SkyNet Wars: How A Nasdaq Algo Destroyed BATS

Tyler Durden's picture

Following the May 2010 flash crash, the investing public hoped that as part of its "exhaustive report", the SEC would find and hold responsible the various components of a broken market structure, be it HFTs, ETFs, stubbing and sub-pennying algorithms, and all the other knowns and unknowns we have covered over the years. Instead, in what would prove to be a move of cataclysmic stupidity (if sadly understandable - the SEC, like everyone else "in charge" is used to dealing with a gullible and simplistic public, which has no access to the real data and analysis, and whose opinion could be easily manipulated, at least until now), the regulator blamed and scapegoated it all on a Waddell and Reed trade (we wonder just what the quid pro quo was to get the asset manager to roll over and take the blame despite protestations to the contrary, at least in the beginning). The result was that the same investing public realized that market structure is so corrupt, and so robotically mutated, there is no place for the small investor in this broken market. Last week's BATS IPO fiasco merely confirmed this. And as usual, BATS (whose chairman Ratterman has just been demoted even as he stays on as CEO) decided to take the "passive voice" approach and blame it all on a faceless, emotionless, motiveless "software glitch". Just like that perfectly innocuous BSOD we have all grown to love and expect any minute. Only it wasn't. To get to the bottom of what really happened, in a world in which the SEC is far more interested in finding the latest discount internet porn stream than actually protecting the small investor, we relied on our friends from Nanex, who have time and again proven to have a far better grasp of what it is that really happens in the market than virtually anyone else. And if Nanex' interpretation of events is correct (spoiler alert - it was not a "software glitch") it takes SkyNet wars from the silver screen and to a trading terminal near you. What happened is that a malicious, 100% intentional Nasdaq algorithm purposefully brought BATS stock to a price of 0.00 within 900 millisecond of the company's break for trading! This is open SkyNet warfare.

The fact that the BATS exchange itself halted just prior to break only facilitated this (and could potentially be a case of malicious sabotage). But one thing is clear - as the data below shows, there is no doubt that an Intermarket Sweep Order originating on the Nasdaq exchange was unleashed to make a mockery out of BATS. It succeeded, and in doing so may have destroyed not only BATS chances for going public, but ultimately ruined the firm's credibility. Who would stand to gain from this? Why exchanges such as Nasdaq and NYSE of course, which already are scrambling for revenue, and in the aftermath of the failed Deutsche Boerse merger, it means that any dirty trick in the book to extend and pretend is now fair game. Such as the algo that crashed BATS.

We fully expect that in keeping with its galactic stupidity of yore, the SEC will do nothing to address this situation which is nothing short of exchange warfare using rogue and malicious algorithms as agents of war. Further, in doing so, it will once more destroy any latent "credibility" that the stock market may have created with the retail investor following the 4 month ridiculous and centrally planned melt up (we doubt there is much faith to lose - as we pointed out last week, Joe Sixpack no longer wishes to be the big boys' patsy). Oh well - if the market and its regulators wish to make "investing" solely a provenance of central banks, ultra fast algorithms, and Primary Dealers, so be it. They can play in their sandbox all they want. Just don't expect the trillions in "money on the sidelines" but mostly in savings accounts, where it may earn 0% interest, but at least it won't be vaporized courtesy of some vacuum tube, to ever come back to stocks. Ever.

As for the forensic reconstruction of what truly happened to BATS, below we provide a spreadsheet (the excel can be downloaded here), of every single trade post the BATS IPO.

 

In Nanex' own words:

Start at line 192 -- these weren't stale quotes from Nasdaq by any means. These were highly accurate and precisely updated quotes from a sophisticated algorithm programmed to take BATS's price to 0. You can see the BATS trades just before the algo on Nasdaq starts up. In other words, after the BATS trades print, everything is fine (except of course for BATS' system). Nasdaq's system is just fine. So is CQS (the SIP). That algo did its job with the precision of a master watch maker.

 

The data and charts make this abundantly clear. The trade(s) that shut down Apple would be considered stale/bad quotes. But not those 500+ trades on Nasdaq.

Nanex' verdict:

It had to be someone who's machines are directly connected to Nasdaq because they used Intermarket Sweep Order orders.

And visually:

Look at the timing! There are many quotes lasting less than 1/10,000 of a second in there! (10 quotes/millisecond). And note the almost perfect 45 degree line in log-scaled blue line below.

 

Had to be from same algo. Way too perfect. Way. Too. Perfect.

 

If BATS' system hadn't failed, this algo would have likely been obscured.

Alas, BATS did fail, and the result was last week's epic embarrassment for BATS which already cost the CEO his chairmanship, and the firm hundreds of millions in fresh equity, but also which destroyed any hope that the retail investor may be coming back to what is now a permanently and terminally broken market.

 

*  *  *

And For the chart porn addicts, here is a step by step forensic view from Nanex of how a stock exchange is permanently prevented from going public.

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death_to_fed_tyranny's picture

FUCK THE STOCK MARKET! LOSE! LOSE! BUY PHYSICAL METALS!

HoofHearted's picture

 

What happened is that a malicious, 100% intentional Nasdaq algorithm purposefully brought BATS stock to a price of 0.00 within 900 millisecond of the company's break for trading! This is open SkyNet warfare.

kind of like what Blythe does to the PMs???

nope-1004's picture

100% rigged casino.  Why anyone "trades" this farce of a ponzi is beyond me.

Banksters can't produce anything, therefore the only earnings to be had are by outright theft.

Nice life.  Wonder what comes at the end of it?

 

DormRoom's picture

If markets signified in 1010s can be hacked, what happens when the ultimate cascading flash crash occurs.  How epic would it be for a red screen of death on every bloomberg terminal. Can't wait for that black swan to unfold its wings.

 

In the next civilization they will talk about the tower of babel and the HFT black swan when refering to man's hubris of reaching God.  Or in quant speak: the Truth.

Zipf's picture

Can an expert explain the mechanics of ISO orders? Help!

Here's my guess: an ISO order order is placed with exhcange Q for 1000 shares, but only 900 are available at the NBBO, spread across 3 exchanges as per reg NMS.  The 900 get filled at the inside price at the various venues (plus the routing fee) and then (??) does the originating exchange get some discretion in filling the remaining 100 shares across markets?  Where does an SOR fit into all this?

I suspect two bots at play here.  One sets the NBBO, the other sells.  The nbbo drops seeing the Ask hit. The other sees the momentum, and hits the ask again. A two-player feedback loop.  The funny thing is that most bots turn "on" after a day of trading for lack of stats.

BATS says the problem was in the auction mechanism, but the above looks like a problem in circuit breaker logic.

 

Oh regional Indian's picture

Zip, the actual mechanics of this hardly matter anymore.

All the HFT traders know, full well, that Nanex will be all over suspicious trades. They cannot be hidden. Clearly "law" applies differently here and now. But your honor, the machine became self-aware, what could I do???

We are in a terminal (BOOMBERG TERMINAL) situation. Co-located computers went live in India a few months ago. No one is even talking about it here. 

It's BOTwars and we are all best off being spectators. 

Get heavy folks, digital paper burns real easy.

ori

/the-age-of-machines/

The Big Ching-aso's picture

 

 

No one's going 2 jail. That means they're still cheating & stealing. That's why I'm out of the market.

Oh regional Indian's picture

Egg-zactly Big Ching. 

It does make for good spectator sport though, especially from a  vantage point like ZH and comments.

ori

smiler03's picture

Yet more evidence that the US is just about winning "The Most Corrupt Nation on Earth" award. I think Nigeria may be 1st place, just.

Its_the_economy_stupid's picture

"get heavy"

I like it! Gold IS heavy.

Gonna use it. Thanks.

AldousHuxley's picture

history has shown that there is nothing that cannot be hacked.

 

also, interestingly....

Babylon is 50 miles from Baghdad, Iraq

LetThemEatRand's picture

And still the dark stain spreads between
Their shoulder blades.
A mute reminder of the poppy fields and graves.
And when the fight was over
We spent what they had made.
But in the bottom of our hearts
We felt the final cut. 

AldousHuxley's picture

www.youtube.com/watch?v=O8g2Fr7A6-c

 

Doomsday Preppers National Geographic series

 

  • hippies bought underground rocket launch cave designed to withstand direct nuclear attack
  • old men made a survival cave out of school buses
  • retired ex marine prepping greenhouse and "spider holes" all over the place

 

I think market bottom is in. doomsday stuff has gone main stream. time for contrarian play and buy some calls.

Things that go bump's picture

Show trials and boiled hemp is my guess.  

eatthebanksters's picture

YOU'LL GET BETTER ODDS IN VEGAS...

DavidC's picture

"Nice life. Wonder what comes at the end of it?"

A crash.

DavidC

Triggernometry's picture

Damn it Nanex, you're chart porn is so dirty good...

putaipan's picture

i concur.  now, if it the folks at the sec were as into it as tranny midget lesbians....

ACP's picture

Less than one second is probably a world record for destroying your competition.

If the SEC doesn't give a shit, Hell, time to get hooked up and fuck with people.

Terminus C's picture

Oh, they will care if YOU do it.

ACP's picture

IF I do it contrary to their ultimate objectives...

(which are commodities down, overpriced stocks up)

I think it's time for a "World's Baddest Ass Algo" competition.

Goal: Who can ramp AAPL to $1000 a share the fastest.

Winner gets a seat in Congress.

Last place is Jon Corzine's lawyer's personal assistant.

Who's IN???

 

j0nx's picture

Anyone who bought silver or gold in the past 12 months has had their fucking asses handed to them. I bought silver this time last year for $39 plus spot charge and have lost my ass on that purchase. Thankfully I bought it to have to trade if TSHTF and not to make money on. There is no safe harbor now in metals or paper. Shit is wayyy too manipulated and volatile in metals to make it a good investment for anything other than the very long game and for hedging against total economic destruction in which it will probably do you no good anyway because you'll be too busy fighting for your life in this multi-cultural utopia that liberals have created for you.

johnQpublic's picture

you should have dollar cost averaged from around eight bucks...my dollar cost average is right around 17.50 an ounce

and thats not counting the paper silver which sold itself at 45 bucks while i was on vacation

which i bought back at 27.45

physical for an uncertain future and some paper to play with

(because i like gambling and the closest casino is lame)

Atomizer's picture

Nice overview Tyler. Wonder how Facebook IPO will look.

Stoploss's picture

I have the new ticker..

 

FAD

GAAP is crap's picture

'Wonder how Facebook IPO will look.'

 

Are you suggesting this may happen to Facebook in an IPO?  That would be messing with the CIA's playground. 

Atomizer's picture

If retail is not playing, Wack a mole becomes the only alternative.

Looky SEC, new Youporn releases to cream your cubicle mates piehole.

eatthebanksters's picture

This is the CIA's playground...and the NSA and....

JOYFUL's picture

End the ZOG....

 partial listing of identified Mossad agents along with their dates of birth. They do not have American Social Security numbers and do not pay American taxes.

Gadi Regev 12/17/1975
Betzalel Yanay 9/4/1978
Eyal Artzel 5/27/1977
Sharon Rotem 8/12/1977
David Susi 1/9/1975
Dana Sasson 8/10/1980
Morin Biton 7/14/1980
Gilad Lifschitz 9/17/1978
Maya Maimon 12/26/1978
Marco Fernandez 4/13/1977
Keren Touyz 8/20/1978
Nofar Bahidi 21/2/79
Michal Gal 8/10/1979
Ophir Baer 11/11/1956
Dilka Borenstein 3/15/1979
Michael Calmanovic 9/6/75

http://occultsecrets.weebly.com/1/post/2010/02/public-service-announceme...

francis_sawyer's picture

"Just like shootin' WOMP RATS eh kid?"

POpatriot's picture

If an algo can manipulate a stock with such ease why would the programmer want to make it so obvious?  At least be discrete about it and try to have it go on for the next 30 years to keep the gravy train rolling.

Tanking BATS only draws attention.  If you can manipulate the market why would you want that?  Something went wrong here and someone royally screwed up.  How hard is it for the SEC to see where the quotes are coming from? 

Dr. Engali's picture

You're assuming the SEC will even begin to look. Shit they probably don't even know where to begin to look. It will be swept away like MF Global.

tickhound's picture

The SEC serves an important function in the system... It's there to make sure you never get to see too much.  It protects the system more than it will ever protect 'us'... Vital to any scheme, particularly once the sceme turns desperate.

It is the 'necessary' buffer between 'us and them.' 

old naughty's picture

Haven't you heard? Nothing is needed to be hidden in plain sight anymore.

So what if a few IPO failed; or a few cronies dumped; its all part of the game, played according to the agenda.

They dare you cannot touch them.

reading's picture

I think they made the point that had the system not failed just prior to the algo it would have remained obscured...it wasn't supposed to be visible. Good luck getting the SEC to look, that isn't the kind of chart porn they are into.

reading's picture

I think they made the point that had the system not failed just prior to the algo it would have remained obscured...it wasn't supposed to be visible. Good luck getting the SEC to look, that isn't the kind of chart porn they are into.

POpatriot's picture

So which party do you think screwed up?

Koffieshop's picture

Does it matter? Anybody who is running HFT shops to fat-finger the market is a criminal. Whether or not they screwed up and crashed something is secondary.

tekhneek's picture

Wouldn't it blow if he started with x-- instead of x++ and that's what fucked this whole thing up?

PC Load Letter's picture
I must have, I must have put a decimal point in the wrong place or something. Shit. I always do that. I always mess up some mundane detail.
thatthingcanfly's picture

I sentence you to 20 years in a federal pound-me-in-the-ass penitentary.

greensnacks's picture

This looks vaguely familiar to the Focus Shares ETFs launched about a year ago. It's as if someone doesn't like competition. Same deal. New product launches and the first few trades tank the security 98% ... times 10.

 

ETFs plunge triggers ‘flash crash’ memories

By Agency Reporter   Saturday, 2 Apr 2011

Ten new exchange-traded funds briefly plunged early Thursday before the trades were canceled, triggering memories of last year’s “flash crash.”

According to a report by Bloomberg, Nasdaq OMX Group Incorporated said it cancelled trades in 10 new ETFs sponsored by Scottrade affiliate FocusShares, some of which plummeted by as much as 98 per cent at one point.

The new FocusShares ETFs started trading on Wednesday and are trying to compete with more established funds by offering lower costs for broad-market ETFs.

Regulator-mandated trading pauses that aim to protect the securities and investors from trading errors cover thousands of stocks and hundreds of ETFs, but were not in place for the new products.

They were originally put in place after nearly $1tn in market capitalization was wiped away in a few minutes on May 6.

“I certainly don’t think this should shake investor confidence because it is such a small glitch compared to the flash crash,” associate professor of finance at Georgetown University’s McDonough School of Business, Mr. James Angel, said.

“But it is a warning that all technological systems eventually break in some manner, and we should be prepared for when they do.”

Angel noted “something went wrong” with the new ETFs, which are not among the securities covered.

Nasdaq OMX cancelled trades in all of the ETFs that were more than 10 per cent lower in price than where they trading previously, calling them “clearly erroneous.”

A FocusShares spokeswoman said a mispricing by a market maker triggered the faulty trades.

The Focus Morningstar Healthcare ETF fell as low as 60 cents after trading as high as $25.33, while the Focus Real Estate ETF dropped to $1.48 from $25.50.

http://archive.punchontheweb.com/Articl.aspx?theartic=Art201104022244018

 

ChrisFromMorningside's picture

I love how they always bring out some stupid shill from a business school to remind everyone that everything is just fine, nothing to see here.

Not the first nor the last time we see an algo like this strike.

nestle's picture

all I see are some lines, little triangles and a few circles.

All seem very bullish for AAPL.

UP Forester's picture

For some reason, it's a lot scarier looking than AsteroidsTM....