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Presenting The "Rise Of The HFT Machine" - Visual Confirmation How SkyNet Broke The Stock Market On US Downgrade Day

Tyler Durden's picture


Zero Hedge has not been focusing much on the topic of our broken equity markets recently because if by now, following over three years of coverage, someone is not aware just how fragmented, manipulated and largely broken the market truly is, they never will. Yet every now and then it worth reminding readers who may have stumbled on this blog recently, just how bad things are in graphic format. Our friends at Nanex, who are by far the best forensic analysts of everything that is busted with the US stock market, have completed a masterpiece analysis showing the churning (packet traffic) in the various fragmented US market venues, from the NYSE to the Nasdaq to BATS and so forth, on a daily basis beginning in January 2007 and continuing through today. While the "rise of the HFT machine" over the past 5 years, following the adoption of Reg NMS, will hardly be a surprise to most, what is stunning is the first animated confirmation of the market terminally breaking on August 5, 2011, the day the US was downgraded, an observation that first was made right here on Zero Hedge. Which begs the question: what really happened in the stock market on August 5, 2011 when the US was downgraded to AA+, when everything literally broke, who is intervening constantly in the stock market, and why are they doing so via various HFT intermediary mechanisms?

Note the insanity that begins on August 5, 2011:

Chart: Nanex
Your rating: None

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Tue, 02/07/2012 - 00:21 | 2132927 Vendetta
Vendetta's picture

evil minds that plot destruction


Mon, 02/06/2012 - 17:45 | 2131989 VelvetHog
VelvetHog's picture

Symptom of The Universe

Mon, 02/06/2012 - 18:00 | 2132056 TheFourthStooge-ing
TheFourthStooge-ing's picture



Mon, 02/06/2012 - 16:36 | 2131692 Motley Fool
Motley Fool's picture

What a brilliant .gif :D

Thanks, Tyler.

Mon, 02/06/2012 - 16:37 | 2131696 Rastadamus
Rastadamus's picture

If it's fire....... LET IT BURN!!!!!

Mon, 02/06/2012 - 17:51 | 2132015 Zero Govt
Zero Govt's picture

Yeah maybe it's the markets turning to Hell

Burn MF'er Burn

..anything and everything does around New York bwankers ..weird

Mon, 02/06/2012 - 16:51 | 2131698 I should be working
I should be working's picture

You know what else might explain what was broken on downgrade day?

The fact that the announcement was on Friday after trading stopped, when the market went berserk 2 days earlier.  S&P clearly leaked the downgrade in advance (either that or Obama's admins did it once they were served).  The public announcement after trading was stopped for the weekend could not have been better engineered to start a market crash.  Big players knew in advance and profited by going short on the market.  

I forget how many points exactly the DOW was down the following Monday, it was at least 500. What I would like to see is an analysis of the short interest in the market starting the Tuesday before the downgrade until the Monday after the announcement.  How this slipped under the radar is beyond me, the WSJ did a tiny piece about an investigation over insider trading, but the whole thing disappeared.

Mon, 02/06/2012 - 17:33 | 2131941 rosiescenario
rosiescenario's picture

Well the guys at the SEC are glued to the Mexican midget wrestling porn and just do not have the time to look at what is happening in the market....

Mon, 02/06/2012 - 20:11 | 2132404 sun tzu
sun tzu's picture

Some people think we need to hire more SEC regulators to watch porn

Mon, 02/06/2012 - 16:41 | 2131707 fnordfnordfnord
fnordfnordfnord's picture

Maybe eTrade ran a commercial that day and got everyone to join? Sort of like when AOL unleashed their hoardes upon USENET*

* http://catb.org/jargon/html/S/September-that-never-ended.html

Mon, 02/06/2012 - 16:43 | 2131710 navy62802
navy62802's picture

My guess ... someone on the inside made a shit load of money in those chaotic days.

Apparently the plan worked beautifully, as we are still here six months or so later trying to figure it out.

Mon, 02/06/2012 - 16:44 | 2131716 zilverreiger
zilverreiger's picture

Does anybody have a legend or scale please? 1500 * what?

Mon, 02/06/2012 - 16:45 | 2131721 Everybodys All ...
Everybodys All American's picture

I believe that is the time of the day. Military time.

Mon, 02/06/2012 - 16:49 | 2131739 Cognitive Dissonance
Cognitive Dissonance's picture

I think he's asking about the vertical scale, not horizontal.

I have no idea.....other than knowing that 1500 is three times greater than 500 and 10 times greater than 150.......the apparent average when the movie (.GIF) started. :>)

Mon, 02/06/2012 - 16:54 | 2131776 hack3434
hack3434's picture

Quotes/bids per milli/microsecond?

Mon, 02/06/2012 - 16:52 | 2131763 JohnG
JohnG's picture

Quotes per second.

Mon, 02/06/2012 - 16:53 | 2131772 JohnG
JohnG's picture

Probably in thousands.

Mon, 02/06/2012 - 16:44 | 2131717 VonSalza
VonSalza's picture


Mon, 02/06/2012 - 16:44 | 2131719 falak pema
falak pema's picture

TD : Some time ago ZH posted a thread where it said that HFT was under regulatory investigation and thus a THING OF THE PAST. I remember clearly that ZH became famous for having being the first blog to denounce these high powered shenanigans on the Net. 

I assumed tht it would end; this legal action would take away this fundamentally flawed technique giving unfair advantage to TBTF parties on both sides of the pond and now international practice. 

Now your current post shows this was just false mirrors and pseudo regulatory procedure, once more, left hand operation by regulators. 

AM I right or have I missed something?

Mon, 02/06/2012 - 16:49 | 2131751 GeneMarchbanks
GeneMarchbanks's picture

70% of trading is HFT, how you gonna stop it?

Mon, 02/06/2012 - 16:55 | 2131765 falak pema
falak pema's picture

rhetorical if left unregulated. Regulating GS on Greek swaps is like swapping punches with world champ in his training camp...you get black eye.

Mon, 02/06/2012 - 17:02 | 2131815 GeneMarchbanks
GeneMarchbanks's picture

Who's going to regulate? These fine people:


Mon, 02/06/2012 - 17:04 | 2131821 falak pema
falak pema's picture

the same who  put them behind bars; the USA government has all the instruments but not the will. Nuance!

Tue, 02/07/2012 - 00:38 | 2132959 Vendetta
Mon, 02/06/2012 - 16:50 | 2131755 Tyler Durden
Tyler Durden's picture

Alas, we put a modicum of faith that the US regulators may for once do their job. We were fatally wrong to escape our usual cynical mindset.

In other news, remember when the Fed was investigating Goldman for those Greek currency swaps? That was a damn fine investigation...

Mon, 02/06/2012 - 17:21 | 2131897 NotApplicable
NotApplicable's picture

That'll teach ya to mainline Hopium!

Mon, 02/06/2012 - 17:51 | 2132016 slewie the pi-rat
slewie the pi-rat's picture

boy!  i'll tell ya, tyler! 

brownie did a helluva job there, didn't he?

Mon, 02/06/2012 - 22:54 | 2132753 JW n FL
JW n FL's picture



Eat the Rich!


The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.



They have been eating You! and Yours!! for GENERATIONS!!!

Mon, 02/06/2012 - 21:48 | 2132602 Everybodys All ...
Everybodys All American's picture

and Lloyd Blanklook himself.

Mon, 02/06/2012 - 16:45 | 2131723 Cognitive Dissonance
Cognitive Dissonance's picture

Someone should alerts the frogs that the water temperature is near boiling.

Time to exit stage up.......and out.

Mon, 02/06/2012 - 22:55 | 2132758 JW n FL
JW n FL's picture



Eat the Rich!


The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.



They have been eating You! and Yours!! for GENERATIONS!!!

Mon, 02/06/2012 - 16:46 | 2131726 AldoHux_IV
AldoHux_IV's picture

With the retail investor out of the equity market, at least we now have a visual representation of the perceived liquidity in the market.

Mon, 02/06/2012 - 16:46 | 2131727 LouisDega
LouisDega's picture

I just got back from pinching a loaf. Let me check the markets. I will be back

Mon, 02/06/2012 - 16:47 | 2131734 Id fight Gandhi
Id fight Gandhi's picture

People still need reminding of this.

Likely nothing will be done until it crashes hard

Mon, 02/06/2012 - 17:05 | 2131825 blu
blu's picture

And nothing will be done after it crashes really hard, either. HFT will then be the only pulse left in the monster. They keep it alive to give CNBC something to blather about is the only reason.

Mon, 02/06/2012 - 16:47 | 2131735 Jason T
Jason T's picture

I don't even know where to begin trying to understand this.. wtf is going on out there?

Mon, 02/06/2012 - 16:48 | 2131743 Cheesy Bastard
Cheesy Bastard's picture

Yup, it looks like someone threw gas on the fire on Aug. 5.  Upon further reflection, that is what actually happened.

Mon, 02/06/2012 - 16:50 | 2131744 _ConanTheLibert...
_ConanTheLibertarian_'s picture

Looks like an ET invasion picked up by SETI. Mars bailout coming?

Mon, 02/06/2012 - 19:18 | 2132265 ChrisFromMorningside
ChrisFromMorningside's picture

It's the "Wow!" signal. As in "Wow! Better get the hell out of these markets before they blow!"

Mon, 02/06/2012 - 16:49 | 2131745 ghostfaceinvestah
ghostfaceinvestah's picture

Speaking of volume

Mon, 02/06/2012 - 16:52 | 2131748 LouisDega
LouisDega's picture

Yea, , Its off the lows alright. That analysis is on da house

Mon, 02/06/2012 - 16:49 | 2131750 Conax
Conax's picture

This is what I love about ZH- that is a perfect illustration of market swamping HFT and a reminder that the downgrade really was our Waterloo. Big funds have rules about creditworthiness that forced the banking institutions to keep the 'market' alive via millions of tit for tat trades.. is that about it?

Trying to understand here.

I always thought a small transaction fee was a good idea, now I'm pretty sold on it.


Mon, 02/06/2012 - 17:56 | 2132037 slewie the pi-rat
slewie the pi-rat's picture

that will be 5 cents, please

Mon, 02/06/2012 - 18:42 | 2132179 Conax
Conax's picture



Uhh, I'll have that nickel tuesday,

or would you like a check?


Mon, 02/06/2012 - 16:50 | 2131757 PSEUDOLOGOI

I wonder what sound(s) or song you'd get if you fed these charts into sound generating software.


Sort of the tune of the market...


And don't tell me it's life support machine sounds... LOL

Mon, 02/06/2012 - 16:59 | 2131804 blu
blu's picture

it sounds just like a train wreck

Mon, 02/06/2012 - 17:54 | 2132027 Buttertooth
Buttertooth's picture

There is a guy who is "playing" tree rings.  He uses a laser to read the subtle differences in density and color and the information is converted into notes on a piano.  I wish I could remember the name....

Tue, 02/07/2012 - 01:40 | 2133029 Cathartes Aura
Cathartes Aura's picture

here ya go Buttertooth:

Created by German artist Bartholomäus Traubeck, Years takes the annual rings that you find in cross-sections of trees and converts them into piano music.


good vid showing the machine "reading" the rings. . . thanks!

Mon, 02/06/2012 - 19:41 | 2132330 MachoMan
MachoMan's picture

I'm thinking something kind of like bohemian rhapsody...

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