VIX-Manipulating HFT Algo Is Booted From Dark Pool, Exposed For Whole World To See

Tyler Durden's picture

VIX was monkey-hammered lower once again today, lifting stocks vertically to Russell 2000 record highs and The Dow within a point of 17,000. The question is who (or what) is doing it. Nanex appears to have found out who...It appears the un-visible hand of VIX manipulation (that we have shown previously) has been forced into the open public markets as Barclays goes dark. Simply put, massive bursts of 1-lot TVIX orders flood and delay the markets enabling HFTs to manipulate the tail that inevitably wags the market (via VXX, SPX options, and leverage) and now that the dark pools are disappearing, we see it all in real-time.

We have previously noted the odd 'dark pool' manipulation we suspected was occurring in VIX derivatives... Through massive VXX selling in dark pools...

Is someone (cough Fed via Citadel) using dark pools to manage their volatility suppression - which implicitly spooks the actual markets in implied vol and thus in a "tail wags the dog" manner, juices the entire US equity market... but we do not find out about it until after hours as the dark pool unleashes its volume at VWAP pricing...

 

Makes us wonder if this is the fingerprints of the NY Fed's Kevin Henry hard at work managing perceptions via dark pools with as much leverage as possible via the vol markets.

just like he did here the week of The Fed Minutes

 

As he did this week...

 

And now Nanex exposes the "odd-lot" algo that appears to have been forced into the light...

There is a new High Frequency Trading  (HFT) Algo afoot, probably designed to measure, or cause system latency. This algo sends extreme bursts of 1-share orders in a symbol to two different exchanges: Nasdaq and BATS. The result is a system-impacting surge of quote updates, similar to quote stuffing, but accompanied by an extremely high number of 1-share trade executions. These trade executions often consume the entire SIP output line, as indicated by continuous sequence numbers with no gaps.

Other observations:

  • The algo seems to prefer low, to very low priced stocks.
  • The price executed at both Nasdaq and BATS is always the same - this isn't from arbitrage.
  • There are always a large number of quotes accompanying this burst of trades.
  • The table below shows a list events we detected on July 1, 2014. Take a look at the event outlined in red. This event involved the symbol TVIX which traded at $2.89. At 12:09:49, over a 2 second period, there were 6,986 trades in TVIX: 3,493 executed on Nasdaq, and 3,493 executed on BATS. Every one of these trades was for a single share which cost $2.89 each.

Now take a look at the graph below...

 

It plots these events as colored bubbles, with each bubble sized according to the number of trades during the event. Extreme events show up as large bubbles - such as the TVIX event which is the largest bubble. The vertical axis shows the time of day, and each day's events are plotted along a vertical line. This helps to see if the algo runs at certain times of the trading day.

The bubbles are color-coded depending on which combination of exchanges are involved - in this close-up of 4 days, only one other exchange combination appeared - Phil and BATZ (green).

The bubble labeled GLUU was the most extreme of these events, until it was superceded by TVIX, which happened while we were writing this paper.

 

If we expand the chart and look further back in time, we find that the NQ+BATZ combination is new. The columns of large orange bubbles make a significant appearance on June 26, 2014, which is, coincidentally or not, is the first trading day after the New York Attorney General announced it was suing the Barclay's Dark Pool (this is a must read). We aren't sure if the two are related, but it's possible. Maybe a HFT got kicked out of a dark pool and it's figuring out a new way to game the system.

And here's the rigging algo in action...

TVIX Trades on July 1, 2014 over about 30 minutes of time, including the event at 12:09:49. 


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The Bottom Line...

1) On days when the VIX has been slammed notably lower, we have seen more than coincidentally massive after-hours volume spikes in VXX and TVIX (where manipulators can hide their actions)

 

2) This is the footprint of dark pools flushing their orders to the public markets

 

3) Since June 26th (when Barclays was hit by the Dark pool probe), a 'new' algo has appeared in TVIX

 

4) Today's major algo manipulation (above) and plunge in VIX suggest the dark pool rigging is in the open more transparent public markets now...

So we know how they do it... will anyone see it as front-running of 'riggedness' and do something about it?