The Latest In The Broken Market Chronicles: Explaining Last Friday's Ridiculous Market Action

Tyler Durden's picture

Submitted by Nanex

Reg NMS Has Been Rescinded!
HFT no longer bound by Trade Through Rules

On October 7, 2011 beginning at 12:03:39.950, a massive surge of quotes in SPY, IWM, DIA and other market index ETFs, along with many symbols in the Dow Jones Industrial Average, caused an overload in CQS that lasted several seconds. This, in spite of a 25% increase in CQS capacity just 3 days earlier to a whopping 1.25 million quotes/second. During this event, Nasdaq quotes into CQS became delayed at least 800 milliseconds (800,000 microseconds). Other exchange quotes feeding into CQS also became delayed.

We found many symbols with trade executions that appeared several hundred milliseconds before the quotes that could have produced them. How does one ensure trade-through price protection if the price being protected hasn't even occurred yet?

Given the evidence from this event, we have to conclude that Reg NMS must have been secretly rescinded: at least the part that talks about trade through price protection, the NBBO (why is it still being computed?), and the importance of keeping the feed affordable.

From the data we have looked at so far, we estimate that CQS capacity needs to be increased to at least 6 million quotes/second in order to avoid becoming overloaded.  This would be the capacity for a normal trading day. The capacity to handle a surprise news event, would of course, need to be much, much, higher. 

To be clear, we are not advocating increasing CQS capacity at all, mostly because all this extra quote traffic is pure non-sense and has no value what-so-ever. It's mostly coming from new HFT, and interactions between HFT algorithms trying to out fool each other. Something that a regulator doing their job would have put a stop to a long time ago.

The next time the market receives a shocking news story, or undergoes unusual stress, the only traders who will have accurate market prices will be those co-located at the exchange. Just like on May 6, 2010.


Below is a 5 millisecond interval chart of SPY showing Nasdaq trades (circles) and quotes (shaded vertical lines). The distance between the points labeled A and a is the minimum time that trades came ahead of quotes.

Below is a 5 millisecond interval chart of SPY showing quotes from EDGE (blue) and Nasdaq (black). The distance between the points labeled A and a is the approximate amount that Nasdaq quotes were delayed relative to EDGE.

The chart below shows the quote rate per exchange going into CQS over the same period and interval as the charts above. The bottom panel shows each exchange's quote rate as a percentage of all quotes going into CQS. You can see the wild oscillations in the red line (Nasdaq) correspond to the dribbling of quotes in SPY above (Between 12:03:40.050 and 12:03:40.800).  Around the 12:03:40.800 mark, Nasdaq quotes suddenly surge accounting for more than half of all quotes going into CQS. If you look closely, you will see other exchange quote rates also oscillate at this time in a round-robin fashion.

Below is a close-up of of the chart above, with a few exchanges removed for clarity.

Below is a 5 millisecond interval chart of IWM showing quotes and trades from BAYS (purple) and Nasdaq (black). Here, Nasdaq quotes are delayed, but so are the trades.

Below is a 5 millisecond interval chart of IWM showing quotes and trades from ARCA (red) and Nasdaq (black). You can see ARCA trades (red circles) are coming before the quotes (red vertical lines) that executed them.


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Sudden Debt's picture

I wonder if I could download a freeware version of the software package and rigg the market myself.


unky's picture

I think you would also need several high speed servers and a hell of a internet connection bandwidth (located near the exchange)

s2man's picture

Hmmm.  How about a telecom/internet-backbone data center.  Does it run on UNIX?

Could lose my job, though.  They caught some guy running SETI on company servers and he was toast.  He didn't even get the three-strikes rule.  hehehe

fuu's picture

How many machines was he running it on?

I managed to get all the slaes, shipping, and transpo machines running SETI back in 2000. I ran into one of the IT guys a year later and he mentioned they thought they had finally gotten them all. I told him he must have missed a few because I was still getting results.

Good times.

s2man's picture


I don't recall how many boxes he put it on.  Probably just his little group, back then.  We have consolidated all those little groups into one big department.  I've got access to a couple thousand boxes, now.

Sudden Debt's picture

I still have my first Atari in the attick if I would help you guys out :)

New_Meat's picture

I have a 1200 baud modem (some of us remember how fast those mothaz were) to add to the mix. - Ned

bob_dabolina's picture

Remember this? Goldmans lawyer Freudian slipping the admission of having an algo that can manipulate the market. 

The problem is that in their case against this guy, Sergey Aleynikov (a Russian immigrant no less, how James Bond is this getting?)the bank's lawyer made the statement that this “raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.”

Boy-oh-boy did I think that was precious.

New_Meat's picture

I have the "unfair ways" thingie printed on a small card with other classics.

fuu's picture

We were starting to get worried about you!

TheFourthStooge-ing's picture

I wonder if I could download a freeware version of the software package and rigg the market myself.

I think you can download a trial version. It's called BucketShop Pro.


SheepDog-One's picture

I hope they build themselves into a massive meltdown.

DoChenRollingBearing's picture

*Excuse Rant*


On and on and on and on and on and on this BS goes!  Where the Hell are the regulators!?  Haven't they had their fill of online porn yet?!

This has got be to be COMPLETELY ILLEGAL (but a Bearing != a lawyer).

Pardon the intrusion on your turf here SheepDog.

/Rant off

DCFusor's picture

DoChen, it's more like taking advantage of a broken collection/reporting system.  In fact, I see these rogue trades (or whatever you wanna call them) even on my low bandwidth TD ameritrade software on level II data - you see these dots WAY outside the current bids/asks -- and you know the future...or sometimes, the past.

It's not illegal for people to trade among themelses off the exchange far as I know, I'm no lawyer either.  Else how would all that "dark pool" and "no one knows who holds howmany CDS's sold by who" stuff be going on still.

Note, not one word in any of the regulatory reform on those things -- people (even here) need to learn to look for what's NOT there to get to the truth of who owns who and where our laws come from.


DoChenRollingBearing's picture

Ignorance != Bliss, DC.  Thanks for better info than I have.  All of this just LOOKS sleazy and illegal...

Good point about the dog not barking.  But, hey I took ONE law course in college because it was required for my business major, LOL...

RobotTrader's picture



Longacre Fund just announced that they got "Amaranthed"....

Let me guess....

They were heavily invested in gold stocks.


SheepDog-One's picture

Or of your old favorites.

RobotTrader's picture

Probably TRX, one of the all-time "hope" favorites by guys like you.

s2man's picture

Someone hit them with ancient Aztec grain?

Disclosure: I own amaranth.  But its for eating. I wouldn't waste it on a wedding, let alone a MF.

The scientific term would be Amaranthaceaed

InconvenientCounterParty's picture

Maybe it was this from the funds strategy statement?

"We periodically hedge interest rate exposure by going short government bonds."

Oh well... If they had phyz gold at least the lawyers will get paid.

hedgeless_horseman's picture

Robust markets.  What could possibly go wrong?

redstuffer's picture

What a joke, and the working stiffs with 401 k mutual fund indexed funds that trade after 12 noon on friday don't execute until tomorrow. wtf

andybev01's picture

"I'm Zaphod Beeblebrox the first, my father was Zaphod Beeblebrox the second, my grandfather was Zaphod Beeblebrox the third and so on...there was an accident with a contraceptive and a time machine."

The Restaurant at the End of the Universe

Withdrawn Sanction's picture

"The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."

This is from the SEC's website. No really.... it is. You just cant make this stuff up.

Actually, in a wierd way, it's good. Anything that undermines respect for this laughingstock of an organization is all to the good.

FunkyMonkeyBoy's picture

When your measuring stick is unlimited amounts of Jew Confetti, numbers are meaningless.

Back to work slaves, there maybe an extra shred or two of jew confetti in your wage packet this month.

RobotTrader's picture

What do Jews have to do with financial markets?


So why not save those type of comments for a Nazi message board or something?

Cynical Sidney's picture

"What do Jews have to do with financial markets?" -RobotTrader

One ought to give this question some thought before one comes to quick conclusions

bob_dabolina's picture

The term "jew confetti" predated the Nazis and was a euphemism for the hyperinflation created during the Weimar Republic in which the financial system was dominated by Germans of Jewish persuasion. 

And I guess you can argue that Jewsish people have nothing to do with financial markets except if you look at the majority of people by religous orientation that make up the industry. Take for example the make-up of the Federal Reserve: Bernanke, Yellen, Kohn, Raskin, etc

If you look at the current policies (printing money and dollar depreciation), the term while not sympathetic, isn't entirely innapropriate.

Note to self's picture

Think that's cause non-jews don't give a shit, are stupid, or both?


bob_dabolina's picture

Looking at the world in its current state I would say that everyone is stupid and doesn't give a shit. It takes something special to have the world as fucked up as it is.

Note to self's picture

well touche' to you, but please don't make it worse by reinforcing (by suggestion) ugly stereotypes that have led some of our even-stupider-kin to do bad things


lizzy36's picture

Yes bernanke is a jew.

Alas, Hank Paulson, Tim Geithner, Jamie Dimon, Vic Pandit, Brian Moynihan all non jews.

Pretty easy to scapegoat a race, a political party, a religion, a people, than to ask the question who does "US versus Them" ultimately serves.

RobotTrader +1000


bob_dabolina's picture

No one was scapegoating anyone. 

And none of the people you named print money (wasn't the topic "jew confetti"?). You also left out the bank with the highest price per share, Goldman Sachs (masters of the universe) 

Take a look at this lineup...stacked deep

And as for Hank Paulson "Christian Scientist" doesn't count, in fact it's an oxymoron. The Christian faith and science are in direct conflict with eachother. That "religion" is an elaborate tax shelter for the rich. And have you seen Geithners nose? Sorry that's a Jewish nose, curly hair and Geithner is a German name...closet Jew

Don't be so sensitive.

homersimpson's picture

Um.. Jews run Wall Street.

I'm not for the anti-Semitism here, but let's call a spade a spade: Wall Street is run by Jewish people. Period.

Executioner's picture

What do jews have to do with financial markets? Perhaps you're talking about some financial market from outer space.

There's nothing wrong with the presence of jews, me, or even you Robot, in the financial market. The number of jews in the financial market is a question better left for the sages.

The financial market are rotten. If this is so due to nazis, catholics, vegans, jews or you, Robot, is something that changes nothing (market is still rotten).

BTW, can someone explain to me, why is that everytime a jewish person is/was pointed as the responsible for some wrongdoing, those who notice must be accused of nazism? Besides, what is the definition of "jew" nowdays? An ethinic group? A religious group? As an ethinic group, the true jewish people (the semits) has NOTHING to do with modern jews whose ethinicity is linked to the Khazar Empire (think of a mix of germans, mongols, hungarians, slavs, etc). Those "european jews" share no conection with the ancient Jerusalem inhabitants (semit tribes). Oh and yes, that's just for when someone (and not necessarily a jew, since I don't wnat to be accused of antisemitism by teaching history) plays the "anti-semit card".

Fred Hayek's picture

We now return to your regularly scheduled pogrom.

Seriously. Leave the baseless anti-semitic stuff for some other venue.

s2man's picture

Not that I like it, but I believe that is a reference to the German slang for their worthless, hyperinflated currency in the 1920's.

That said, I am hearing a lot about the pending deflation.  I don't see how, with all the currency they have been printing.  I am betting on hyperinflation.  Long physical PMs.  Short FRNs (very short, at the moment).

Edit: wow. +6 for robot trader.  unheard of.

Saro's picture

Perhaps you should start calling paper money something more relevant to today.

I humbly suggest something like "Bernankonfetti".

rocker's picture

Would it not be better to explain today's. Just who owns all the supply that they need to sell.

   100% Cash and Holding. This is bogus shit and a rigged market.

Short interest increased aqain, is it the only way to make the market go up ? 

Fred Hayek's picture

Gosh, why don't small investors trust these venues? It's inexplicable.

The scum who allow these markets to be run fraudulently might think they're not paying any price for it, that they're getting away with it scot free. But in the small circles within which I travel I know people who aren't nearly ZH'ers or PM bugs who are fed up with the corruption and abject fraudelence and who won't play any more.

augie's picture

not very often you get to use a word like "Rescind." That's one of them 5 dollar words. 

carbonmutant's picture

What's expected of us

It was just a little toy that could only predict one second in the future...

Originally published in Nature

augie's picture

Thank you for posting this.