Presenting The Quote Stuffing Trading Strategy Of The NY Fed's Favorite Hedge Fund: Citadel

Tyler Durden's picture

As regular readers are well aware, when it comes to "more than arms length" equity market intervention in New Normal markets, the New York Fed's preferred "intermediary" of choice to, how should one say, boost investor sentiment aka "protect from a plunge", is none other than Chicago HFT powerhouse, Citadel.

Yet one question had remained unanswered: just how does Citadel manipulated stocks?

We now know the answer, and perhaps more importantly, it also links in to the true culprit behind the May 2010 Flash Crash, no not Waddell & Reed, but quote stuffing.

Most importantly, the revelation that for Citadel quote stuffing is not just some byproduct of some "innocuous" HFT strategy, is that none other than the Nasdaq has now stated on the record, that the most leveraged hedge fund (at 9x regulatory to net assets), and the third largest after Bridgewater and Millennium, used quote stuffing as a "trading strategy."

One wonders: did Citadel (with or without the Fed's urging) also have something to do with the infamous and biggest (to date) May 2010 market crash and subsequent surge - and was it merely a test for something else?

We hope to bring readers the answer soon, in the meantime here, courtesy of Nanex, is all you wanted to know about Citadel's quote stuffing strategy:

The Quote Stuffing Trading Strategy

On June 16, 2014, Nasdaq posted a Disciplinary Action against Citadel Securities, LLC (CDRG) which was similar to one posted by FINRA on June 12, 2014 (and we wrote about here). Usually, exchange disciplinary actions are identical to FINRA's except for name changes, however in this case, there was one paragraph in the Nasdaq action missing from FINRA's. And not just any paragraph, but the most stunning revelation about Quote Stuffing to date. Let's read through it:

The paragraph states that Citadel was sending excessive orders (Quote Stuffing) as a trading strategy 3 separate times.

This was not a glitch or human error, it was an intentionally programmed trading strategy!

If there was a glitch, it would be from from a human mis-configuring a parameter, allowing the Quote Stuffing trading strategy to blast orders at rates much higher than 200 per second. Is placing and cancelling 200 orders per second excessive? This depends on whether they are spread out evenly over the entire second (1 every 5 milliseconds), or if all 200 are sent in one 5 millisecond burst and then silence for the remaining 995 milliseconds. If sent in a burst, the impact on networks and trading systems is significantly higher than if spread out evenly (see Latency on Demand and Direct Feed Slowdown). Furthermore, a burst followed by quiet wouldn't be detected by exchange monitoring software looking at traffic at one second resolution or higher (most internet monitoring software looks at 5 minute averages!). This isn't theoretical, it's real and we have documented many examples, such as this one here.

After analyzing Nasdaq's TotalView data (their direct feed) and SIP data, we found a few inconsistencies with Nasdaq's finding. First, Nasdaq claimed Citadel placed these orders at a rate of 8 to 9 per microsecond (millionths of a second). That is wrong, they probably meant per millisecond (thousandths of a second) - you'd think an exchange that catered to HFT would know the difference. The data shows the Citadel Quote Stuffing algo placing and canceling orders at a steady rate of about 17 messages per millisecond, or half that number if we are counting orders: so 8 to 9 orders per millisecond (1 message to add the order, and 1 message to cancel it). Only one order was active in Nasdaq's order book at any given time - it would place an order, then cancel it, before placing a new one and repeating the process.

The other inconsistency is that Nasdaq states Citadel's Quote Stuffing algorithm ran in PENN between 13:32:53.029 and 13:33:00.998, but both direct feed and SIP data shows it ran between 13:32:48.875 and 13:33:04.525. This is clear in the chart below: the red is TotalView activity, the blue is the SIP (which is stacked on top, not behind).

Let's zoom in on one second of time and look at data from both TotalView (Nasdaq's direct feed) and the SIP, when Citadel's Quote Stuffing strategy was running in Penn National Gaming Inc. (symbol PENN).

Each pixel along the x-axis is 1 millisecond (1/1000th) of time. The blue line shows the number of quotes sent by the SIP during each millisecond. The red line shows the number of order messages recorded in TotalView (DF, the direct feed) each millisecond. Lastly, the green line shows the lag between the SIP and the TotalView. According to Reg NMS, there shouldn't be any lags: but there are many. You should know that the lag to the SIP isn't confined to PENN - all other stocks process by the same network/computer will experience the same lag.

What is the benefit of a lag? For one, latency arbitrage is enhanced, especially if the lag is predictable, which it would be for someone running a Quote Stuffing trading strategy. The type of firm that would benefit the most from latency arbitrage would be an internalizer - someone that matched retail stock trades based on the slower SIP, but could buy and sell the same stocks on the faster direct feed. By the way, Citadel's bread and butter is internalizing (matching) retail stock trades. Another benefit is that lags throw off smart order routers, and that can enhance HFT's ability to pick off stale dark pool orders (many of which are priced on the SIP), as well as allow them to get out of the way of a large order (see this example of a trade we documented in detail).

Direct feeds can also be slowed down: see this detailed examination of delays in NYSE's OpenBook caused by Quote Stuffing.

The chart below zooms in on a 200 milliseconds. Note how quotes from the SIP come to a full stop several times, with some lasting up to 16 milliseconds. After the stop, the SIP then sends a burst of these stale quotes to subscribers who have no idea the quotes are old because the SIP replaces the timestamps when they are transmitted (this page has nice animation of how this works) 

How often do Quote Stuffing trading strategies run in the market? All the time! Many seconds of the trading day will have multiple symbols with Quote Stuffing events, but these algos usually stuff quotes at rates of 200 to 1000 per second per stock.

The chart below shows all instances of high quote spamming events (more than 6,000 quotes in 1 stock in 1 second) for all NMS stocks between 2009 and when the Quote Stuffing algos were detected (February 2014). The dots are sized to the number of quotes in an event second. The red color indicates when the number of quotes exceeded 25,000 in 1 second. The events that triggered the Citadel fine are in the labelled box. Note that the threshold for inclusion on this chart is extremely high. A rate of 6,000 orders placed and cancelled per second means that each quote has a life shorter than 1.6 millionths of a second - the amount of time it takes for light to travel about 1,500 feet. Anyone farther than half that distance has no chance of executing against these quotes.

Basically, every dot shown in the chart above was a severe quote stuffing event that should have resulted in a fine. There are millions more at lower thresholds; levels that easily impact systems, networks and smart order routers. You probably want to know how many times regulators fined HFT firms for running Quote Stuffing trading strategies? As far as we know:

Citadel is the first and only firm that was fined for running a Quote Stuffing trading strategy.

Something to ponder.

See also:

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kowalli's picture

100% unrigged market.

Latina Lover's picture

In the USSA a bankster stealing billions never goes to Jail. Cue John the slime Corzine. But if you steal candy, you  can face death by cop. I'd ask Michael Brown but he is deceased.

Escrava Isaura's picture

Latina Lover,

This might help solve this mystery:

To The Dartmouth Class Of 2016: “Freshmen, There Will Be Lies. Not small lies, or white lies, or inadvertent ones, but straight-out lies that help the administration gain the goals that it seeks at your expense.” — Joseph Asch – class of 1979

LetThemEatRand's picture

Small lies, white lies, and inadvertent lies eventually cause trouble for the liar.  Big, repeated straight out lies cause trouble for everyone else.

Escrava Isaura's picture

And not that I need to remind you of how much trouble we are in.

But I’ll say this, Rand: We ain’t seeing nothing yet!

Wait as people become even more desperate and destitute. These people will discard reason, science, and facts for any quick solution by the demagogues.

It will only get worse, I am afraid to say.

However, I will change my mind about what I just wrote, if I see these people TV and video games on the trashcan. 

philipat's picture

Why don't we just disband the SEC and pay Nanex a Fee for each fraud it identifies?

max2205's picture

Don't worry about getting your Mac D meal from a robot....the market has digitized 

WhackoWarner's picture

i AM A SELF-CO0NFESSED IDIOT.  But what I do know is if it looks like fraud; quacks like fraud; swims like fraud; breeds like fraud; migrates like fraud; feeds like fraud; flies like fraud;  hovers around my home like fraud?

Must be ssomething benign that is beyond my understanding. 


Going broke slowly by feeding the birds.

ArkansasAngie's picture

No ... I don't need to ponder.


I mean seriously.  WTF

what's that smell's picture

Stephen Falken: Uh, uh, General, what you see on these screens up here is a fantasy; a computer-enhanced hallucination. Those blips are not real missiles. They're phantoms. 

McKittrick:  Jack, there's nothing to indicate a simulation at all. Everything is working perfectly! 

Stephen Falken: But does it make any sense?

ToNYC's picture

If you look hard enough, you'll see they let them do it for a reason that lasts until you discover it.

bobert727's picture

Love to see a list of Citadel's political they do some pocket stuffing too!

arrowrod's picture

Nice.  However, If I remember correctly, the various exchanges sell "same room" access.  I'm sure other, more powerful. companies are aware of Citadels strategy and take advantage. 


I wonder if I scrutinize the SEC filings of the various players, I can see who spends the most on equipment and programmers. 

disabledvet's picture

You should see the arms race in bitcoin exchanges.  I mean "server farms in Iceland just to keep them chilled"?  Nvidia sales have exploded.

Kaiser Sousa's picture

doesnt matter...
nobody is gonna do a mother fucking thing about this...
u all know the Fraud markets r rigged in the favor of the insiders with the blessing of the MoneyChangers but some of ya'll knowing this still allow urselfs to get bent over...
why, cause u the smart ones that can play n their casino and win?????

and this is why their fraudulent paradigm survives...
cause not only do the dumb dumbs continue to unknowingly get shafted but those that know wont simply walk away...

there r only 2 forms of real money - Physical Gold and Silver...

free urselfs or stay fucked.......

Quinvarius's picture

This excuse is like saying you were cleaning your gun and accidently shot 9 people.  Computers what they are told to do.  And in this case, the computer was told to do something very specific that took effort to code.  No mistakes were made.  It was on purpose.

Yen Cross's picture

    If you feel Dat you're the victim of  "Wrist Slapping".

   Please send your self addressed "stamped" envelope to : Mr. Yellen @ Suite 1/2 greenmoney circle ct.

  I'll personally dIRECT your complaint to Da Kevin Henry. He runs Da plunge potection team and all... Dats another story.

  I dated an Atty....A long time ago.

   The next time you wonder why your pool is only 4' feet deep, thank your neighbor. Diving boards, and deep ends are passe. Someone could drown.

  It's ok if someone breaks their neck diving into 4' pool though. Food for thought my friends. ;-)

Simplifiedfrisbee's picture

Tyler, you would certainly benefit by implementing similar software to generate more posts, traffic, and reads. Updates every minute is the new information format.

crazytechnician's picture

Surely the Fed is the largest leveraged Hedge Fund ?

falak pema's picture

Shadow banking is a vulture parasite by its very nature. Always has been since Milken and Soros made it the talk of the town.

Just like the Templar State governing the Oil Patch has been a guardian of Oil Jerusalem ever since the Balfour blueprint was conceived and executed post Ottoman demise (Sykes-Picot).

Wake up ZH you have been wallowing in your worship of HF scions, the princes of arbitraged markets;  all the time you cry about HFT and market manipulation. Totally schizophrenic assesment of markets as societal (socio-political cum economico-financial) construct.

As a trading site you have never been able to correctly define the evils of deregulation. Pretending its the neo-keynesians who pump and dump as slaves of statism. Utter balderdash. Its the private Reaganista/Nixonian Oligarchy that took over from the MIC when NWO made the cold war MIC junior partner and surrogates to Big Money; aka during the Bush/Clinton/Dubya/Obama years.

Its the very essence of Reaganomics from day one : wholesale market stuffing to feed the Oligarchy risk asset pump; as of DAY 1;  to the detriment of the middle class and welfare state.

US Oligarchy has morphed from warmongering empire in Nam days to Friedmanian petrodollar debt pumping in Nixon/Dear Henry days to Reaganista asset pumping based on recycled petrodollar debt-- all denominated in greenback treasury notes-- thus feeding the shadow banking Frankenstein addicted to derivative steroids. 

And these HF, all of them, have been the paid Conquistadors helping to rape the commodity and monetary wealth of all and sundry--whatever their pristine vision and hopium fed resolution of building a new promised land-- based on being supply and demand market efficiency facilitators, they all ended up addicted to the same pervavise trend like slaves of Gatsby like delusional hubris. 

Couldn't resist the sweet smell of easy succes like taking candy from the sheeple.

Thats what it has ALL been about. And your scions the libertarian style Kyle Bass HF managers--Rhett Butlers of this "American dream Gone with the wind" age-- are all tainted with the same brush.

Blancs bonnets and bonnets blancs; so much for free market mechanisms in land of free ever since Rockafella and Morgan invented US capitalism in a nation the size of a continent cleansed of its original population. 

The MIC is now growing a new pair thanks to Putin and Caliphate. We move back to Cold War muscle building big time.

'Cos the NWO financialista Oligarchy manipulated global village construct is now hitting the asymptote.  To understand how this will end just remember what happended to Spanish Habsburg universal Empire. It died militarily  with the peace of Westphalia (1648). It died politically in 1713 (peace of Utrecht).  It lasted two hundred years : 1519-1713.  Pax Americana total timeline : 1945- 2050. With the "military" defeat of the Greenback, aka demise of dollar domination as monopoly beginning in 2008...
Escrava Isaura's picture


Outstanding post.

Wonder if I can use this post? I have an idea for it.

Of course, I will give you the credit. And I will link it here.

falak pema's picture

use it as its public now.

Sorry about typo errors.

Escrava Isaura's picture

Thanks Falak.

I am keeping the original as is—with the typo errors.

I just want to add 'some' additional information to it.

By the way, when are you going to write from 1945 back; say, to the 13 colonies (late 1600’s)?

Would love to read that!

Wonder why?

To show its contribution to what became the highest religiosity and societal dysfunction, labeled as American Exceptionalism.


Let me give you an example: This is something that I wrote in a post to ‘dubaibanker’


“Of all Roman conquests, only Asia had a surplus” — Cicero, 66 B.C.

How the misinformed ‘Lucky’ US middleclass got the world’s surpluses. How we’re going to lose them. In few words:

US is a consumer nation. The only thing we produce more than the rest of the world is weaponry and ammunitions. Even Airbus manufactures more airplanes than Boeing.

We, in America, got to this point, mainly, by two ways: Global Reserve Currency [non-military invasion] and/or invading [overthrowing elected governments]. Iran, Chile, and Indonesia are good examples. But the list is long.

Anyway, before Iran, Chile, and many others:

In 1783, Americans kicked the British out of the 13 colonies. That was the “First British Empire” lost [how ironic]. Gibraltar remained under British rule, but, it had NO resources.

In 1846 was the beginning of US war machine —Military Industrial Complex (MIC)— by invading Mexico [No Global Reserve Currency back them] and stolen about half of Mexico. Link here. 

Then, in 1861, the other ‘quagmire’ America faced was how to reconcile the expending industrial north [financial oligarchs and MIC] with the agricultural [laid back] south. They solved it by killing each other [Civil war]. Then, the ‘North’ labeled it [lied] as they were freeing the slaves, when, in fact, they [the north] were planning to send the ‘freed’ slaves to Liberia and Haiti. However, the logistics of moving out these many [freed] black people became impossible.

Another reason for the civil war [to exploit the South] was that the ‘North’ economy was stagnating [railroad and land speculation collapsed, living the north bankrupted and its savings gone] while the ‘South’ was prospering.

Of course, there was NO minimum-wage [all were slaves] on the South, Remember? So how could the ‘South’ NOT be profitable, Right?

In 1896, America turned its ‘Global War-Machine’ (MIC) into a Empire, by moving into Central America and kicking Spain [an US allied against the British] out. Even the Philippines was taken from Spain. Then, it created the Down Jones 12 industrial stocks.

1900 election [McKinley] campaign was focused on expanding a) US imperialism abroad, b) Protectionism [products had to be made in America], and c) High-tariffs [if the ship carrying any products, to or from America, didn’t have US flag].

Also, America started as the richest [coal, oil, and natural gas] continents to exploit, with only a few scattered Amerindians putting up a fight [FlakmeisterTM]. Imagine if the Permian Basin and Spindletop [oil] and Anthracite Upland [coal] were in Brazil? Or Argentina?

Then, late 1800’s, came the realization of the importance of oil, as the most likely substitute of coal. Even that, the 1st oil well and refinery were built in Russia, in 1745.

Anyway, the German and Austria-Hungarian needed to get to the oil before the British Empire did. So, invading Russia and moving East [Ottoman Empire] were a must [WW-1]. The Germans didn’t care about France, but needed France to stay neutral. However, France was a British ally. Also, Ottoman Empire was running out of meat. And Germany out of produce.    

WW-2 was a continuation of WW-1. However, with lots of debt and heavily on propaganda.

In 1944 came Bretton Woods: Dollar as World’s Reserve Currency. It means: United States would use the convertible financial system to trade at a tremendous profit with developing nations, expanding its industry and acquiring raw materials. It would use this surplus to send dollars to Europe, which would then be used to rebuild their economies, and make the United States the market for their products. This would allow the other industrialized nations to purchase products from the Third World, which reinforced the American role as the guarantor of stability.

Bretton Woods collapse [America decline] started in 1949: “Loss of China”. Followed by Korea, Indonesia, Vietnam… and the list goes on.

The second major blow to Bretton Woods [America decline] was in 1971, when the US became a net-importer of oil. It means, more dollars going to the Middle-East that would be exchanged for gold. US unilaterally cancel this direct convertibility, upsetting the Saudis, thus causing oil shortages and inflation.

By pegging the dollar to oil —say Australia wants to buy oil from Iran, Saudi Arabia, or Iraq— it needs first to buy ‘have’ dollars to buy the oil. The aim here is to get a ‘cut’ on these transactions, generate foreign exchanges, while extracting capital [those dollars] back out the country, as well as its oil. In this example, to Australia.


WillyGroper's picture


Watch out, Ronnie RayGun is still an omnipotent god to some around here.

OldPhart's picture

What he said...

wish I could understand it, but i support the general gist.

piratepiet's picture



Interesting post, although I do no understand all of it. 

Why do you call Israel the Templar state ?

Eternal Complainer's picture

May 6th
Gordon Gekko's birthday in WallStreet


Yen Cross's picture

 I've been staring at those nanex charts for almost an hour. I've logged the analog with the blips/

 I'm perplexed by the "fluctuations" on the PENN chart. The SIP penetration on the <0> line towards the far right side of the chart.

   It's no so much the "variation" of the move, but the "relative" aspect of the move.

   That move, on a shorter term chart would raise flags. That move, with consistent variation, would be an anomaly, on a larger time frame chart.

  Don't dive into shallow pools.

RaceToTheBottom's picture

That was why Citadel bought ETRADE.  To control and manipulate order routing....

reTARD's picture

And I thought the NY Fed's favorite hedge fund was Infidel, not Citadel.

Downtoolong's picture

How can thousands or millions of quotes per second be legitimate if an individual (or even another algo) can’t possibly take them out and execute a trade on all of them? This should be the test which proves the fraud and manipulative strategy they truly are.


RaceToTheBottom's picture

I love how they call cheating "misconfiguring".

Daytona 500, removing the governor is called cheating and punished as such.

Criminals removing ankle tracking devices is called breaking the law and punished.

If you or I rewrote ATM software to submit 1% of all deposits into my account, I would be caught and punished.



WS is nothing but a bunch of Criminals masquerading as a legitimate business, enabled and promoted by Regulating Agencies and the Political class.

They deserve whatever comes to them.


OldPhart's picture

I find this all interesting, but I got out of the market in 2008 (other than 401-k) and haven't put another dollar into it.

My 401k contributions have been zero since 2008 yet my balance has tripled since then.  fukin' brokerage account has had zero contributions, but I'm suddenly getting daily correspondence on 'managing my portfolio' (in 2008 there was less than $200 in it).

Now, I'm all 'fuck it'  I'm refinancing the house to pull my interest down from 7.5% to 4.1% or so, pulling $60k equity out on a $100k refi from a $30k balance.  The $50k or so will be used buy $10k in gold and silver, the other $40k will be used to upgrade the shithole and set up burial expenses for my wife and me (she does not share my prophacy of being found as a dried up corpse on the side of a desert dirt road).

Payments remain about the same and I'm now in the position to pay 2.5 times the base each month.  House is insured so if I run into trouble this bitch will light up like a match held to a fart.

Settlement is giving me heartburn...with my fuckin' luck, I'll get my wired money the same day Obama's thieving government does the bail-in.  Really sweating this.

Ban KKiller's picture

This just one reason individuals shun the free is

Death, by law, to Banksters....crooked accountants, bank's attorneys and, yes, their secretaries....just to be safe.


RMolineaux's picture

The solution is to place a transaction tax that includes quotes.

Sorry_about_Dresden's picture

Completely obvious solution. Just tax canceled orders. Legit. Traders shouldn't suffer...Right?

exartizo's picture

The motivation and the problem here are simple.


...But the solution is not so simple.

What happens when you cut quote stuffing and HFT trading off?

They make up new ways to break the rules and give themselves advantage.

GREED is a Many-Headed Hydra.

Cut one off?

It grows a new one in a different place.

potato's picture

Hello Nanex.

I'm pretty sure 6000 orders per second is one order every 16 ten-thousandths of a second, not 1.6 millionths.