HFT firms get their lawns watered.

Al Huxley's picture

It's been pointed out before, but the HFT fraud is just the way select exchanges steal billions of pennies from the market, both legally and fraudulently.  But simultaneously, the old-school fraud persists that steals in much bigger amounts via insider trading and straight-up stock price manipulation, all under the guise of 'QE for the masses'.


Fuck, the fact that the FED has now ADMITTED that their policies have made the rich much richer without doing shit for the economy should make it clear to everybody that their transition from nominal citizens to fucking cattle is almost complete - the fact that the money masters running the show don't even try to hide their criminal intent and action, or disguise the results should make everybody else REALLY angry but also REALLY nervous - you're seen as cattle by the owners, know what happens to cattle?

Seize Mars's picture

Well, death of course. They aren't too secretive about it: the Georgia Guidestones say it plain as day: they want the human population at no more than 500 million. So now the question is, what's their method of choice?
My guess is a cocktail of conventional wars, nuclear incidents, fluoride in the water to continue the IQ slide, as well as staged epidemics.
What's truly amazing to me is how many of the lunatics actually believe themselves to be "insiders," and hence immune to the shitstorm.

walküre's picture

Cattle got slaughtered by the BLM. None of the American brownshirts blinked as much as an eye. When they're rounding up people, some bullshit propaganda or mind altering drug will turn any American brownshirt agents into "law-enforcers" or "cleaners". The statists will never let go of their grip on power and control.

catch edge ghost's picture

It was the neutrino discovery a couple of years ago that allows them to see trades before they happen. What you need is a quantum decoupler. With that you can anticipate your own trades before they do.

CREAM's picture

Providng liquidity my ass. The SEC clowns continue to be a bunch of knuckle-dragging bystanders who wouldn't know fair and efficient markets if one T-boned them on the interstate. 




Own gold or learn how to speak Chinese.



icanhasbailout's picture

providing liquidity is just another way of saying pissing in the pool

cro_maat's picture

The SEC knows what a fair and efficient market is. However, they do not want these markets to exist. They want to work for GS or JPM and cash in after they have played their part in the ongoing Ponzi scheme.

Buy Gold AND learn Chinese.

StychoKiller's picture

"...You see a girl's brown body dancing through the turquoise

And her footprints make you follow where the sky loves the sea

And when your fingers find her, she drowns you in her body

Carving deep blue ripples in the tissues of your mind

Tiny purple fishes run laughing through your fingers

And you want to take her with you to the hard land of the winter..."

-- "Tales of Brave Ulysses" -- Cream

GoldenTool's picture

I don't see how this is an issue the numbers look the same to me...

mccvilb's picture

It's def Michael Lewis's fault. These past few weeks some very strange things have transpired inside TD Ameritrade's book. It's like the entire market has gone over to the dark side. There's been very little liquidity displayed publically, yet rashes of executed trades pop up on occasion that occur too fast to show up as initial bids or offers. It's like the public has been shut out from the trading venue and is no longer allowed to participate in the market. Pity the fool. That will teach us lowly MFrs to dare to demand accountability from the SEC and DOJ!


Born2Bwired's picture

I think this animation should be redone with A->B the correct time relationship A->C. It should actually get there about 200 times faster on DISTANCE as there are 5280 feet in a mile so 40x5 is 200x distance then you multiply the speed 40GBps rather than 1GBps we get to 8000 times faster. This assumes equivalent speed fiber as well with no intermediate support to get 40 miles, wherein the shorter one is probably faster regardless.

If you then realize that UDP is a stateless single packet transmission with no packet breakup/ordering/transmission/retransmission/reordering/delivery that occurs in a TCP stream that is probably another 10x in speed. 

So rough guess the true animation would show the speed of A->C about 80,000 times slower than A->B? At least ballpark.


nanex's picture

The timestamp just happens to show + 2 milliseconds by chance. It could be -2ms for all we know, depending on the accuracy of the SIP timestamnp - we've seen jumps as high as 16ms on the SIP! http://www.nanex.net/Research/ClockDiff/UQDFClockDiff.html



BGO's picture

The more I read about HFT the more it looks like an elaborate front running smoke screen. Any trader can tell you front running was a common practice for years before anyone ever conceived of electronic trading. Saw front running first hand, ever single day, trading bonds; brokers (who also legally traded on their own accounts) would receive buy/sell orders from various trading desks, big orders that would with 100% certainty move markets to the upside or down. Before the brokers filled orders, they would first buy/sell contracts for themselves and THEN they would fill their customers' orders. So, say you are a broker and receive a market order from a big bank, say the order says to buy 350 bonds. Before you'd fill the order, you'd buy 50 bonds for yourself. Once the trade was executed, you'd dump the customer's order onto the market, the bond price would go up (like you knew it would) and viola, instant profit. Even though doing this was illegal back then, this is pretty much the way things have always worked. In fact, the system is pretty much set up to work this way. A big broker could never make a living by the commission he gets paid for executing trades. I dont know how much brokers get paid to fill orders today, but back not that long ago, it was less than $2 per contract. In my experience, there's only one way to eliminate front running- force the brokers to trade among themselves, and force the market makers to gamble among themselves. The whole HFT thing is just a ruse. Even if someone somehow figures out a way to eliminate HFT, something will rise up to take its place.

Muppet's picture

Hate to say.  You're right.

The Econ Ideal's picture

The financial markets have been rigged for many years. Scott Patterson's Dark Pools is an excellent read of some early history of rigging in the electronic markets. A good chunk of the rise was a response to the crony system of traders and broker-dealers at NASD, NYSE and major financial houses (which continues in various forms to this day). Not sure why Lewis is getting more notoriety for his book than Patterson did for his. Dark Pools is far superior. 

I agree with the post above, which states that even if HFT is eliminated, something else will take its place. Front running is a very old scam, and electronic markets arose in response to the then much slower colluding front-running taking place by the establishments. Now the establishments have adopted HFT and any other tricks to fight back. Gaming the system will continue ad infinitum. Battle for power of the House. If the retail or institutional guy wants a different venue ('House'), then the answer is go create one, just as Island did in the 90s. Then see how long it takes before the system is gamed. Human nature? 

withglee's picture

Timestamps will always be problematic as long as the "timestampers" are not in precise sync with each other. Further, "precise" is a relative term. In the really olden days precise times on cloudy nights may have been a couple hours.

Regardless. If the precision of the clock synchronization is greater than the precision of the timestamping,  and if the latency of the timestamping is much longer than the time for transmission there is no problem. You just add a random number of seconds to the timestamping to assure all traders have an equal chance of getting their trades made fairly.

It's not rocket science. If they wanted the problem solved, it could have been easily solved within minutes after the first proposal for HFT was suggested.


dot_bust's picture

This is the technical part of the fraud, but the wizard behind the curtain is the Fed. Just look at the reverse repos from March and April and how they correlate closely with market sell-offs.


El Gordo's picture

So the solution, as I understand it, is to manipulate (slow) the speed at which the information travels in such a manner that it all arrives  at its various destinations at precisely the same time.  Isn't this sort of like what we've experienced in equalizing the education system, or ensuring "fairness", (ie: playing to the lowest common denominator) in other sectors of society?  Everybody trades on stale information rather than current data in the spirit of fairness or equality?  Is that how capitalism works?  Once the data or the system is manipulated, there will be people (or governments) who manipulate it to their own ends.

WTF_247's picture

HFT revenues make up as much as 40% of exchange revenue now.

Think about it - yet again the lack of enforcement of rules has allowed yet another massive miss-allocation of resources.  The exchanges have expanded upon this source of reveune.  Cut it off and its a disaster for them.  The daily trading volume is massively inflated by HFT.  Again - remove that and the public could see how little volume is actually trading.  This would likely cause alarm/fear.  Again another reason why the regulators do nothing.

The same could be said of financialization of mortgages from 2002-2008.  It was way out of hand, based on fraud but everyone, including regulators looked the other way becuase it was providing a massive source of revenue for the banks post .com bust.  Lack of enforcement lets it get way out of hand until it crashes.  Should they do the same with HFT the same will happen again. 

spine001's picture

This is a lot worse than even the worst comment here makes it sound. Let me clarify something for those of you that have not run a company in the USA, while in Japan the main accountability of a company is to Japanese SOCIETY by law or to its stakeholders, in the USA it's to its shareholders. What this simply means is that the fiduciary obligation of any Officer on an USA company is to maximize profits by any way deemed legal by Counsel. If the penanlty is an administrative fee then they are obliged under the law to behave antisocially to maximize profits, no matter the consequences for the stakeholders (usually Society at large). If they don't do it they would get fired and replaced by somebody who does. Why do you think these guys get paid the big money in the largest corps in the world? It's really hard to find smart people who are willing to live with this. Now and then a founder /dreamer like Steve Jobs comes who dies with only a few hundred million, and gets fired along the way for not willingly go this route. But most of the time you have Microsoft/Facebook type founders that go along.

Mediocritas's picture

Bears mentioning also that most switching gear assigns priority to UDP traffic over TCP. HFT lads are, of course, well aware of this.

So if network hardware is routing both TCP and UDP traffic in parallel, then a surge in UDP traffic causes a slowdown in TCP traffic as the switch prioritizes for UDP (UDP is a much simpler protocol with no handshake and smaller headers, so is easier to clear in heavy traffic).

In this situation, an HFT shop can deliberately increase latency for TCP traffic (slow down the SIP) by blasting the network with UDP traffic.

Been pointing this out for years now.