Market Rigging Explained

Tyler Durden's picture

Submitted by Nanex

Market Rigging Explained

We received trade execution reports from an active trader who wanted to know why his larger orders almost never completely filled, even when the amount of stock advertised exceeded the number of shares wanted. For example, if 25,000 shares were at the best offer, and he sent in a limit order at the best offer price for 20,000 shares, the trade would, more likely than not, come back partially filled. In some cases, more than half of the amount of stock advertised (quoted) would disappear immediately before his order arrived at the exchange. This was the case, even in deeply liquid stocks such as Ford Motor Co (symbol F, market cap: $70 Billion). The trader sent us his trade execution reports, and we matched up his trades with our detailed consolidated quote and trade data to discover that the mechanism described in Michael Lewis's "Flash Boys" was alive and well on Wall Street.

Let's take a look at what we found from analyzing 5 large trades executed at different times over a 4 minute period in Ford Motor Co. Before each of these trades, the activity in the stock was whisper quiet. Here's a chart showing millisecond by millisecond trade and quote counts in Ford leading up to one of these 5 trades:

You can clearly tell when the trade hits: activity explodes to over 80 quotes in 1 millisecond (this is equivalent to 80K messages/second as far as network/system latency goes). But the point here is that nothing was going on in this stock in the immediate period before this trade hits the market.

In this particular example, there were a total of 24,800 shares advertised for sale at $17.38 (all trades and offered liquidity will be at this same price) from 8 exchanges. The trader wanted 20,000 of these shares. What he got was only 12,133 shares and 600 of these were on a dark pool (which wasn't part of the 24,800 shares of liquidity on the lit exchanges)! Worse, someone ELSE was filled for 1,570 shares during these same milliseconds! Remember, nothing was happening in Ford until his order came into the market. Based on the other 4 examples, we are sure that no trades would have occurred during these few milliseconds of time if it wasn't for this trader's order.

What happened to the 24,800 shares offered and why couldn't he get at least 20,000 of them? How is it that others were able to get shares during this time? This is especially disturbing when you consider these other traders (HFT) only bought shares in reaction to the original trader's order.

Detailed Analysis of a Trade

To answer these questions, let's take a look at the individual order executions and cancellations at the $17.38 limit price. In the table below, there are 7 columns. The number in the 1st column we'll use to reference a record. The 2nd column is the timestamp of the event - this is from CQS/CTA, the consolidated quote and trade SIP (Securities Information Processor). The 3rd column shows which reporting exchange sent the information in this record. The 4th column shows the total number of shares offered at $17.38 among the exchanges that trade this stock (Ford) and the 5th column (Add/Cancel) shows the number of shares added to, or removed from the total offered. If the 5th column is blank, it's because this record represents a trade execution.

The 6th and 7th columns show information about one order execution resulting in a trade at $17.38 (these columns are blank if the record is a quote update). The 6th column shows the number of shares executed, and the 7th column contains either a number which corresponds to the trade report # received by our trader, or an "X" which indicates someone else got this trade execution.

Note that other than the first entry (which is a reference to how long the 24,800 shares was sitting in the books waiting for execution), there is only 3 milliseconds of time shown here! The entire trade is reported in about 15 milliseconds (but 82% completes in 5 milliseconds).

Looking at the table data, we note the first trade is 100 shares on BOST (NQ-OMX Boston) and belongs to our trader. Note, however, it was the 4th trade reported back to him ("4" in the last column).

The next trade is 67 shares at EDGE (New Bats Edge-A), and that someone else bought those shares ("X"). How does that happen?

Lines 4 and 5 are order cancellations of 100 shares and 600 shares from ARCA and NYSE respectively - all in the same millisecond!

Lines 6, 7 and 8 are trade executions from EDGE and belong to our trader - note the first trade (line 3) was also from this exchange but went to someone else. This also means that the order cancellations from NYSE and ARCA happened before any size appeared.

The next 19 entries (lines 9 to 27) show a flurry of order cancellations coming in from NYSE, ARCA, BATS, NQEX and EDGX. This is before the first trade execution at any of those exchanges! This flurry of cancellations removes 10,300 shares from the number of shares offered (Shares Avail. column drop from 21,400 down to 11,100)!

Within 2 milliseconds, half of the shares have disappeared, someone else stole 67 shares, and our trader has only 13.5% (2,700 shares) of his order filled!

Let's chart the changes to the available liquidity, the shares executed, and orders canceled to get another look at this problem.

First off, let's start with the ideal case, which is shown in the chart on the left. The number of shares available at $17.38 is shown by the green line, which starts at 24,800 and decreases from order cancellations and trade executions (it would increase if additional sell orders were added). Note the green line is a plot of the Shares Avail. column in the table above. The cumulative number of shares executed is shown as a blue line.

In the ideal case (left chart), a trade arriving first, would execute against all the liquidity until the order was complete or liquidity (shares available) became exhausted. The blue line rises in synch with the green line, until 20,000 shares are traded.

In the real world, things are not that simple. There is another variable to account for: namely order cancellations. The cumulative number shares for sale at $17.38 that have been canceled is shown by the red line.

There is also a fourth variable - trade executions that belong to other traders, but we'll leave that out for now for simplicity sake.

The chart on the right clearly shows that order cancellations happen far faster than trade executions (red line goes up faster than blue line). This is why our trader wasn't able to get the advertised liquidity - the orders simply disappeared faster than exchanges processed his buy order.

In fact, more shares are canceled than executed - note the red line ends above the blue line. Also note how much of the activity takes places in about 2 milliseconds (09:47:56.571 to 09:47:56.573).

Perhaps this is just an isolated case and the order cancellations happening a fraction of a second before the trader's order were just a coincidence?    

Not an Isolated Case

If we take the number of shares available when the order first started executing, and plot the percentage of those shares that were canceled during the trade execution, we'll arrive at the Share Cancel % (which is simply the percentage of shares were canceled and not executed). In the first example we detailed above, the percentage was slightly more than 50%. The following chart shows the percentage of orders canceled for each of the 5 trade examples. If the chart below doesn't sufficiently cause alarms to go off, then you might want to restudy the data up to this point. The Share Cancel %  is shockingly high:

The next (and last chart) breaks down into detail where the available shares went when our trader's order started executing. It includes the component "HFT Shares" - which are trades that should have gone to our trader, but were instead stolen by other market participants, who only made those trades after reacting to his order. Note in some examples, the number of shares stolen is disturbingly high.


All this evidence points to an inescapable conclusion:

The order cancellations and trades executing just before, or during the traders order were not a coincidence. This is premeditated, programmed theft, plain and simple.

Michael Lewis probably said it best when he told 60 minutes that the stock market is rigged. To the fantastic claims made by HFT that they provide liquidity, perhaps we should ask, what kind of liquidity? To the now obviously ludicrous claim that "everyone's order uses the same tools that HFT uses", we'll just say, the data shows otherwise. To Mary Jo White and other officials who claim the market isn't rigged and that regulators need to look at the data before making any decisions, well, you made it this far - if things aren't clear, just re-read the above, or just call us and we'll explain it to you. Or dust off Midas and lets us show you how to work with data.

One more note to the SEC in particular - if you believe that the industry can fix these problems on their own, then we believe you are no longer fit to regulate, because that is not, and never was, how Wall Street works. Honestly, a free for all, no–holds–barred environment would be better than the current system of complicated rules which are partially enforced, but only against some participants. And make no mistake, what is shown above is as close to automatic pilfering as one can get. It probably results in a few firms showing spectacularly perfect trading records; it definitely results in people believing the market is unfair and corrupt.

And to CNBC and other financial media companies who say these problems have all been fixed - we think you might have been lied to. Probably by the ones doing the market rigging.

And finally, to our regular readers: we are taking a break. Everyone has a limit to how much corruption they can witness and digest in a given period of time and we've simply reached our limit.

* * *

We wish Nanex an enjoyable break.

We here at Zero Hedge, on the other hand, are not only just getting started, but every new case of corruption (which inevitably 6/12/24 months prior was nothing but another ridiculous "conspiracy theory") merely doubles our resolve to expose and chronicle this farce of a rigged market, rigged economy, and rigged political theater, as an aid to whatever comes next. One can only hope that the mistakes of this period of near-terminal lunacy will be studied and, hopefully, not repeated.

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XenoFrog's picture

I can't believe anyone would try and trade equities right now.

SafelyGraze's picture

maybe this sort of trading violates some obscure SEC regulation.

maybe not.

but one thing is for sure:

the local news is All Over the stories about children in hot cars.

they are everywhere.

and we can all be outraged at their parents.

and feel good about that outrage.


BobTheSlob's picture

My wife told me about that story in TWC. Her reaction to the woman who is pushing legislation to "mandate" an alarm she doesn't know how to make...."She's proving that ya can't fix stupid".

Typical progressive...blame someone else for my failure and mandate legislation that will push future blame to the auto companies.

rehypothecator's picture

Markets can remain irrational longer than one can remain solvent, but this article indicates that markets can also remain rigged longer than Nanex can stay pressing the issue. 

Still, kudos to Nanex for doing the jobs that the SEC, FINRA, FBI, and a host of other deadweight government agencies refuse to do.  

Dollarmedes's picture

This is all planned.

In exchange for political donations, the Obama administration is looking the other way so that firms can steal.

HFT isn't even the tip of the iceberg of corruption.

CrazyCooter's picture

Retirement is a lie. That is what is driving all this.

Once a man bucks up and realizes he is hoe'in until his last day, it gets pretty simple.



MeMadMax's picture

So, next time, stagger your trades: 100/500/whatever a second/min/hour/whatever...


I'm sure you could wait a couple of minutes to get your trade in...


At least you would get your trade in...

SWCroaker's picture

That's like making 20 trips to the grocery store, but only taking $5 with you each time 'cause the muggers go after big money.   Effective maybe, but not what I'd call a solution to an egregious problem.

maxamus's picture

Um, and for those of us with large accounts, what, am I supposed to only buy $10k worth of stock at a time and now use multiple multiple orders?  That is your solution?

MeMadMax's picture

You got any better ideas?

It's the large orders that are tipping off the bull in the china shop...


Now, what would you rather do?

Take a little more time, and money to ensure that the order gets thru and the customer is happy?

Or would you rather get stiffed while some other asshole makes money off your move?



PrintemDano's picture

Since numerous small trades generally cost more than one large trade your solution will cost the trader more money.  Throwing gasoline on the fire.

asteroids's picture

Sorry you missed the point here. The market isn't irrational at all. The point NANEX is making is that it's premeditated. The result is a criminal environment. NANEX isn't calling it theft, but I'll call it fraud. The tape is lying to you.

BobPaulson's picture

Can't tell if you are being deeply facetious by further pointing attention to the tangential farcical new story, or if you are serious and therefore revealing how you are part of the problem. 

(oops, sorry, just read your post below and now I can see you are a troll)

NoDecaf's picture

So is it too late to make an investment club on Yahoo groups and start day trading with my neighbors? I saw some housewives on TV doing it back in 2005 and always wanted to get in on the action.

BobTheSlob's picture

Amusing, but "rigged" isn't the same as manipulated. So they effectively are competing against a computer. If you don't like it, go buy Ford from your next door neighbor after looking up the last price in the news paper. This is the 21st century, and someone has found a fun way to electronically make some change off of each transaction. Not "rigged", manipulated. And rather cleverly!

nanex's picture

Fuck you Bob. And I mean that.



BobTheSlob's picture

Send me pics. You have mine already.

Cliff Claven Cheers's picture

I like to refer to it as Financial Fuckery TM.

BobPaulson's picture

It took me reading two of his posts to see he/she is a troll. Sorry, MillionDollarBonus is funnier. Who was the one before that about two years ago?

Excursionist's picture

Regardless of your views on what is clever, cute, etc., rules appear to be flouted as an ordinary course of business.

Example:  scroll to the summary discussion of Reg NMS Rule 611 on page 25:

Of note is the language pertaining to "intermarket sweep orders, quotations displayed by markets that fail to meet the response requirements for automated quotations, and flickering quotations with multiple prices displayed in a single second."

Whatever.  Flash Boys and the ensuing media attention created a two-week blip on the public's Kardashian-filled minds.  A critical mass doesn't give a shit, so the status quo will prevail.  If you're employed by Cliff Asness, Ken Griffin or someone of their ilk, send 'em my congrats.

rum_runner's picture

Half of America owns no stocks, doesn't understand concepts that aren't pictures of tits and ass, and is both hooked on social media and also trying to survive.

TheReplacement's picture

Thank you for a very informative and not-50,000-feet-over-my-head write up of this subject.  You can ignore bob.  He's probably on the juice to say whatever they want him to say.  I hear propaganda-troll is the leading jobs gainer.

ugmug's picture

Wasn't the Titanic the epitome of technology in its day. Enough said.......

Downtoolong's picture

You’re so proud of your smart technology.

Question: What’s dumber than an algo that thinks it can purchase a $40.00 stock for $0.01?

Answer: An algo that manages to purchase a $40.00 stock for $0.01, then turns around a microsecond later and sells it for $0.02

crazyjsmith's picture

I think the conclusion is "rigged" AND "manipulated"


It can and is Both at the same time.  Plenty of room to be both.  

bunnyswanson's picture

We've seen this before.  "Story of Civilization, Rousseau and Revolution," p. 634.)



"In Germany, The swej were relatively safe and prosperous, though they suffered various disabilities in economic and political life.  Special taxes were levied upon them in most of the pricipalities.  The law allowed on a limited number of sjews to live in Berlin but the law was loosely enforced.  ... many were employed to manage finances or provision their armies.  Joseph Oppenheimer known as the "Jew Suss" served the Duke and earned him many enemies. 

Accused of malfeasance at the mint, he was exonerated by a board of investigators and raised to member in the Duke's Privy Council where he soon became the dominant power.  He invented new taxes, established royal monopolies, and apparently accepted bribes - which he divided with the Duke.  When the Duke proposed that all church monies should be deposited in a central state bank, the protestant clergy joined with the nobility in opposition of the Duke and his minister.  On March 3, 1737, the Duke suddenly died.  Oppenheimer was tried ad convicted, and on February 3, 1738, he was strangled and his corpse was suspended in a cage in a public square."


Will Durant - The Jews

venturen's picture

Bob can you explain why they had to change Global Warming to Climate Change and how they actually mean the same things, just one doesn't require any increase in tempurature and is permanently true? What an idiot you are! 

buzzsaw99's picture

i hope they didn't chase it higher. not even one penny.

BobTheSlob's picture

And that's the point exactly. Nobody is forcing anyone to settle for a higher price. Why would you if you knew you were being goaded by a computer. My dog, however, falls for it every time.

buzzsaw99's picture

a pension fund should be able to enter a market order without paying a tax to the HFTs

BobTheSlob's picture

Well I guess a "tax" is one way to look at it. The other way to look at it is that someone invented Robobidder. NOt an easy task to place a "moral/immoral" tag on that IMO.

TheReplacement's picture

The day you go to the grocery store and someone takes what you intended to buy and asks you nicely to pay them more for it, that is the day you will get it. 

ILoveDebt's picture

More like -- "The day you go to the grocery store and it allows someone to take what you intended to buy and asks you nicely to pay them more for it, that is the day you will get it."


The real problem here is that the exchanges and regulators are complicit with the theft.  

g speed's picture

buzz--I gave you the td for resonding to BTS----

RaceToTheBottom's picture

"My dog, however, falls for it every time."

Forcing Sexual favors is not acceptable, even against animals.

ekm1's picture

Is there anybody on earth who can prove that market is .....not.....rigged?

novictim's picture

Rigged?  Rigged, you say?

I'll tell you about rigged!  Let us start with "compounded interest"! Every modern model of corporate earnings and profit has this little devil hiding at its core.  

How in the hell can anyone think that you can realistically apply pure mathematical fantasy onto natural systems?

The concept of compounded interest is a "rigged" notion if their ever was one.  Every prediction that has this nonsense baked into it is "rigged" to inevitably disappoint!  

Yen Cross's picture

    The "Bait & Switch" is alive and thriving...

Chief Wonder Bread's picture

+1. That simple phrase sums it up. Bait & Switch.

This is corrosive to trust in the system, what little trust is left. It creates a bogus picture of liquidity that isn't there when execution needed.  This article is the first time I've truly understood this issue. Even though it won't affect me, I'm a minnow, I say Fuck'm.

Muppet's picture

Excellent article ZH!    Informative and factual.   Great job.

IllusionOfChoice's picture

Keep up the good work Tyler(s).

Tall Tom's picture

Thank you Nanex.


Do not think that your efforts have not been appreciated. I know that this type of investigation wears upon you and you need to step back from it to keep your sanity.


Take a vacation if you must. The fight for integrity and honesty will continue as long as I can utter my words.

orangegeek's picture

Nicely done Tylers!!!

Skateboarder's picture

I want to personally bitchslap everyone who didn't recognize Nanex for their great article. Thanks to the Tylers for bringing this to ZH. This is some of the most shareable information I've ever come across. It's legit as fuck and you can't question it.

DavidC's picture

Don't stop, please. Scott at Nanex, I hope this is just a break.

Articles like this one make me hope that where people KNOW what is going on at some point it WILL stop. When the Berlin Wall went up people thought it was forever.

Scott, and Joe and Sal at Themis, and Tyler(s), make me know that there are people who CARE.


Tall Tom's picture

Nanex deserves a break. This wears upon you day after day while watching the fraud.


Even reading ZH...Sometimes I will take a break to gain perspective and realize that there is still a World with things to do and enjoy.


They have fought the good fight. Thank them for it.