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Cutting Through The HFT Lies: What Really Happened During The Flash Crash Of August 24, 2015
One of the fallacies being propagated about yesterday's flash crash, is that somehow HFTs came riding in as noble white knights and rescued the market from a collapse instead of actually causing it. This particular lie is worth a few quick observations and explanations of what really happened.
What did not happen, is what Doug Cifu, the CEO of HFT titan Virtu, the firm which as we have profiled repeatedly in the past has lost money on 1 day in 6 years...
... told CNBC when he said it wasn't Virtu's fault the market did not work for anyone as a result of countless HFT glitches: "we don't cause volatility, as a market maker we're absorbing volatility and we think we soften it."
The most amusing bit was when Cifu said that "we're really just in the role of transferring risk from natural buyers to natural sellers." Considering Virtu and its "special sauce" has never actually taken on risk with its trading record, discussing risk is a little rich for the owner of the Florida Panthers, and here's why: in a note by Credit Suisse's Laura Prostic (the typos are because she is in S&T) we now know precisely what happened:
HFT is typically 50% of overall volm, but they have to walk away in this heightened vol envt, which dramatically reduces liquidity. Hightened vol was mainly unwinding of hedges, not panic.
Anyone who actually trades (and is not part of the Modern Market initiative) knows that this precisely what happens every time there is a spike in market vol: HFTs simply walk away leading to the dreaded "HFT STOP" moment, creating a feedback loop of even less liquidity, and even more volatility, until circuit breakers are finally hit or asset prices hit limits. Yesterday, for the first time in history, not only the S&P500, but the Nasdaq and the DJIA all hit their particular "limit down" triggers.
Credit Suisse also directly refutes what Doug Cifu said: HFTs, far from not causing volatility, merely step aside when volatility surges thus leading to such stunners as VIX soaring above 50 overnight (with the CBOE too ashamed to even report what it would have been in the first 30 minutes of trading).
This also ties in with the summary in our last night's post comparing the flash crashes of 2010 and 2015:
The good news is that with liquidity inevitably collapsing ever further to a state of near singularity with ongoing central bank interventions, and with markets broken beyond repaid, we will very soon have a repeat flash crash like today, one which will provide enough satisfactory answers to the question of just happened that lead to a market that was completely broken for nearly an hour, and where the VIX was so very off the charts, the CBOE was afraid to show it for at least thirty minutes.
One thing is certain though: while the market dies a slow, painful, miserable death, the biggest HFTs will continue pocketing millions. Such as Virtu: "Virtu Financial Inc., one of the world’s largest high-frequency trading firms, was on track to have one of its biggest and most profitable days in history Monday amid a tumultuous 24 hours for world markets, according to its chief executive."
As we previously reported, while Virtu may have fabricated its role in yesterday's events, there was one truth: it had an amazingly profitable day because as a result of the total chaos, HFTs were able to frontrun block orders from a mile away and as a result of soarking bid/ask spreads, Virtu raked in millions by simply capitalizing on the chaos it and its peers have created. As Cifu said then "Our firm is made for this kind of market." We quickly corrected him: "your firm made this kind of market."
But back to the lies: earlier today the WSJ reported the following:
The speed and depth of the drop harked back to the flash crash of May 2010, when program-driven trading produced a self-reinforcing wave of selling. This time around, high-frequency trading firms like Virtu Financial Inc. and Global Trading Systems LLC were buyers that helped U.S. stocks rebound midday from their early slump.
“We were catching those falling knives,” said Ari Rubenstein, co-founder of Global Trading Systems.
Actually no. What happened is that in early trading the entire market was in freefall, and the only thing that saved it was the various major market indices hitting their limit down levels for the first time in history - not even during the Flash Crash of 2010 did this happen. The following Nanex chart documents this beyond a doubt.
If HFTs did anything, it was merely to frontrun the buy orders once the selling wave - halted thanks to limit downs being hit - had exhausted itself, and the buying scramble was unleashed around 9:35am leading to a 5% move in less than 10 minutes! It was here that Virtu made its colossal profits, however not from taking the least amount of risk, but merely from frontrunning order flow into a stil chaotic market with gargantuan bid-ask spreads, which incidentally not only does not provide liquidity, but reduces it as it competes with other buy offers for any market offers, also known as "providers" of liquidity, only to immediately flip the transaction to those buyers which Virtu knew with 100% certainty were just behind it. In any other market this would be illegal, except for one in which Reg NMS has made such frontrunning perfectly legal (courtesy of billions spent by the same HFTs who now benefit from it).
So what was the real contribution of HFTs: an unprecedented failure of ETFs to trade with their underlying securities and vice versa. As we said yesterday: "for minutes at a time, there was an unprecedented disconnect in ETF fair value as hedge funds sold off ETFs however correlation arbitrageurs were unable to capitalize on the discrepancy with the underlying leading to historic, and extremely lucrative divergences."
... experts are still scratching their heads over what may have caused these ETFs to nosedive. One possible explanation is that liquidity providers -- think high-speed traders and other Wall Street firms -- charged with stabilizing the market weren't there when needed. That's what happened during the flash crash of 2010. "When markets get hairy, sometimes those liquidity providers step out of the way to avoid getting run over," said Matt Hougan, CEO of ETF.com.
So while we await for the first clear break of the ETF model, thanks to none other than HFTs, here is a visual example of what really happened: some 220 ETFs which all fell by 10% yesterday!
But it wasn't just the "transitory" failure of the ETF model: yesterday the Nasdaq ETF, the QQQ, had its widest 1 minute price swing in history. Yes, the NASDAQ!
And just in case there is still any confusion if yesterday's event was indeed a flash crash, the answer is yes, most certainly, as can be seen by the 15% tumble in QQQs right at the open. That, ladies and gentlemen, is the definition of a flash crash.
Again: thank you HFTs.
With that we leave matters into the SEC's capable hands which we know will do absolutely nothing until the time comes when the next marketwide crash does not see a promptly rebound, and the time to finally point the finger at the HFTs comes. It's just a matter of time, plus someone has to be a scapegoat for the real, and biggest, market manipulator in history: the Federal Reserve.
And since, naturally, the complicit and corrupt SEC won't do anything, expect another wave of retail investors to drop out of the market forever and to never come back, having seen yet again what a truly broken and rigged casino it has become.
Finally, while we are delighted that firms like Virtu make outside profits on days in which the market crashes and leads to untold losses for retail investors, we have just one simple request - please don't take us for fools anymore: by now everyone knows all of your tricks, and can see right through your bullshit.
So, dear Virtu, frontrun whoever you have to, other HFTs, hedge funds, mutual funds, or whoever else is left in this quote-unquote market, and have another Madoff year (one with zero trading losses) but you will have to do it without what was once called the "investing public." They are now permanently gone until two things happen: i) the market is once again a market, not artificially propped up by $14 trillion in central bank liquidity which makes every asset "price" a illusion, and ii) HFT frontrunning is no longer legal, endorsed and blessed by the SEC, the regulators and all law enforcement agencies.
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Columbia University: HFT Electronic Front Running Benefits Retail Investors?Bought-and-paid-for bullshit propangda.
Interviewed by Pisani too.... the guy eats this stupid shit up, and blurts what he's told to say. The station blatantly lies and ignores the truth. As I've witnessed countless times in the past, they often go to "breaking news" in the middle of an interview when the interviewee brings up the reality of this ponzi and is not playing propaganda by the stations' rules.
He said his firm was "managing risk and volatility throughout the day"
LMFAO! You didn't manage shit. You skimmed off of each trade, whether the seller did so in fear or for minimum loss. That makes you an asshole!
And also: Thank you ZH and Nanex for exposing fraud, even if it seems no one is watching yet...
Great summary of the role of HFTs under pressure,
ETFs really blew their cookies. Quotes as much as 20-50% below last trades on the underlying. I expect they will try to cover up and make whole those who got caught in that, but if you EVER thought about trading ETFs on margin, time to think again.
Next time may be the last time.
Agreed KH... if yesterday showed us anything is that nothing paper/electronic-based is safe. People who think miners, GLD/SLV, etc are as good as metal need to wake up...
When the bomb eventually drops, and it will, you won't be able to sell at any price
On days like today, I only have one thing to say. "I LOVE this market"!
I would think that the VVIX, being at its highest point in history yesterday, would demonstrate that it was the HFTs that were causing the problem. Unless we magically believe that normal human reaction time was responsible for that, which I guess could be explained but in that case the rest of the world would really like to know what kind of performance enhancing drugs those guys are on these days.
That huge gap is a huge weakness. If it hasn't already been done, someone is working on a bold strategy to monetize that.
Ari Rubenstein loves this market!! more thieving opportunities, then pretend to be a "force for good" OY VEY!
Bill O'Brien could straighten this out for us
None of these arrogant criminals will be touched until the entire system collapses
And then it will be too late for anyone to care... but I hope i"m wrong for a change...
Will you marry me?
"make a little more money than we lose"
so a little more money buys this?
"Florida Panthers Owner Vincent Viola Selling NYC Mansion – $114 Million" (Viola cofounder of Virtu)http://bustedcoverage.com/2013/12/15/vincent-viola-nyc-house/
They don't manage anything other than bid/ask spreads and exploit the difference using trading speed..........funny to hear him try to describe otherwise. Knowing how bad the Panthers suck and are losing money hand over fist at least makes us feel a bit better about this goofball doing God's work.
Here's another video of Cifu and Viola explaining what Virtu does and how they managed to have only 1 losing day in 6 years.
http://www.nytimes.com/video/business/dealbook/100000003632551/virtu-fin...
[Vomit]
These douches should be in black and white horizontal stripes instead of pinstripes.
I don't know why, but with that look on his face I just want to beat the living shit out of him.
The man is the quintessential example of a psychopath who has successfully gamed the system to his own advantage.
This asshat provides "liquidity" (ie front-runs) on the way up. But, on the way down he runs away like a coward. That's how you get a flash crash. The PPT then becomes the market-maker of last resort and steps in to provide "liquidity". There you have it folks, thats how it works.
Re"Columbia University: HFT Electronic Front Running Benefits Retail Investors?"
what idiot would downvote this one? Its the damn truth?
HFT is BUILT TO EXPLOIT these moves, not ameliorate them.
Wake up world, Skynet is picking your pockets.
The fix is easy, just put an an automatic 2 second hold on bid withdrawals on the HFT's. IIf they aren't gaming the system, they won't have any problem......
Pseudorandom 0-2 second delay. It'd be a shame if the buy/sell processed before the spoof...
Let's just go back to trading in 1/8th and 1/4s... instead of decimals... or like options, trade in .10 increments... problem solved...
Jail, jail, jail the HFT execs.
Look at that stupid fucking hair.
short version: they can front run buying but if they try to front run selling there will be a congressional investigation and possible jail time.
Ot: They got another brown person.
http://www.cnbc.com/2015/08/25/jpmorgan-analyst-arrested-for-insider-tra...
At this rate, the market's integrity will be completely restored by Thanksgiving.
yeah, i laughed
Is CNBC still a viable concern?
Fuck all of these crooked ass markets, rape them by buying physical Gold and Silver.
JM Bullion got a shipment of 100oz Sunshine bars in today about 1:30, by 2:15 they were sold out. They are now only offering 1 choice for 100 bars, JMs....everything else is sold out. Sunshine 10 ozs have been on pre-order for a month.
Silver.com also only has JMs in 100 OZ
Way ahead of you. If it were up to me, every single one of those soul-less criminals would have their berries stapled to a maglev train...
Meanwhile back at the ranch the 2:30 ramp kicked in, lets see what they can do with it HFT or not.... I was looking for a flat close today, but it looks like I will be way off.
doesnt look like you were off too much....currently up only 54 points....
expect another wave of retail investors to drop out of the market forever
BS. Retail investors are attracted to bubbles; we cant help ourselves. The next one that arrives, rest assured we will buy high and sell low. Everyone vowes to quit gambling several times during a single Las Vegas junket.
No worries, the bulls are back in charge! This time it's different! I'm going all in again!!!
/s
That's nonsense. I and many people I know who are retail investors bought low and sold high. It's not hard at all. The market is predictably cyclical.
I know a couple who win at blackjack too. But the Vegas strip is testomony to the fact most lose.
"What goes on in Vegas, stays in Vegas"
I thought they were talking about investing money?
Lol! "Investing money" has nothing to do with stock market. trading stocks is like blackjack but no free drinks.
Well that is me, the guy walking around the casio not stopping at any table. Same with Wall Fuckup Street. Out of it
Bravo Tyler and Nanex. Again this is why I read ZH.
HFT is about sub-millisecond arbing. They could trade fuck out the market -- huge vols -- and leave the tape unchanged. In fact flying under the radar is pretty much Job One with these guys, going along scraping nickles. No I tell you what, this is the usual panic selling and then panic buying. It might be machine-driven and probably is. But it's not what you think, someone playing around at the margins. Nope. Big engines at work here, slamming shit around, shaking out the dumb money, breaking each other. Like sumo wrestlers just taking over and breaking everything in sight.
Seige engines of the market kind.
Excellent comment cougar_W
The muppets get fleeced when there is blood in the streets!
All of the doomer preppers don't seem to get that basic concept with today's rigged markets. But then again, that's why preppers live in trailers and call cans of beans and an old SKS "wealth". LMAO! Meanwhile the big boys live in mansions and own private helicopters and yachts!
The doomers always chant "wake up" when it is them who actually needs to wake up and understand how this economic system actually works.
Care to elaborate on everything past your first sentence? Sounds like your describing near endpoints of a line (why preppers live in trailers <-> big boys live in mansions) and ignoring the stuff in the middle.
From my vantage point, the economic system doesn't work at all except at the local level. What am I missing that you seem to be alluding to?
He seems to think that had we put our beans and SKS money intelligently into the market, we'd have mansions and yachts instead.
I don't buy that theory. He doesn't get that there are only so many yachts and mansions to get, and you can't have one unless you are one of THEM to begin with. And, those beans are going to dry up very, very soon what with global trade turning down and world-wide food production declining.
The only ones able to get those beans soon are those who saved up gold and silver...and bought those SKS's.
I'm a 'doomer prepper' and I have a nicer house than you, no debt, and more money than you. Obviously I'm doing something right. So fuck off.
good thing nobody is linking up robots to these colossal AI fuckups
To me HFT is perfectly summed in 'That sucking sound!" The hyper-vacuum cleaner of the markets constantly Hoovering away all the wealth.
Another example of Virtu Reality on the half-shell.
fucking fuckers fucked everyone fucking dry yesterday
Is it my imagination or does that guy look like an Ivy League educated mobster?
This is why I read ZH
Awesome reporting ZH. And thanks Nanex, for 'collaborating' .
here here
Got out of the stock market many many years ago because I knew of this fraud.
I started stacking yellow pet rocks instead.
F the fraudsters, the sec, the gov etc. They're all pigs in the same blanket to steal your wealth.
It's hard to "trade" as a person when you are competing against A.I. bots operating in NANOseconds!
Back in the late 90s I was actually trading very well. My setups were profitable or flat 70-80% of the time. It was nice to be able to trade arca or island and avoid being screwed by the nyse specialists. But then, something changed.
More and more I noticed my orders not being filled. It was obvious something was wrong. Got out and never looked back. Too bad crooks always have to go too far and fuck things up.
Wow, Island. Cool. Old School.
Insider trading is taking advantage of inside information before that information is widely know, correct?
Can someone explain to me how HFT is NOT insider trading?
It's not insider information. It's order flow. Where they are blatantly illegal is with the spoofing. It is SUPPOSED to be illegal to enter orders not intended to fill.
nyse is a snake pit. but soon even the snakes will have wanted to be out
Does he talk out the left side of his mouth when he speaks the truth?
I am now convinced that august 24 was nothing more than a practice run....they caused it to learn for when it does happen in later september. I have a question tho, who are you going to sell your gold to when all of this collapses...Do you think your coin dealer will have money? I dunno but just a thought from what I saw in greece and cyprus. nobody had any money. They had to go to another country. Where ya gonna go? mexico? Canada? etc?
just a thought
Plenty of people will take payment in gold or silver, why do you think it needs to be converted into fiat before a transaction can take place
I dont think anything, I just ask questions...if you think people will take gold for a transaction then I say maybe. But who are those people that will take it? I dont know anyone who would take it. They might take ammo, food, etc. but not sure who will give you services for gold or silver when they cant cash it in for fiat...You may be right, but my gut says you are wrong...I dont know anything tho. I just watched what happened in greece and cyprus, the banksters test run. Know thine enemy or you will be destroyed.
This discussion is hypothetical but if the SHTF the people that have ammo, food etc know the value of gold and will take it as payment. Those that don't take it probably have nothing you want or need anyway.
Anyone that keeps any more than the minimum in a bank to pay bills deserves what happened in Cyprus and Greece.
Life existed before all the financial games and it will exist after
Life existed before, yes. But we are in a new game that history has no reference to. This is what upsets me about history articles. Our history is not our present or our future. If you think people will take your gold for services, then head on. I would not take gold for my services. I can fix anything from an electronic device to a vehicle, but I wont trade for gold or silver...I would not know what to do with it.
I agree this is unprecedented time. I'm not pushing gold or silver just offering it up as an alternative as a store of wealth because what other alternatives do you have
With your skills/abilities you are further ahead than 95% of the population so you're ahead of most people thru an investment in yourself
Well, wake up and learn what fiat currency is.
Gold/silver is the money - you trade it for goods and services. I suppose ammo could become money also, like cigarettes were during WWII.
Are the HFT's stepping away near the close of the market every day now? Below 1600 now, and the DOW could close red for the fourth straight day. 1/2 hour to go, grab the popcorn.
Correction. That would make it 6 straight losing days.
Here goes NDQ taking a big fat shit into the close.
Sell the rips bitchez.
A Tobin-tax would kill HFT.
Corporations don't like taxes, but the do like fees.
A Tobin-fee would kill HFT.
The HFTs were pissed, pissed the stops kicked in to limit the theft they had planned out.
....so.......buy AAPL.....?
PPT hit the floor at 3:50, wonder when the red team will make thier big play.
Off the .... Oh
Chris Martenson says he couldn't trade the markets anymore since 2008. I was knocked out in 2011. The FED will end up owning majority interest in all global corporations before it is over.
Yet the large banks control the FED so they will rule the world.
They'll start to eat each other once they have eaten everyone else....
I have a suggestion to make. If Navinder Singh Sarao wants to ge this own back he should simply publish his formula on how to beat the HFTs at their own game. There will be a tsunami of traders willing to give it a go and the HFTs will die by their own sword. Of course, I could be blowing bubbles (to coin a phrase).
What you on about? I did it from my house in west London with an Algo I bought from the pound shop, and margin I got from a bust company that has close links to a senator in The US, who has 'allegedly' done far worse than me. Come stick me in jail for 300 years you bastards.... Mr Senator hope you are enjoying your summer hols paid for by my commissions.
To all those who go Postal around the world shooting innocent. There is so much other good stuff out there to take instead while actually helping the world.
Rolling Stones Let It Bleed Remastered FULL ALBUM
https://www.youtube.com/watch?v=xZz0mTb1qtU
Cool-a-mundo.
Open season day on hedge fund managers.
ii) HFT frontrunning is no longer legal, endorsed and blessed by the SEC, the regulators and all law enforcement agencies.
Laws aren't necessary ... or desired. Just add a random delay to each transaction time stamp and then handle transactions in FIFO order. HFT will have no advantage whatever after such a simple change, and "all" investors will enjoy the elimination of HFT noise and advantage.
Why do people believe adding a random delay or a transaction fee will stop HFT's? They have proven to be masters at gaming the system and will create a way to use that against humams as well. Electronic trading was originally embraced by the trading community during the transition from the pits to the screen because of FIFO. Now FIFO has been turned into a massive technology arms race and used completely against humans. The only solution, aside from outlawing HFT's altogether, is to give human traders trading for their own account priority access in the order book at all times
Why do people believe adding a random delay or a transaction fee will stop HFT's?
A transaction fee is a bad idea. But a random delay "will" work. HFTs must be able to "slide in at the head of the line". With a random delay, their transactions will be folded into the line. Speed loses all advantage then.
They have proven to be masters at gaming the system and will create a way to use that against humams as well.
They're using the same kind of gaming Rothschild did when he rushed the news of Waterloo back to his traders before it could be generally known. 200 year old gaming secret?
Electronic trading was originally embraced by the trading community during the transition from the pits to the screen because of FIFO. Now FIFO has been turned into a massive technology arms race and used completely against humans.
Unlike the arms race, the transaction race loses all it's advantage with a random delay before FIFO is applied. Remember, this is about "investing". Real investments last more than milliseconds. A random delay levels the playing field yet leaves the market very responsive to "investors". To work, the delay "must be random".
The only solution, aside from outlawing HFT's altogether, is to give human traders trading for their own account priority access in the order book at all times
Not only is that "not" the "only" solution, it's a really bad treatment and not a solution at all. The solution is a random delay of just a few milliseconds. It is simple to implement (requires only a buffer) and it "outlaws" HFT by making it totally ineffective. That's the best way to outlaw things. You don't fix a runaway engine by telling it not to go too fast. You install a governor that makes it impossible for it to go too fast.
If it hasn't been said earlier then someone should be locking Waddell & Reed up. How come they're allowed to run rampant over the markets? snicker
CAN SOMEONE HONESTLY SAY THEY READ EVERY ZEROHEDGE ARTICLE EVERYDAY? MAKE A GOD DAMN YOUTUBE CHANNEL JESUS 50 PAGES AN HOUR GIVE ME A FUCKING BREAK
Mmm. Teevee
The book is always better than the movie.
CAN SOMEONE HONESTLY SAY THEY READ EVERY ZEROHEDGE ARTICLE EVERYDAY? MAKE A GOD DAMN YOUTUBE CHANNEL JESUS 50 PAGES AN HOUR GIVE ME A FUCKING BREAK
CAN SOMEONE HONESTLY SAY THEY READ EVERY ZEROHEDGE ARTICLE EVERYDAY? MAKE A GOD DAMN YOUTUBE CHANNEL JESUS 50 PAGES AN HOUR GIVE ME A FUCKING BREAK
Flash crash could happen again. Here is a story about one such possibility.
http://michaelekelley.com/2012/05/25/flash-crash-epitaph-short-story/
Thanks
HFT's create noise, static nonsense, and diversions in order to suck out money in all the chaos and confusion they create...
We do need to thank Eric for all the good work.
'
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Sat there Monday up at my Mud'da's house, 85 years old, no internut, watching and said, "Can't wait until I get back to the city, to read ZeroHeadge and find out what went on, who was the plunge protection team, et cetera.
Damn right the 'retail investor' is out and not coming back.
Anyone really think anyone over 60 can take a 15% loss in 2 week then watch it all come back, especially with their retirement funds?
•?•
V-V