Caught On Tape: HFT Algo Manipulating GOOGL 1000 Times Per Second

Tyler Durden's picture

Via Nanex,

It is very common to find examples of stock quotes changing rapidly - hundreds and sometimes thousands of times per second in a single stock. At the extreme, we've seen in excess of 25,000 quote changes in a single stock in one second of time or less (this page has a chart that documents every extreme example). Often there are no trades during these events. Sometimes a simple pattern evolves from the quote price changes, such as in the case of a certain High Frequency Trading (HFT) algorithm that we've recently seen run every day in Google stock.

This particular algorithm starts with a bid (or offer) several dollars away from the bids (offers) from one of the other 10 exchanges trading Google Class A stock (symbol GOOGL). We've also seen this algo running in other higher priced stocks. The algo in this example only appears to run from the Nasdaq-Boston (BOST) exchange. In the chart below, we show bids and offers color coded by reporting exchange (there are 10 exchanges in GOOGL). Note that these are "top of book" quotes - that is, they are the highest bid price and lowest ask price from that exchange. The best top-of-book bid and ask become the National Best Bid/Offer (NBBO) and  is shown as light gray shading in these charts. Note, this algo only affects the NBBO when it gets near the end of its price stepping loop.

The algo starts with an order to buy 100 shares at $581.87. This is replaced, sometimes only milliseconds later, with an order to buy 100 shares at $581.88 (1 penny higher). Over the course of 1.5 seconds, this process repeats another 253 times, ending with a order to buy at $584.41. Within less than a second, the $584.41 order is canceled and replaced with an order several dollars lower, and the cycle repeats.

In the case below, the number of quote changes from this HFT algo is averaging 175 per second, but during some periods the rate approaches 1000 per second (1 per millisecond).

1. GOOGL bids and asks color coded by reporting exchange over a 5 second period of time.



Now, some folks (particularly the math/physics challenged) will say:

"So what? HFT needs to be able to cancel quotes fast so they can tighten spreads, add liquidity and lower costs."

The problem is that when HFT cancels a quote after just 1 millisecond (ms), then anyone located more than 93 miles (150 km) away will see a stale quote. Worse, they won't know it's stale unless and until they try to act on it and wait for a response. The animation below shows how this works. Note, this animation assumes zero processing time on the part of the investor or any other real-world delays. In other words, this is the best possible case, and it will be much worse for the investor in the real-world.

  • The animation starts at an Elapsed Time of 0 microseconds. 1 microsecond (?s) is 1 millionth of a second. 1000 ?s is 1 millisecond (ms).
  • HFT places an order at the top of an exchange's order book, which causes a quote to be transmitted out to investors.
  • An investor 93 miles away receives the quote after 500 ?s (0.5 ms).
  • Assuming the perfect case, the investor immediately acts on the quote and transmits an order to the exchange (really their broker, but let's assume a perfect world).
  • The exchange won't see this investor's order until a total elapsed time of at least 1000 ?s (1 ms).
  • HFT changes its mind after 1 ms and cancels the order - just before the investor's order arrives.
  • The investor won't know that their order failed for another 500 ?s or a total of 1500 ?s since HFT sent the initial order!

 


Effectively, when HFT changes its mind 1000 times a second (or after 1 millisecond) anyone located outside the (93 miles/150 km) circle below will receive stale quotes:

An expanded map is shown below. Each red circle shows how far quotes can travel before expiring at different update rates. For example, the ring labeled 150 is how far quotes will get if HFT is canceling and replacing 150 quotes each second. At 150 quotes/second, people in Chicago will be processing quotes they can't act on! People in Los Angeles have it even worse - quotes changing just 38 times a second will render them all obsolete by the time Los Angelians or anyone on the Google Campus in Stanford California first sees them.

Now, look back at the example in Google above - that HFT algo was changing Google quotes an average of 175 per second, which means those quotes were expiring somewhere between the two rings labeled 150 and 250 in the map below.


Back to our Google example, let's zoom out and see how often this HFT algo is running.

2. Zoomed out to just under 30 seconds of time (the zoom box is detailed in chart 1 at the top).

 



3. Zoomed out to about 18 minutes of time (the zoom box is detailed in the chart above). Note how often this algo runs!
Each green sliver is made up of one HFT algo's bids or offers changing 1 penny at a time at rates exceeding 100 times and sometimes 1000 times a second.



4. Zoomed out showing 9am to about 3pm Eastern Time (the zoom box is detailed in the chart above).
Note the distinct periods of time when this algo runs. Too bad other HFT algo's don't make themselves this visible.

 



5. Another close-up, showing how the algo does the same thing on the offer size.

 



6. A different pattern in a different stock on another day. This involves multiple exchanges and affects the NBBO.
Note: The chart shows 3,549 quote changes in about 1/4 of a second of time. These are not rare! Not many people outside of the exchange datacenter will see these quotes before they expire. Yet everyone will have to process them (because there is no way to know how long before they are canceled).

 


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NidStyles's picture

Damn fine work, for whomever provided this.

Skateboarder's picture

It's Nanex. They also provided the AAPL HFT swings chart last year. If only every other 'reporter' on the planet gave as many fucks.

Help Wanted: Algo Bot*

*humans need not apply.

NoDebt's picture

And this obvious farce is what has exchanges (and their captured regulators) bowing down to and calling "liquidity".  Yeah, like a pool of water that immediately recedes every time somebody reaches down to get a drink from it.  Plenty of it there until you need it, then it's unavailable.

Meanwhile, the number of ACTUAL trades (probably a better indicator of real liquidity) continues it's multi-year decline.  And 60% of THAT volume is HFT guys trading back and forth amongst themselves with a hold time of mere seconds or less.  That leaves only 40% of trades that are of what a human being would recognize as legitimate transactions with actual intent.

max2205's picture

Hey it's illegal so it's okey for goldmanfucksacs to do it anyway

Fuck me!

KnuckleDragger-X's picture

You think it's illegal? Try reporting it and see if you can find a shit to be given.

rehypothecator's picture

It would stop tomorrow if they decided to make it cost a penny a quote, after the first thousand quotes per day. 

KnuckleDragger-X's picture

10 second delay on all cancels would do it. Of course the whining and moaning from all the 'fair traders' would be immense.

Harbanger's picture

That's exceptional trading bitchez.

fzrkid's picture

Ok, so not find out how to monitor this algo and determine how to profit from the trend it creates.

DeadFred's picture

So I should move from Malibu to East LA to get better quotes?

I sure ain't movin to Jersey

Freddie's picture

Wow that is a toss up.  I can think oif a lot of parts of Jersey that are much nicer than East LA.  NJ and CA are a lot alike.  Lots of pretty spots but most of those states are filled with ass hole residents brainwashed by TV who vote for Dems and enjoy the the high tax police state they voted for.  

NJ and CA are also crowded with way too many people and most are AH's.

Carpenter1's picture

Sign #365,897,088 of the US's demise.

A far, far too complicated financial system. 

FieldingMellish's picture

And? Who goes to jail? Which operation gets shut down?... I thought as much.

Harbanger's picture

When they fuck up they resign, we go to jail.  Some animals are more equal than others bitchez.

Bangalore Equity Trader's picture

Listen.

For this one. I'm on the Algo's side!

Go ALGO!

Diogenes of Sinope's picture

Joshua: Shall we play a game?

medium giraffe's picture

The only winning move is not to play.

Harbanger's picture

Bullshit.  We are not run by machines, We are run by homos, these fuckers bleed like pigs.

SillySalesmanQuestion's picture

"If it bleeds, we can kill it."

junction's picture

So, as I understand it, I have to live within 93 miles of Wall Street to avoid getting stale quotes involving pennies.  Good to know.  On another subject involving staleness, the government just acknowledged that since 2008, the NSA was covered by the FISA court requirment that when NSA wiretap information was used in a U.S. criminal case, the government was required to tell the defendant of the NSA wiretaps.

New York Times: "But a provision in the Foreign Intelligence Surveillance Act, or FISA, requires the government to disclose when it uses information from eavesdropping in any “proceeding” against people. In 2008, Congress made the N.S.A.’s warrantless surveillance program a part of FISA, but the full implications of applying its disclosure provision to that program were overlooked."

---

Criminal Attorney General Eric Holder knew from the get go about this requirement, as did U.S. Attorney Michael Garcia when he prosecuted then Governor Elliot Spitzer for something (violation of the Mann Act) using NSA wiretap information at the personal behest of Karl Rove acting through President Bush.  Everyone kept silent.  Feloniously quiet.  Along with the Stasi type judges on the FISA court.

Everyone involved in this criminal NSA conspiracy covered up illegal wiretap information used to send tens of thousands of Americans to prison.  The USA of old has ceased to exist, as has the Bill of Rights. 

The Fonz...before shark jump's picture

Realtors should use that as a selling point, when trying to put a property on the market....

located in a front running friendly neighbourhood

Harbanger's picture

They already do, they call it up and coming.

Freddie's picture

Any neighborhood near NYC is also in safe gun free zones too.

Maxter's picture

Police already know how to avoid this by using a reverse ingeneered evidence collecting technic.

Simply put, they want to jail you because of something they heard in a wiretap (or simply because they want to cover their asses), then they fabricate evidences collected "lawfully" that match what they want you to be prosecuted for.

 

Usualy it should be the other way around: investigate a crime or allegation, then prosecute where it leads you.

The Fonz...before shark jump's picture

Well what are you gonna do...the dingbat at the SEC already said that they only have laws for humans...not machines so I guess we are S.O.L

ebworthen's picture

"Open the pod bay door HAL!"

"I'm sorry Dave, I can't do that right now."

medium giraffe's picture

"The problem is that when HFT cancels a quote after just 1 millisecond (ms), then anyone located more than 93 miles (150 km) away will see a stale quote. Worse, they won't know it's stale unless and until they try to act on it and wait for a response"

Essentially a Denial Of Service attack.  Because Fuck You, that's why.

KnuckleDragger-X's picture

They ain't denying service, just your existence....

Theta_Burn's picture

In the FPS world, the high pingers are nothing but fodder..

buzzsaw99's picture

I'm learning the ropes
Yeah I'm learning a trade
The east river truckers
Is churning with trash
I've got so much money
That I'm spending so fast
When the whip comes down...

Goldilocks's picture

The Rolling Stones - When the Whip Comes Down - Lyrics
http://www.youtube.com/watch?v=tvc9xpUAxgc (4:21)

Everyman's picture

I have said it before.  Somebody that "loses everything" to one of the HFT firms may SNAP and then take a .50 cal BMG rifle to their microwave tower and blast their antennas.  That would stop them for a day or two.

The maps "exist" and are not hard to find.  Academic and intellectual arguments may indeed meet and unstoppable force: A man with nothing left to lose.

Dangerous thoughts indeed. But the willful and ILLEGAL operation of HFTs needs to be purged.

I am thinking maybe some rich guy may even "contract out" a mercenary sniper to do the work as weel.

 

Just spitballing here.  It IS possible. I really hope somebody does do it and exposes the HFTs for what they are.

Harbanger's picture

Hmm, an Alpha male perhaps.  Like the Redskins owner who told the liberal MSM to go fuck themselves and fought them head on..

VAD's picture

Some of those towers are located on Diehl Road in Aurora Il.....ya know...just fyi.

miker's picture

HFT is a plague on the market.  BUT the government won't do anything about it because were it prohibited, true volume on the stock exchanges would be apparent.  They don't want people to know how little trading volume there is anymore.

KnuckleDragger-X's picture

Volume is for the weak. Now a few million dollars worth of supercomputer riding a dedicated link is power.

SillySalesmanQuestion's picture

These are the finest charts yet, clearly showing the manipulated, programmed, daily theft by HFT's. Bravo to Nanex!

all-priced-in's picture

If I already had a limit sell order for 100 shares of GOOG at $584 before the HFT trade was entered why wouldn't it execute?

 

I have to think someone has a sell order on GOOG above the existing market.

 

 

 

 

cooperbry's picture

Humans cannot compete.

Smiley's picture

Nice analysis.

Only a fool would invest in this market.  BTFD my ass; GTFO while you can.

KnuckleDragger-X's picture

Of fools there are many....

armageddon addahere's picture

How do they make money off this?

Wallstrefugee's picture

Clearly this is not the trading activity of a buy and hold investor and someone is manipulating the market. The question I have is how does this trade work? It appears pretty obvious that the strategy involved walking bids up by the penny to the NBBO to illicit a sell order on the Boston exchange that matches the withdrawn bid. Is the trade to fish for a market sell order or a limit sell order on the Boston exchagne so that when the order is received in Boston the bid has withdrawn and the algorithm then picks up the sell order at a lower price than the NBBO because the order has goine through the NBBO but has not had time to replicate the next NBBO? If this is the case, the algorithm can just wait a few ms for the NBBO to replicate and sell what it just bought for a small profit. If this is the case, the walk up in prices is designed to start at a price such that it is able to the largest distance within it takes the NBBO to replicate.

I do not understand the plumbing of these systems and I believe neither do most people but there is certainly a plumbing arbitrage opportunity.

The9thDoctor's picture

This market is so fake, it makes the Matrix look real.

Pretorian's picture

Rat in granary!!! Kill them fast or they kill markets and capital.

Not Goldman Sachs's picture

I have a couple of orders from 2010 that I would like canceled please.