Dear HFT, Please Explain This

Tyler Durden's picture

From Nanex

Dear HFT, Please Explain This

On August 25, 2011 at 15:45:48, in a one second period of time, there were more than 10,000 quotes and exactly zero trades in DELL. Close inspection of these quotes reveals something very disturbing. This cannot be dismissed as a computer problem or glitch. This can't be explained as stupidity or some oversight. It is not pinging for hidden liquidity. And it's certainly not price discovery. As far as we can tell, it's not adding liquidity or narrowing the bid/ask spread.

What caused this blast of 10,000 quotes in DELL appears deliberate. Of the 10,000 quotes, the bid and ask prices remain the same. The bid size also remains constant except for one change after the first 7,000 or so quotes. The only real variation is the ask size. Not a simple 2 step variation, but one that repeats in a mathematical pattern with a long cycle. This makes it difficult to detect, but it also confirms that it must be emanating from a single source.

There are approximately 4,000 stocks that quote during active trading. Which means 40 million quotes/second if just one of the 9 exchanges allow this nonsense to spread to all 4,000 symbols. You would need 40 gigabits per second of bandwidth to receive data at that rate. Unfortunately, we think it's just a matter of time, because events like this one in Dell are no longer isolated or rare. And it doesn't look like there are any grown-ups in charge. 

DELL - Dell, Price and Sizes

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Abitdodgie's picture

Well nothing to see hear move along

DoChenRollingBearing's picture

I really cannot understand why this crap is not illegal.  Makes no sense that computers can make phony bids.  And they ask us why we buy gold and silver.

cynicalskeptic's picture

Think of all the revenue you'd have by taxing every one of these computer 'transactions' at even a minimal 10 cents......  The budget deficit would vanish in short order.

Vendetta's picture

that would require integrity somewhere in our political system and the will to enforce it ... rare as the dodo bird

Bananamerican's picture

the only way to win?

DON'T PLAY!

rocker's picture

HFT = "High Fucking Treason" against Honest Investors.

Where is the guillotine.  Make it a long rope and deep ditch.  Off with their heads.  Eh.

Libertarian777's picture

best way to end up with a million bucks in the stock market?

 

start with $100 million (preferably other-peoples-money)

Irwin Fletcher's picture

The hedge funds pay the math PhDs the big bonuses to write the C++ code to calculate the transaction costs. The government collects the transaction costs from the exchanges and uses the leverage gained from the monetary velocity of the transaction costs to empower the transitory increases in the budget deficit. Thinking is bad. Must stop now.

Hobbleknee's picture

Think of all the revenue you'd have by taxing every one of these computer 'transactions' at even a minimal 10 cents......  The budget deficit would vanish in short order.

 

Not a penny would go to paying off the deficit.  They would just find new things to waste money on.

mikla's picture

I really cannot understand why this crap is not illegal. 

It *is* illegal.  You can't post a quote without the intent to have it filled.  You can't post quotes that intentionally manipulate the price.  You can't post quotes that disrupt orderly trading.  These offers are posted, and then immediately canceled, for the purpose of (1) manipulating the price, (2) hindering market price discovery, (3) prohibiting other traders from hitting a price before *you* do.  HFT only works because "skimming the delta" lets you screw everybody in the "price drift" only as long as nobody else can figure out what's going on (only as long as they can't figure out what you're doing to manipulate the price).

Just as there is currently no accounting and no reserve requirements (we literally have no standards of any kind for banking and corporate reporting), there are no regulators.  Actually, the regulators are "in" on the fraud, because the system is currently only functioning *because of* the fraud.

The curious reader should review that previous sentence until it is understood.

Everybodys All American's picture

Actually, the regulators are "in" on the fraud, because the system is currently only functioning *because of* the fraud.

What is telling is the your use of the word "system" and not "market" in describing the trading environment. Your analysis is spot on. No longer do we have a market but rather a system.

Spirit Of Truth's picture

Of course....that's what the SEC is paid to do.

The problem is....God is watching: 

http://thespiritoftruth.blogspot.com/2011/08/gods-judgment-nears.html

JW n FL's picture

the problem is... a LOT! of "We the People" have Rope and know how to tie a knot!

Then God can have them!

Founders Keeper's picture

[Actually, the regulators are "in" on the fraud, because the system is currently only functioning *because of* the fraud.]---mikla

Thank you for your post, mikla.

This same game of "Hush, or you'll wake my parents" is being practiced across the globe by those in-the-know.

The market is broken.  Gone.  Done.  But, try to explain that to the average person.  Impossible.  The bankers and CBs' age-old use of Complexity for Cover is working perfectly. 

Thomas Jefferson warned us about this as Alexander Hamilton and his crony bankers and financier friends were plotting and sowing the seeds of public deceit as the ink was still drying on the US Constitution. 

Benedict Arnold was a traitor to our cause for Independence.  Later, Hamilton was a traitor to Liberty

EDIT

Not unlike Arnold, Hamilton was a heroic officer of the Revolutionary War.  Finally betraying his country.  Deceiving even his friend Pres. George Washington, Sec of Treasury Hamilton was trusted by Washington to advise him in matters of money. 

EDIT

Jefferson's image belongs on a gold or silver US mint bullion coin.  Hamilton's image resides appropriately on the fiat FRN ten-dollar bill.

 

 

tmosley's picture

So you are saying that what you call a "quote", everyone else in the world calls a "bid"?

Why on Earth would they switch terms like that?

mikla's picture

So you are saying that what you call a "quote", everyone else in the world calls a "bid"?

In the loose sense, we are talking about "bid quotes" and "ask quotes" (so "quote" can be synonymous for either).

True, the "quoted price" historically represents the last point at which the highest-bid and lowest-ask "met" in a transaction for a stock.  For example:  http://www.investopedia.com/terms/q/quote.asp#axzz1W6Tb3XVF

The issue is that these high-volume broadcasts are for the sole purpose to cost competitors  milliseconds (and nanoseconds) while giving yourself an advantage (front-running and skimming through price drift).  You don't intend for your quotes to be filled.  You immediately withdraw all your offers after "flooding" the lines with noise.  That's HFT.

tmosley's picture

Thanks, JohnG explained it to me below.  I was thinking the algos were (not) buying rahter than (not) selling.  Now it makes perfect sense, and I can see why it is illegal.

JohnG's picture

Oh, but it is NOT legal:

http://taft.law.uc.edu/CCL/34ActRls/rule11Ac1-1.html

 

A quote displayed without the intent to trade is in blatant violation of this rule.

tmosley's picture

So the act of getting a quote is implicitly a bid?  That doesn't make sense to me.  Unless by "quote" they really mean "order".  

It seems to me that getting a quote, and declining to trade based on the price presented by the counterparty in that quote should not be illegal, nor should it have any effect on the markets.  Only placed/winning bids should effect the market.  I am aware of the fact that yanked bids move the market--but they shouldn't.  This seems to be a problem with the market.  Prices should only move based on completed trades, not aborted ones.  Further, if these guys are doing a bunch of annoying shit like requesting quotes millions of times per second, I would think they would just be banned from the exchange.

But then, the fact that anyone plays in this rigged paper market doesn't make sense to me either.  

Raymond Reason's picture

When I was in lumber wholesale/retail the most important concept was "point of sale" POS.  This was the exact moment in time when a transaction was executed, and was very significant in everything that followed.  "Executed means SOLD... the bullet exited the barrel.   Lumber prices change daily, hourly, or even continuously (on the purchasing side).    But intent to buy is meaningless in all ramifications. 

Which billing period does a credit card transaction fall in, for example?...when you put something on a wish list on Amazon?   Try telling a banker your intent to pay his installment was within the grace period.  The idea that they use "intent to buy" as a basis for price discovery (whether in HFTs or futures contracts), is nothing other than halariously absurd!  The bankers themselves must be amazed that it would be accepted by the public.   No wonder they are so fucking arrogant.  They think we are complete morons.  Maybe they're right?

 

Bob's picture

They're not entirely right, but definitely more than half right, imo. 

The "public" does not understand the workings of the market as a whole, much less this kind of arcane minutia.  But don't blame the public for that--it's what separates the common man from "investors" and what justifies all the money made in the markets, right?

It's not "the public's" responsibility to do something about it.  It's those in the know who have that burden and are the only ones positioned to do anything about it.  Unfortunately, most in the "investor" community celebrated the shifts in public policy that led to this place.  Financialization of the US economy was all good until "investors" themselves started running into trouble against unfair competition at the hands of transnational corporations and machines.

Sound familiar?  It's very similar to what labor faced in the past 30 years with outsourcing, Unfair Trade Agreements, demolition of pension systems and so on.  Applying the same standard to the markets, here "competition" seems to be coming full circle in a very similar way to bite those who so fanatically promoted it for other people. 

The "public" is primarily concerned with getting decent jobs.  How many "investors" lie awake at night worrying for them or their families? 

Karma may be a bitch, but don't expect any love, compassion or cries for "fairness" from the public on behalf of wronged "investors." 

It is profoundly sad, but the public feels more than a little hope that hurricane Irene will take out NYC for good.  That tells you what you need to know about the public. 

Unfortunately, it tells you more than you want to know about investors.

Raymond Reason's picture

The "public" does not understand the workings of the market as a whole, much less this kind of arcane minutia.  But don't blame the public for that--

Yeah, i understand what you are saying, but i am more and more inclined to think the public NEEDS to understand this arcane BS.  People need to take personal responsibily to understand economics, as they should take responsibilty to understand gardening, personal health, child rearing, home maintainence, personal defence, etc, etc.  I was as guilty  of negligence as anyone.  There is a social meme that says "because i worked all day, i have no further responsibilties when i get home.  I throw a little money at these other responsibilities, and let those specialists take care of them."  Not good. 

Bob's picture

Agreed, but in this technocrat society such complex issues are deferred to "experts" who make the decisions themselves.  The lay public is structurally excluded from the table . . . and the corporate media makes sure they only get the minutes of last week's meeting in passing.  With all references to human reality fully redacted.

I agree it's bad.  What commoner would have ever agreed to the policies that have destroyed our real economy and gutted our wealth for the benefit of so few? 

We have become such a nation of self-serving liars that even being conversant in the issues brings no resolution, though.  Look at discussions around here.  Crazy misreads of the problems prevail (and sincerity does not transform crazy into anything better than it started life as.)  Look how many people see what's happening as socialism!

At this point, I see no hope for improvement for the society as a whole.  What it's going to take is a crash that wipes out the upper middle class investor sycophant who has supported this monstrous process from the start. 

Only then will he change his tune.  Problem is that, as the boy who never cried wolf during many years of culling of the herd, nobody is going to listen to him then. 

How awful the epiphany must be that in spite of your self-righteous pretensions you were in reality nothing more than a dingleberry on the ass of the elite who served an essential purpose only in delegitimizing the claims of those "below" you . . . until you were no longer needed.  

Suckers

Bob's picture

btw, the "you" is strictly rhetorical, nothing personal meant in that RR!

AldousHuxley's picture
  1. HF algo programmers/traders are bored, so they are making HFT Art.
  2. HF intern is getting initiated to the live markets
  3. This is a distraction piece for ZH readers while Buffett gets insider private deal ($5B with $300M divds + option to buy more at the bottom prices) on a publicly traded stock...again

 

JohnG's picture

4.  This is an algo gone mad.  A programming error.  Beginner mistake that didn't choke the algo and was very fucking lucky it shut down before more time elapsed.

If you're trying to game the system better hire some experienced programmers, this sort of error can wipe a firm clean OUT.

bigkahuna's picture

5. It was a successful test of a hack designed to bring electronic markets down when used on a wide scale.

JohnG's picture

Bingo.  I'm just wondering who initiates the quotes.  The CQS should show the broker ID.

Wonder where it came from, and I'm actually terrified that I might be right in my conjecture.

Nanex?  Where's these come from?

JohnG's picture

ps.  The ID can be spoofed, it's just a packet.

Black Friday's picture

I think this is proof that cheaters actually do prosper.

DormRoom's picture

shazam uses speech recognition  by collating spikes and troughs to form a audio fingerprint.

 

perhaps the algo is trying to build a monotone fingerprint in which is seems like noise, but may execute @ that bid/ask in the near future, masking its trade, as other algo have no way to detect the signature from the noise.

Shirley Wilfahrt's picture

Or perhaps the hooker sprawled over the keyboard while getting nailed from behind by HFT man before meeting the wife and kids for dinner and a show....

SMG's picture

Tyler, thank you for exposing this.  Someone will listen eventually, NEVER give up on this.  One day the world will be better, as long as the idealists NEVER give up.

PicassoInActions's picture

damn , i need that system, my EA in MT4 does not works that fast.

GiantWang's picture

Skynet is now running the stock market.  Soon terminators will come after anyone who makes a profit in the market.

cynicalskeptic's picture

Skynet was right - humans are the enemy.... (at leasrt some of them)

Pay Day Today's picture

Either humans are the enemy...or the human race is a virus. And the important question: do we deserve to survive? There comes a time when you cannot run from the things that you have done.

Mactheknife's picture

>Dear HFT, Please Explain This

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

Seize Mars's picture

What's funny is that the sine function used actually is pretty expensive computationally. So it seems like a wasteful flourish to me. That must be one hell of a fast machine if you can afford that sine call 10,000 times a second.

DCFusor's picture

You just make a table, and look up the values....Old DSP hand here.

Drag Racer's picture

not really just a fast machine but many of them. If you think of Google having 100,000s just to search for web pages what do you think someone wanting to control the financial markets markets would put together with unlimited budgets. Also keep in mind, just as Google pre-processes to provide instant results, so do financial manipulators. It is not just the algorythm doing the work on the fly but also pre-processed responses as well and pre-planned attacks.

geekgrrl's picture

I'm thinking they would use something like this: http://www.cray.com/Products/XK6/KX6.aspx. Speed is what they're after, not servicing 700 million requests for websites about Lady Gaga's pubic hair.

Looking at the brochure for this supercomputer, it states power consumption at 45-54.1kW. So for the bank shown at Cray's website to run for a year, it would consume a bit under half a million kW hours.

I wonder just how much electrical energy is wasted, just wasted, in these firms that are not only completely non-productive, but are parasites on people who actually are productive. How much of all the energy that this country consumes actually goes to something, anything, with real productive value?

Anyway, I hope the HFTs break the entire system. Before it breaks us.

Mec-sick-o's picture

Don't worry, once they break the ETF and Futures markets, they will use these nice supercomputers to CENTRALLY plan all production worldwide.

Utopic Communism will be their target.

Damn, Orwell missed it by 30 years, enough to make a generation forget. hmmm.

kote's picture

Pre-record the sequence.  No processing required during playback.

JohnG's picture

It's precomputed and indexed.  Fast, fast, fast.

JohnG's picture

No, she said stop.  Please.  Don't.  Stop.  Please.  Don't stop.  Please don't stop.  Faster.  Please don't.  Stop.  Faster..........

jakeman's picture

Like the olde, great college drinking song: "Oh, please, surrender, do not touch me"

g's picture

Yes a look up table is faster. However, 10,000's of sine and/or trig functions is not that many per second. The average computer can process far more per second than 10,000. Benchmarks are easy enough to produce if requested. I am working on some software using the orthographic projection (lots of sin and cos functions) that processes 400,000 navaids in a fraction of a second and renders them, on an old AMD 939 socket machine.