SkyNet Wars: Presenting The Rogue Algo Responsible For FaceBook's Downfall

Tyler Durden's picture

Back on March 27, following the epic disappointment that was the BATS IPO, we presented a detailed forensic analysis courtesy of Nanex, which demonstrated step by step how a Nasdaq-borne algo may have been the culprit shattering BATS' hopes of ever going public. Fast forward two months later to the most anticipated IPO in recent history, in which FaceBook's even more epic, if not quite as stark, implosion has set back the general public's faith in capital markets decades back. The irony, of course, is that FB didn't do anything that many weren't warning about: it simply plunged which would make perfect sense in a normal world. This in turn was the spark that provoked the public ire - had FB simply doubled since IPO day, nobody would care about what really happened on May 18. Alas, it didn't. And now the lawsuits come. The problem is we don't transact in a normal world, but one dominated by central banks and algorithms - which is why the most pressing question for those who grasp the real new normal is how come in a market as controlled and manipulated as the central bank-dominated venue we have now, was FB stock allowed to plunge? For what may be the actual definitive answer, as opposed to now trite philosophical ruminations on valuation, ethics, underwriter and shareholder greed, we once again go to Nanex, which has caught the perpetrator red handed once again.

Somehow we doubt many will be surprised to learn that the reason FB failed to take off following its break of trading in the low $40s, has everything to do with, you guessed it, another HFT algo, which in those first instants of trading, did something that threw the entire market off: it kept crossing the market, with the Bid surging above the Offer, in the process shocking the entire price-supporting HFT array, designed to build upon upward momentum, resulting in the only other natural outcome: a steep, rapid selloff.

As Nanex' Eric Hunsader tells us: "Turns out just before Nasdaq's quote crossed and became non-firm, one copy of the same quote (crossed) was marked regular, and I think that caused other algos to react and immediately sell off the stock. When that crossed quote from nasdaq appears, bid prices from other exchanges suddenly evaporate and that causes the NBBO spread to explode from 1 cent to 70+cents in 1/10th of a second! Nasdaq's quote started doing this when the stock approached 42.99 -- that effectively prevented the stock from going higher (a few spurious trades right at the open came from BATS for 44 ~ 45 etc, before Nq's quote was in play). So these stupid Algos effectively short circuited the stock for Facebooks IPO! Unreal."

Sadly, for millions of people who were gullible enough to buy into the propaganda, all too real.

Below is Nanex with its traditionally lauradtory forensic analysis that leaves nothing to the imagination:

Did a Stuck Quote Prevent a Facebook Opening Day Pop?


On 18-May-2012, within seconds of the opening in Facebook, we noticed an exceptional occurrence: Nasdaq quotes had higher bid prices than ask prices. This is called a cross market and occurs frequently between two different exchanges, but practically never on the same exchange (the buyer just needs to match up with the seller, which is fundamentally what an exchange does).


When Nasdaq's ask price dropped below its bid price, the quote was marked non-firm -- indicating something is wrong with it, and for software to exclude it from any best bid/offer calculations. However, in several of the earlier occurrences the first non-firm crossed quote was immediately preceded by a regular or firm crossed quote!


During the immediate period of time when the Nasdaq quote went from normal to non-firm, you can see an immediate evaporation in quotes from other exchanges, often accompanied by a flurry of trades. We first noticed this behavior while making a a video we made of quotes during the opening period in Facebook trading.


The reaction to the crossed quote often resulted in the spread to widen from 1 cents to 70 cents or more in 1/10th of a second! It is important to realize that algorithms (algos) which are based on speed use existing prices (orders) from other exchanges as their primary (if not sole) input. So it is quite conceivable, if not highly likely that these unusual, and rare inverted quotes coming from Nasdaq influenced algorithms running on other exchanges.


It is now more than a curiosity that the market was unable to penetrate Nasdaq's crossed $42.99 bid which appeared within 30 second of the open and remained stuck until 13:50. Could this have prevented the often expected pop (increase) in an IPO's stock price for FaceBook?


This also brings another example of the dangers of placing a blind, mindless emphasis on speed above everything else. Algos reacting to prices created by other algos reacting to prices created by still other algos. Somewhere along the way, it has to start with a price based on economic reality. But the algos at the bottom of the intelligence chain can't waste precious milliseconds for that. They are built to simply react faster than the other guys algos. Why? Because the other guy figured out how to go faster! We don't need this in our markets. We need more intelligence. The economic and psychological costs stemming from Facebook not getting the traditional opening day pop are impossible to measure. That it may have been caused by algos reacting to a stuck quote from one exchange is not, sadly, surprising anymore.

Chart 1. NBBO (National Best Bid or Offer) Spread along with Nasdaq quote.
NBBO Spread colored black: bid < ask (normal), yellow: bid = ask (locked), or red: bid > ask (crossed).


Chart 2. Nasdaq's Stuck Bid appears to set a defined ceiling in Facebooks stock price during the first minute of trading.


Chart 3. Close-up showing NBBO along with ARCA quotes (red) and Nasdaq quotes (black = normal, green if non-firm).


Chart 4. Same period of time as chart 3, but showing NBBO and trades from Arca (red circles) and Nasdaq (black circles) for reference.


Chart 5. Note how the spread tightens in all exchanges when Nasdaq Quote goes from Non-firm to normal.


Chart 6. Just before Nq Quote changes to non-firm, a crossed quote from Nasdaq appears and is marked normal.


Chart 7. The next charts are more examples of other exchange prices reacting to Nasdaq's quote changing to non-firm


Chart 8.


Chart 9.


Chart 10.


Chart 11.


Chart 12.


Or, another way of presenting what happened, is the following video.

Hunsader's explanation of what you are seeing:

Watch Nasdaq's quote (first box to appear - 10 o'clock). Note the crazy bid prices are higher than the equally crazy ask prices. After trading opens, Nasdaq's quote will start turning red when it's no longer eligible to set the NBBO. Watch how quotes on the other exchanges react wildly causing the price to evaporate.


Each box represents one exchange. The SIP (UQDF in this case) is the box at 6 o'clock. It shows the National Best Bid/Offer. The shapes represent quote changes which are the result of a change to the top of the book at each exchange. The time at the top of the screen is the time of the last quote or trade update in Eastern Time HH:MM:SS:mmm (mmm = millisecond). We accelerate time until the open, and then we slow time down so you can see what goes on at the millisecond level. A millisecond (ms) is 1/1000th of a second. The blink of an eye is about 200 ms.


Note how every exchange must process every quote from the others -- for proper trade through price protection. This complex web of technology must run flawlessly every millisecond of the trading day, or arbitrage (HFT profit) opportunities will appear.

Dear class action suit attorneys - you are indeed quote (sic) welcome.


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Morrotzo's picture

Remind me what the justification for high frequency trading and rigging the game is again, please?

What the hell benefit is this supposed to give the common people, that is, the scant few retail investors who got decapitated by FaceBook?

Colombian Gringo's picture

The justification for HFT is to screw retail investors in favor of the banksters. We live in a predatory capitalist system where a tiny group of  the connected and corrupt eat and steal while the rest of us work and suffer. FB is nothing more than the insiders cashing out, transferring wealth from the connected to the suckers. Disclosure: I am short and enjoying it.

cocoablini's picture

For more forensics. NASDAQ goes radio silent and no audit trail at the beginning. Quotes go into the ozone and come back..?
Not only non-firm and firm but no best price audit. You get what you get when you get.
Some things to think about:
- expectations were a POP so HfT that manipulates stock down allows tbtf banks to collect FB stock on the cheap fast. Plus other Algos sell as they did in flash crash. But stock had no POP as the Algos were fast but dumb.
-Zuckerberg sold a billion bucks of shares. Would he do that expecting a POP? There are some QUESTIONS to be asked about that trade. But, then again, the markets are a criminal playground and retailers should protest and just go to cash-which they are monthly.

Sadly, stock market is just a way to manipulate your equity holdings higher to make your books look better. It's a money supply device- not a market- a way to get around printing and fractional reserve rules

markmotive's picture

Ever hear of John Law and the Mississipi Bubble? It's like looking in a mirror...


Manthong's picture

Can’t help but think of an analog..

“Following their leader to the end”

Ahmeexnal's picture

Using "capitalism" to describe the current state of affairs in Wall Street (or any other of the world's markets) is like using Stalin's Gulags or Pol Pot's killing fields as a poster example of socialism.

Careless Whisper's picture

I appreciate the in depth analysis, I only wish I could understand it.

For now, I'll go with the drinking with bob explanation;

flacon's picture

I too am tired of the inclusion of the term "capitalism" to describe this hideous beast of a system we have. 

Soul Train's picture

Let me remind you something. Next time the market crashes in another epic adventure to the abyss, these rigged stock exchanges will have some odd ball excuse to justify why 'all systems are down' and they couldn't execute your trade.

It's all rigged, starting with the 1913 Fed cartel.

realtick's picture

Exactly - it's all rigged. They manipulate it up, and they manipulate it down by further destroying confidence with charades like this one.

sitenine's picture

The seven deadly sins:


1) gambling

2) ponzi

3) naked short

4) AAA ratings

5) mark to fantasy

6) commingling

7) unregulated derivatives

HD's picture

Deadly sins? Thats the entire business model...and what is sad, is that I'm not even being sarcastic.

Ident 7777 economy's picture



" Deadly sins? Thats the entire business model. "


You catch on fast ...

Michelle's picture

Rigged, yes, but what about blatant sabotage? Seems that there was every reason to bring FB down and expose the system for what it is.

Remember Arab Spring and FB's contribution to the uprising? Maybe this is payback, or maybe this is exposure of corruption, bringing down the most highly publicized IPO in recent history only to fail miserably. Either explanation works for me.

Bolweevil's picture

Yes! I hope it's not for something as trivial as personal gain or squidwardly deeds.

scatterbrains's picture

I could visualize JPM trashing the MS IPO event because maybe some hedge funds are getting funding by MS to take advantage of JPM's unfolding Whale debacle.  JPM slapped MS with an open hand kinda thing.. no clue though... Just trying to think like a psychopathic criminal.

Whoa Dammit's picture

So is this why NASDAQ (knowing they wre on the hook) so kindly and generously offered to pay more than the amount they are required to by law to investors who lost money in those first hours of FB trading?

Whoa Dammit's picture

So is this why NASDAQ (knowing they wre on the hook) so kindly and generously offered to pay more than the amount they are required to by law to investors who lost money in those first hours of FB trading?

boogerbently's picture

If HFT's CAN'T be sued, when they are to blame, then who CAN be sued??

ToNYC's picture

Stock market valuations keep up with Inflation because they are Inflation plus Hopium. The value received by the customer continues to deteriorate as the nominal value appears to increase. Balances in the account are smaller than they appear. Call any vegetable and the chances are good.... that the vegetable will respond to you.

putaipan's picture




boogerbently's picture

Find which firms use HFT.

See what THEY did on FaceFlop day.

Sue the ones that ran the price down.


The "regulators" can't say HFT is LEGAL, then blame other entities for what HFT's do.

ArrestBobRubin's picture

Viva Columbian mi hermano!

Mucho, much gracias Senor :-)

veyron's picture

Please read before downvoting ...


HFT has replaced the role of the specialist.  Specialists could make money in an environment with 7 cent spreads, but now with penny spreads they can't survive.  HFT is capable of market making at a lower cost basis compared to humans.  The other thing is that specialists played favors explicitly (they would selectively trade against orders on the book, front run, etc), which HFT does to a much lesser extent (not saying it doesn't happen, but lets compare apples to apples)

More_sellers_than_buyers's picture

Really?  A good specialist could make money with any spread.  It was the job of the specialist to predict price movement and prepare so they could provide the other side of the trade when it happened.  You didnt have to be a thief if you were good.  And if you were wrong you were still obligated to make a market no matter what you were losing.  A lot of stocks there was never a way to make money in.  But that is why firms had split up big stocks, so firms could make enough money in the big ones to support getting their ass handed to them in the shit ones.  It worked.  And you could say specialist played favorites, but the neat thing about specialists is you never knew if they were long or short, so hence you never knew who's side they were on! Favorite one day... not sop much the next...Better than the shit system we have now where the machines are always on The banks side and NEVER on yours!

Xkwisetly Paneful's picture

Please not rearranging same shells and getting a different outcome.

The retail trader was so much worse off before vs now.

These fantasies of folks providing negative expectation volume for the sake of liquidity all the while they ain't robbing it back times ten are hilarious. Guess what? HFT's can't do that-their margins are so fucking small, they can't afford to give away money with the idea of stealing ten times it back later.

Marco's picture

They didn't need to be a thief, but it certainly helped the bottom line ...

I agree, for all the ills of HFT ... at least a HFT market is a free market, if you can afford the fiber/colocations/quants you can join in and abuse the hell out of flash orders and rape all the idiots still using stop loss. No artificially limited set of market makers with privileges.

BTW, YOU never knew who's side they were on ... but THEY did, and if you think THEY was just the individual market maker well ...

dime2962's picture

What's so free about those who have the capital and ability to rape the little guy with no information and no speed? There is nothing free about a market where the elite can have better information, charge you for liquidity, and have no responsibility to the market. 

What you don't seem to understand is that the HFT community has as complete a picture as anyone can have these days. Like the Specialist seeing an order book with 90% market share. The flow of orders, imbalances, is information. Now what we have today is a participant who "provides liquidity", uses its tools to see as complete a picture as is possible, and has ZERO responsibility to the maintain a fair and orderly market. The specialist had a responsibility to maintain a fair and orderly market at ALL TIMES, not just when conditions were advantageous to the bottom line. Right or wrong on their own position, the specialist has to maintain an orderly market, no matter how much money they make or lose. You could lose your job or blow up your firm, firms went under or had to raise capital after the '87 crash. If it were as easy as you believe it was, everyone would  be doing it.  

They were private businesses that provided order to the chaos, a public good, acting as a utility for the everyday investor. 

With that privilege comes responsibility, a responsibility that is completely lacking in todays market structure. Today it is a free for all, and investor confidence has taken another hit, at a time when it can not afford it,  alienating another generation of investors, one it will take decades to recover from.


Xkwisetly Paneful's picture

A market has two primary obligations: price discovery and guaranteeing counter party risk.  Not the projection in that post. 

If they can't handle the traffic to the point that the price discovery is fraudulent, that's on them to increase their capacity.


capital +ability is just about the walking, talking definition of free market capitalism.

Free of disinterested beaurocrats taking a cut offering nothing but dumb governance which is worse than no governance at all.  People would be  better off operating under the assumption that the markets are completely unregulated because that would be basic reality and is nothing new either.



Element's picture

You turgid little dumbfuck!  Investment is about funding production for the trade of REAL THINGS, for profits.

Parasitic skimming and scamming for an undeserved profit is what an investment isn't.

That's called being a crook, and you clearly can't tell the difference.

Disgusting scumbags like you have destroyed the market trading system.

Filth like you have destroyed the productive trade investment mechanism itself. 

Arseholes like you have consigned the globe, humanity, to trade collapse, economic depression and conflict.

I've had enough of your conceited verbal splatter, and hopeless shit-for-no-brains mentality.


Xkwisetly Paneful's picture

 Conceited? I am the guy posting everyday what a total imbecile I happen to be while you folks are self proclaimed rocket surgeons and brain scientists-fuckiing scary how I get it and you don't. At the same time, while you're proclaiming something about who deserves what? and further providing some 3rd grade definition of investment. Fucking moron, if spend resources to beat you in the market, I expect a return. That is productive, my beating you is production. Otherwise it is inefficiency which is the exact opposite of productive.

I could diverge into a 4th grade civics lesson on the import of communications and how things like the telegraph basically won the civil war for the north but what would be the point of that?

Yea parisitic, the mountainous regulators and regulations accomplishing nothing but fooling the people into an expectation of a regulated market.

Can you possibly be any more naive even  if that was the sole goal?

JFC this pathetic perpetual need for self victimization all the while the retail trader is significantly better off now than ever embarrasses all of mankind.


Marco's picture

"What's so free about those who have the capital and ability to rape the little guy with no information and no speed?"

It's free in that it requires no positive rights ... just a free market

That is just my opinion though, I'd love to hear how the ZH consensus manages to blame HFT effects on government rather than the market being left to it's own devices ... lay it on me, how is government responsible this time?

GeezerGeek's picture

How is government responsible, you ask. Well, Al Gore invented the internet, with all those ISPs, fast networks, broadband communications and such. We need to outlaw broadband communications and return to 1200 BAUD dial-up modems. See how well HFT works under those conditions!

[Just kidding - I wouldn't want to wait for all the Wm. Banzai pictures to download.]

dime2962's picture

The system we have is an absolute disaster. Nobody in control, just a repetitive loop of bad decision making alogs


overbet's picture

veyron is right that the specialist were the biggest crooks! I seen those bastards do some dirty shit. I am not anti or pro HFT but they system would be improved if HFT were required by regulation to make a market like the specialst.

vast-dom's picture

Poor Vey, such an idealist...some of these very specialists you cite joined the very darkside that ultimately made them paleolithic in these hyper markets......when the system becomes so sophisticated and makes the full circle into greed at the expense of IQ and basic human judgement I say to you SHORT THE PLANET!

And maintain a macro narrative such that you are not fiddle-fucking around with pennies -- let the algos implode from that as they surely will one day until we have RISE OF SKYNET PT III and other sequels (to take advantage of the upcoming 100% guaranteed market crash for which algos will be tweaked  in financial apocalypse code/mode).....

Remember: humans built SKYNET and then humans spent a long time in dystopia attempting to dismantle it to no avail.......


PS Vey junk votes build character!

resurger's picture


i have the codes ...

vast-dom's picture

but are yours FASTER than mine? 

OpenThePodBayDoorHAL's picture

There was a storm with snow and ice on my flight from Tucson to Mexico, I could see erosion on the interstate caused by a flood. I thought I might get stranded so I reached out for help at the airport but no luck. There was a telecommunications failure so I couldn't let you guys know. Now there's a big cloud over the facility because of a leak in the roof. They say the waves are still good in Sinaloa and that's the target of my surfing vacation, I hope they don't crest before I arrive. So watch TV in case the authorities have a response, my flight might still get cancelled. Not too smart to travel during a blizzard, I know, good thing I brought some homegrown!

to decipher:

HAL 9000's picture

This mission is too important for me to allow you to jeopardise it.

GeezerGeek's picture

You just need a faster CPU, and I have just what you need. Faster than Sandy Bridge or Ivy Bridge, it's codenamed Brooklyn Bridge. For the insignificant sum of $1000 I can sell you one.

mrdenis's picture

I knew plenty of speclist ...the small guys ...who were loaded up to the gills in stock on that monday of the 87's crash had that market not bounced on the opening it would have been the end for them most were  partnership firms and thy would have lost everything ...hence the reason the NYSE wanted more capatilized firms ....

geoffb's picture

Human specialists actually carry inventory and manage that carry risk to keep the market liquid. HFT's don't. Orange meet apple.

Xkwisetly Paneful's picture

Exactly, because they charged more and could afford to carry inventory since they were raping people ten ways to China in other ways.

Back to the notion that someone provided negative expectation volume for the sole purpose of liquidity. It is laughable. Anything they gave away which was virtual nil, they stole back times ten. 

koan's picture

So what's the fix?


Stop playing.

Widowmaker's picture

It gives retail suckers the opportunity to say fuck off and never come back.


The Big Ching-aso's picture



Just another HAL 9000 phuck-up.    Carry on.  BTW, anyone seen Dave?