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Did Slaying The Knight 'X1000 Algo' Kill The Equity Markets?

Tyler Durden's picture




 

Year-to-date, before the decimation that the Knight x1000 Algo wreaked upon the market, volumes had trended lower YoY but had not cratered. As the charts below suggest - in somewhat stunning technicolor - that since the Knight-algo was put-to-death, NYSE volumes have coincidentally plunged by 40%! Today's run-rate with an hour to go was the lowest of the year. For those that hang on the consideration that this is due to high-priced stocks and USD-volumes are stable - err, wrong answer - futures volumes cracked in half also (and that is a stable USD volume); The summer doldrums explains it - err, wrong answer - we are 20 percentage points below a normal summer-drop-off. The simple fact of the matter is, with retail suddenly the smart-money and exiting stage left (unable to trade this ridiculous market), it seems that losing one market-maker algo has almost halved trading volumes; what happens if GETCO ever goes down?

 

NYSE Volume is down 40% since the Knight Algo Slaying relative to the year-to-date prior...

 

 

and S&P 500 e-mini futures volume (lower pane) has cliff-dived (as has average range per day - middle pane) coincidentally as Knight's Algo died...

 

We guess the proof will come soon as the next few weeks of events are sure to encourage more than just the algo-bots to battle it out as manager's 'years' are made or lost on a red-flashing-Bloomberg headline...

 

Uncoinvinced that the market is entirely run by algos - the following stunning drill-down by Nanex should dispell any mystique...

Below One Second

The SEC has stated on more than one occasion that it isn't worth the effort to look at data in resolutions under one second, because it's just noise. Follow us "down the rabbit hole" as we drill down from 1 second to 1/1000th of a second and see what we find. Note: more examples on this page.

The charts below drill down from 1 second intervals to 1 millisecond intervals in the stock symbol FXS on the morning of August 30, 2012. Each chart shows the National Best Bid/Offer spread (NBBO) as gray shading. The top of the shading is the best ask, and the bottom is the best bid. Changes to the NBBO are shown as triangles color coded by exchange. Triangles pointing up represent best bids, triangles pointing down represent best offers.

1. FXS - 1 second interval, showing about 17 minutes of data.
Others might think the column of color in the middle is just noise, or a glitch, or fat-finger. Let's look closer and see.



2. FXS - 25 millisecond interval, showing about 26 seconds of data.
As we drill down, what looked like single quotes (triangles) above, now appears complex and involves multiple exchanges (multiple colors).



3. FXS - 5 millisecond interval, showing about 5 seconds of data.
At this resolution, note the white spaces between the gray lines. This indicates that the NBBO isn't stable, it actually flutters quite rapidly at many different prices. We couldn't see this fluttering on a resolution as fine as 1/40th of a second (25 millisecond). Note how many different exchanges are involved . This might be the work of one HFT shop plugged into at least 4 different exchanges.



4. FXS - 2 millisecond interval, showing about 2 seconds of data.
A pattern starts to emerge. This is anything but noise. 



5. FXS - 1 millisecond interval, showing about 1 second of data.
The pattern looks very familiar. This appears to be an algo testing out its ability to rapidly back away from the market from multiple exchanges when a large, informed order appears. Based on this chart, it looks like HFT is able to withdraw from multiple markets in a few milliseconds.


 

Charts: Nanex and Bloomberg

 

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Thu, 08/30/2012 - 15:48 | 2750440 fightthepower
fightthepower's picture

Fuck you Bernanke!

Thu, 08/30/2012 - 15:57 | 2750474 climber
climber's picture

+1 for subtlety

Thu, 08/30/2012 - 16:09 | 2750515 malikai
malikai's picture

What gets me about these charts is the symmetry. That is a clear sign of a single algo to me. Perhaps it's just a coincidence, or maybe I'm just overextrapolating things, but with orders spread like that, it looks like the same code to me.

Thu, 08/30/2012 - 16:41 | 2750618 veyron
veyron's picture

FYI: Surprised Tyler didnt mention this ...

 

Getco was down for the year up until the Knight event, when it miraculously made more than 40M in that trading day alone ...

Thu, 08/30/2012 - 17:12 | 2750684 Darth..Putter
Darth..Putter's picture

Better put the PFBest fiasco and the Sentinel descision on the calender.  Who wants to donate some cash to banks nowadays?

Fri, 08/31/2012 - 03:26 | 2751698 Western
Western's picture

Nanex, amazing.

Thu, 08/30/2012 - 16:12 | 2750526 kliguy38
kliguy38's picture

Might as well make it consensual since they've been fucking you your entire life.......hehhehehehehe

Thu, 08/30/2012 - 15:58 | 2750448 Hype Alert
Hype Alert's picture

I mentioned that before that volume has taken two steps down.   One in Dec 2011 and the latest when Knight blew up.

 

And for those that didn't see it on Bloomberg tv:

Something's Gotta Give

http://www.bloomberg.com/video/single-best-chart-s-p-rising-while-volume-dropping-e1nreG7NStSDC3hCmpI_LQ.html

Thu, 08/30/2012 - 16:04 | 2750483 Comay Mierda
Comay Mierda's picture

all the vampire squids pulled their market-making algos (aka retail-ripoff algos) offline to make sure the chinese havent hacked them as well

 

Thu, 08/30/2012 - 16:14 | 2750536 ThisIsBob
ThisIsBob's picture

Go, China!

Thu, 08/30/2012 - 17:23 | 2750723 FRBNYrCROOKS
FRBNYrCROOKS's picture

My SPXU position might pay off at last?

No fucking way!!! I was just 12 months early? As usual!

At least I didn't sell/cover.

I hope it, volume reaching zero/snp 1750 is before Christmas so I can blow the money in China on Vacation!!!!!

That is the best chart ,bloomberg i.e., I have seen all year!!!!!

Thu, 08/30/2012 - 15:52 | 2750453 RmcAZ
RmcAZ's picture

Now just imagine if the rest of the algos were killed... volume would be down at least 99%.

Thu, 08/30/2012 - 15:55 | 2750460 unionbroker
unionbroker's picture

i find it humerous tying to explain to someone that you can buy and sell all day at the same price and actually make money

Thu, 08/30/2012 - 16:11 | 2750522 mammoth mo
mammoth mo's picture

All you need is a really big computer.

 

And no morals.

Thu, 08/30/2012 - 15:56 | 2750463 ekm
ekm's picture

Nobody would know about it if Zerohedge did not exist.

So, give a pat to yourself for enlightening the peasants.

Thu, 08/30/2012 - 15:58 | 2750477 AbelCatalyst
AbelCatalyst's picture

Math meet gravity.... When the HFT sucks the air out of the room look for the epic collapse... By then all the real traders will be gone and no one (or thing) will be there to pick up the pieces... They can have all kinds of fun when there is low volume but eventually math and gravity will return with a vengeance!!!

Thu, 08/30/2012 - 16:40 | 2750611 FL_Conservative
FL_Conservative's picture

I'm not sure if you're saying that in jest, but I seriously wonder, with the vast majority of retail out of the market, whether when the epic collapse begins, will the market become bidless and drop like a rock.  With algos competing to get out the door, who's going to be buying on the way down?  I think this is going to be quite a scary sight to behold.

Thu, 08/30/2012 - 17:17 | 2750705 FRBNYrCROOKS
FRBNYrCROOKS's picture

We (the market) still have 401k contributions and pension funds to try and steal. I am wondering who will come up with the "old school" platform were they meet under a tree and actually trade certificates to make sure they are not getting hosed?

Thu, 08/30/2012 - 18:41 | 2750888 Pubcoceo
Pubcoceo's picture

That's who will be buying all the way down...lol

Thu, 08/30/2012 - 19:54 | 2751083 Axenolith
Axenolith's picture

I've kept mine in money market since I started where I currently work, and keep 50% of that loaned out to myself so it can't all disappear if MM's go south.  I'm about the only one in the company that didn't get hosed in the last 4 years.  That loan will roll over soon, and I'll be back in for enough to get another slug of gold and silver (physical)...

Thu, 08/30/2012 - 15:58 | 2750479 user2011
user2011's picture

I wonder if this report can be presented in court.    Time for class action lawsuits.      Regardless, it is a wonderful document to show kids about the manipulations of the market that change the investment world forever.    We are witnessing the extinction of equity trading

Thu, 08/30/2012 - 16:12 | 2750527 mammoth mo
mammoth mo's picture

You can't sue Bernake.

Thu, 08/30/2012 - 16:26 | 2750543 Abraxas
Abraxas's picture

We will be able to when we establish the People's Court. The trial will last for about 2 seconds.

Thu, 08/30/2012 - 16:04 | 2750503 q99x2
q99x2's picture

You mean to tell me I'm the only human with a Scottrade account that is still in the market. I must look like a morsel and unnoticed otherwise I'd a been eh't (my abbreviation for eaten) by now.

Thu, 08/30/2012 - 16:21 | 2750561 AcidRastaHead
AcidRastaHead's picture

They're saving you for dessert.

Thu, 08/30/2012 - 16:31 | 2750593 cougar_w
cougar_w's picture

They are saving Warren Buffett for dessert, maybe. The rest of us were left on the pastry room floor.

Thu, 08/30/2012 - 16:51 | 2750641 buzzsaw99
buzzsaw99's picture

You'll be fine as long as you don't set stops, or place market orders. Scottrade's clearing agent will fill your orders in the moist efficient manner possible always getting you the best prices with your best interest at heart and not at all in a parasitic bucket shop manner. Your account will never be corzined because there are laws protecting small investors. [/sarc.]

Thu, 08/30/2012 - 17:53 | 2750799 Savyindallas
Savyindallas's picture

Yeah  -I sleep well knowing there is a crackerjack SEC covering my back. I don't worry about the porrn -they work hard, they need some daily relief jacking off in their offices to reduce the stress.

Thu, 08/30/2012 - 17:13 | 2750687 FRBNYrCROOKS
FRBNYrCROOKS's picture

I've got an account and a few positions but, I dare not trade in this environment. I went short October 2011 and have been bathing since waiting for the "great correction". Pulling many hairs out fighting the FRBNY.

I actually cash my paychecks and hide the money now!!!!!! I haven't placed a trade this year. It will make tax time easier. I don't think I will book any loses. I will wait it out.

Thu, 08/30/2012 - 17:47 | 2750782 Savyindallas
Savyindallas's picture

BS  -you're a Scottrade employee trying to pump your pathetic company just to save your job. Give it up.

Thu, 08/30/2012 - 19:57 | 2751091 Axenolith
Axenolith's picture

eh't... lol

Jeet yet?

Thu, 08/30/2012 - 16:23 | 2750514 cougar_w
cougar_w's picture

Ha! I win! I wrote about this in my first installment of ZH fiction.

In "The Exchange" Fortran breaks the NYSE and nukes the algos by ramming prices up/down 20% in pico-second swings on massive volume, leaving the market to "appear" absolutely flat. In that flat market she executes a few actual trades with real humans -- there being no (other) machines left to interfere -- turns a modest profit and goes home.

More and more, I find that my art is starting to enter this life. It wiil be too bad if "Uncomfortable with the Truth" ever comes true. Beans and bullets, indeed.

Thu, 08/30/2012 - 16:10 | 2750517 Xibalba
Xibalba's picture

I'd be interested in finding out who wrote the source code to that algo that brought them down...and what their affiliation with Goldman Sachs is.

Thu, 08/30/2012 - 16:10 | 2750518 GrinandBearit
GrinandBearit's picture

Most traders say 70% of the market activity is due to algobots. 

I disagree.  I think it's more like 95%. 

Thu, 08/30/2012 - 16:26 | 2750573 MillionDollarBoner_
MillionDollarBoner_'s picture

dude...get with the "New Pareto"...its 99% versus 1%...

Fri, 08/31/2012 - 03:28 | 2751699 Western
Western's picture

Not even.

 

It's the 0.01% that are the true culprits.

Thu, 08/30/2012 - 16:28 | 2750580 cougar_w
cougar_w's picture

If you include programmed buy/sell orders that professional money managers employ to cover short positions and take profit at resistance levels, then the value is probably closer to 99%. And most of the latter is just running with the momentum created by actual bots.

There is no traditional trading taking place now, or nearly none. There won't be again, ever. The capital model is going to fatally implode first and the shrapnel will take all this with it.

Thu, 08/30/2012 - 16:35 | 2750600 mammoth mo
mammoth mo's picture

 

Day trading has been reduced to guessing at 1:55 pm and selling at 7:35 the following morning if you are right and at 7:40 if you are wrong.  There simply aren't enough swings to wade in and ride up or down.

Look at JPM, C, BAC, and WFC today.  You going to play 1% or less in either direction?  Are you that sure of 1%?

Retail can't participate they can only donate.

 

Thu, 08/30/2012 - 16:10 | 2750520 Hype Alert
Hype Alert's picture

The pattern looks very familiar. This appears to be an algo testing out its ability to rapidly back away from the market from multiple exchanges when a large, informed order appears. Based on this chart, it looks like HFT is able to withdraw from multiple markets in a few milliseconds.

 

The bid and ask price and quantities mean nothing.  It's really bad, and obvious, in the options.  What you think you're seeing, isn't real and they're doing nothing to fix this.

Thu, 08/30/2012 - 16:12 | 2750524 AcidRastaHead
AcidRastaHead's picture

Yes but can it play Global Thermonuclear War?

Thu, 08/30/2012 - 16:12 | 2750525 Solarman
Solarman's picture

Also note that the miners and the metals stopped getting bid whacked after that day.  NUGT is up 50%  since that day.

Thu, 08/30/2012 - 16:13 | 2750534 superbroker1
superbroker1's picture

Buy Silver?

Thu, 08/30/2012 - 16:18 | 2750553 Schmuck Raker
Schmuck Raker's picture

Probably just coincidental, but I don't recall reading any comments from RoboTrader since Knight blowed-up, either.

Thu, 08/30/2012 - 16:26 | 2750566 apberusdisvet
apberusdisvet's picture

The bots will be ready to pounce tomorrow; they'll try to take silver down below 30; there will be no announce of QE; but on 9/12, it'll be a totally different story.

WE.....MUST......BAIL....OUT.....OUR.... PARTNERS.......IN.........CRIME

Thu, 08/30/2012 - 16:29 | 2750583 MillionDollarBoner_
MillionDollarBoner_'s picture

How many times...?!?

Its not a CRIME...they "deregulated" so its NOT A CRIME...

Geddit!

Thu, 08/30/2012 - 16:36 | 2750604 FRBNYrCROOKS
FRBNYrCROOKS's picture

This was interesting:


Federal Reserve To Crash Markets Before Launching QE3? 

http://etfdailynews.com/2012/08/29/federal-reserve-to-crash-markets-before-launching-qe3-indexsp-inx-spy-tza-gld-faz/

 

Thu, 08/30/2012 - 16:30 | 2750589 youngman
youngman's picture

I scaned the graph...it looks like a bar code with my Apple IPhone....and I got a discount Coupon from Groupon on an Latte at Green Mountain Roasters

Thu, 08/30/2012 - 16:33 | 2750597 cougar_w
cougar_w's picture

A glimpse into --- The Matrix!

Thu, 08/30/2012 - 17:02 | 2750663 Racer
Racer's picture

What 'market'?

Thu, 08/30/2012 - 17:17 | 2750701 Downtoolong
Downtoolong's picture

losing one market-maker algo has almost halved trading volumes

And we're all  suffering from losig that liquidity they told us was so important, right? Nope.

what happens if GETCO ever goes down?

We're one more of about ten steps closer to getting a fair market back.

Thu, 08/30/2012 - 17:32 | 2750750 michael_engineer
michael_engineer's picture

Suspect the volume drop is due to the recent negative attention HFT is getting so the players are scaling back HFT's use.

Can anyone supply a chart confirming this in ways?

Thu, 08/30/2012 - 17:42 | 2750773 sardonical1
sardonical1's picture

Just more typical fear mongering from ZeroHedge.

Thu, 08/30/2012 - 18:00 | 2750812 Mugatu
Mugatu's picture

Sardonical1, is your picture a horse or an ass?

Thu, 08/30/2012 - 18:48 | 2750904 Pubcoceo
Pubcoceo's picture

You're probably the Econ prof who gave me a D on my paper entitled self induced high velocity hyper inflation

Thu, 08/30/2012 - 18:56 | 2750920 knukles
knukles's picture

Krugman's mentor

Thu, 08/30/2012 - 22:03 | 2751325 Mike in GA
Mike in GA's picture

sardonical1 "Just more typical fear mongering from ZeroHedge."

ZH is THE ONLY website that provides this type of cutting edge INFORMATION free of charge. I, for one, GREATLY appreciate the education I get here.  Much of the info provided happens to be negative and paints a grim picture of the state of so-called 'free markets' in the US but "typical fear-mongering" is NOT an appropriate description.  You're merely shooting the messanger for the message.  Tyler's scoops are usually WAAAY ahead of the herd and provide well thought out analysis that - more often than not - is not only dead right, but prescient enough to qualify as brilliant.

Thu, 08/30/2012 - 18:00 | 2750816 Imminent Collapse
Imminent Collapse's picture

How does all this stay working?  It is amazing how many balls are in the air and are still not fallilng.  I wonder how long it can continue?

Thu, 08/30/2012 - 18:53 | 2750913 Michelle
Michelle's picture

It's the NYSE RETAIL LIQUIDITY PROGRAM, STUPID!

Geez, did everybody forget that Knight's algos blew up because of it????

Thu, 08/30/2012 - 19:06 | 2750954 orangegeek
orangegeek's picture

More recently, lower volume on higher prices has been so blatant, it's a joke.

 

http://bullandbearmash.com/chart/dow-jones-industrial-average-daily-augu...

 

A weekly version of this shows lower volume on higher prices since mid 2010.

Thu, 08/30/2012 - 19:55 | 2751085 flaunt
flaunt's picture

Who the fuck hyphenates the phrase "put to death?"

Thu, 08/30/2012 - 20:50 | 2751191 chinaboy
chinaboy's picture

the SEC will do everything it can to drag the feet. For the rest us, the market is no longer a market.

Fri, 08/31/2012 - 00:55 | 2751565 Antifaschistische
Antifaschistische's picture

the lack of volume is the key to high prices.  Where supply of shares are effectively constrained as the Funds buy/hold.  Those share are not truly part of the market supply even though they are part of the market inventory.  The more they hold, the fewer available shares there are to lubricate true volume.   This Ponzi effect allows for more manipulation of the price...which is desired because it maximized the net portfolio value of the funds...even though the liquidation value is no where near the market price....they get to pretend that it is....until the end, when selling volume overwhelms the currently shallow supply pool.  There's not enough savings to keep prices inflated at that point.   That point isn't hear yet and will that be a slow painful boomer retirement driven death or will it be a single catastrophic event (natural or otherwise).   We will one day know.

Fri, 08/31/2012 - 04:11 | 2751721 Coldfire
Coldfire's picture

The tape is a masterpiece. Or a cartoon.

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