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"Volatility On Demand": Catching A 54 Second Grand Rehearsal For A Market Crash In The Act

Tyler Durden's picture





 

After uncovering all the dirty HFT-related details surrounding the SEC-complicit misdirection of the May 6, 2010 flash crash, which scapegoated a plain vanilla mutual fund with a report that has been now proven to be fatally flawed, and likely fabricated on purpose, the market forensics at Nanex have now uncovered something even more disturbing. As a reminder, some time ago, Nanex discovered that there is a direct and simple way for HFT-based operators to create latency on demand: the very same phenomenon that facilitated the flash crash once it had started, and prevented normal price discovery. Now it is time to add Volatility on demand: a precondition that may well be critical to setting up the next May 6-like market wide flash crash. Because according to the following analysis, yesterday at market close Nanex may have observed a grand dress rehearsal for the next programmed market wide crash.

To wit: "Either someone likes buying high and selling low, or they have figured out how to significantly increase the volatility in a stock." For those who still trade stocks and want this translated into English, here it is: "On May 2, 2012 beginning right at market close (16:00 Eastern) and continuing for about 54 seconds, an HFT algo ran that significantly increased volatility and impacted at least 34 stocks. We think this was either a test of an algorithm someone is getting ready to deploy during market hours, or that this algo already runs during market hours, but is much harder to detect amidst the huge volume of market data noise."

Did Nanex just catch a 54 second-long dress rehearsal prepping for the next produced market crash? Read and decide.

From Nanex:

Volatility On Demand

Either someone likes buying high and selling low, or they have figured out how to significantly increase the volatility in a stock.

On May 2, 2012 beginning right at market close (16:00 Eastern) and continuing for about 54 seconds, an HFT algo ran that significantly increased volatility and impacted at least 34 stocks. We think this was either a test of an algorithm someone is getting ready to deploy during market hours, or that this algo already runs during market hours, but is much harder to detect amidst the huge volume of market data noise.

Since the Flash Crash, using real actual market data, we have debunked, several, claims made by HFT proponents. One claim that we haven't been able to debunk up until now, was that HFT dampens volatility. We believe that beneficial HFT acting as a market maker will dampen volatility. But there is only room for one or two market making HFTs in a stock, so newcomers have to find other ways of squeezing out profits from each equity transaction. Here's one such algo we uncovered that appears to be geared for creating volatility on demand (if someone designed this algo to make money from buying low and selling high - they failed miserably). Since we have seen this same algo pattern in the past, it is not likely to be from poor programming. See also Latency on Demand.

 


The first 3 images are 1 minute OHLC bar charts that show just how damaging this algo was to price discovery. We only show 3 of the 34 stocks we found, but they all show a similar pattern.

 


The next set of images detail one of the stocks affected, Potlatch Corporation (PCH) which has a market cap of $1.25 billion. Trades are circles while best bids and offers are triangles: each color coded by exchange. NBBO is shaded black if the best bid < best ask, yellow if best bid = best ask, or red if best bid > best ask.

Note how the best bid price drives higher within just milliseconds until it exceeds the best ask price and trades execute. Then the best bid price will drop back near where it started, and the best ask price will drive lower over the next few milliseconds until it drops below the best bid price and trades execute.


PCH 25 millisecond interval chart showing trades and NBBO.


 

 


PCH 25 millisecond interval chart showing each best bid and offer along with NBBO range.
Note the very high quote rate - often exceeding 4,000 per second.



PCH 5 millisecond interval chart showing trades, the NBBO range and each best bid and offer.



The next 4 images zoom in with 1 millisecond interval charts showing trades, the NBBO range and each best bid and offer.






The next set of images are tick charts (how to read) showing trades (large gray circles), the best bid (green dots) and the best ask (red dots). The colored lines are bids and asks from other exchanges which you can pretty much ignore. Note how the best bid price (green dots) drives higher within just milliseconds until it exceeds the best ask price (red dots) and trades execute (gray dots). Then the best bid price will drop back near where it started, and the best ask price will drive lower over the next few milliseconds until it drops below the best bid price and trades execute. This pattern repeats more or less many times in each stock.

 

 

 


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Thu, 05/03/2012 - 15:01 | Link to Comment lolmao500
lolmao500's picture

And the markets aren't rigged... right!

More volatility coming :

White House: New approach may be needed in Syria (Reuters)

http://www.bbc.co.uk/news/world-europe-17937795

Russia says it is prepared to use "destructive force pre-emptively" if the US goes ahead with controversial plans for a missile defence system based in Central Europe.

http://koreajoongangdaily.joinsmsn.com/news/article/article.aspx?aid=295...|home|newslist1

After Pyongyang threatened to wage “special action” against Seoul, a number of North Korean submarines have disappeared, a South Korean government official told the JoongAng Ilbo.

Thu, 05/03/2012 - 15:03 | Link to Comment Dicite justitiam
Dicite justitiam's picture

All ur markets r belong to us!!

Thu, 05/03/2012 - 15:10 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

I sold more stock yesterday, been a net seller "poco a poco" since 1995.  Yeah, OK, I missed much of a nice run from March 2009 until now, but that's OK.  I made money too.

So rigged...  Just when we NEED capital investment...  Sorry, no investment capital from me.

This stuff has GOT to be illegal?!  .gov regulators snooze, we lose!  

I will just watch from the sidelines.

Thu, 05/03/2012 - 15:14 | Link to Comment battle axe
battle axe's picture

Market Crash: CHECK, Now War to take everyone's mind off of it: CHECK

Thu, 05/03/2012 - 15:23 | Link to Comment NotApplicable
NotApplicable's picture

SEC to launch Nanex investigation in 3.. 2.. 1..

Thu, 05/03/2012 - 15:38 | Link to Comment lolmao500
lolmao500's picture

If you are waiting for the SEC to investigate Nanex's data, you better start counting from 1 trillion...

Thu, 05/03/2012 - 15:58 | Link to Comment WonderDawg
WonderDawg's picture

I think he meant SEC to investigate Nanex, ala Egan Jones.

Thu, 05/03/2012 - 16:09 | Link to Comment lolmao500
lolmao500's picture

Yeah I know...

Thu, 05/03/2012 - 19:21 | Link to Comment fourchan
fourchan's picture

shit's bonkers!

Thu, 05/03/2012 - 16:01 | Link to Comment ShankyS
ShankyS's picture

And you better atart from one quadrillion before they can even get a clue how to decipher it. 

Thu, 05/03/2012 - 15:40 | Link to Comment ParkAveFlasher
ParkAveFlasher's picture

7/8, 3/4, 2/3, 5/8, 1/2, 3/8, 1/3, 1/4, 1/8, 1/16, ...

Thu, 05/03/2012 - 15:34 | Link to Comment FlyoverCountryS...
FlyoverCountrySchmuck's picture

"Either someone likes buying high and selling low"

 

Can we all say "PLUNGE PROTECTION TEAM"?

YES, WE CAN!

Thu, 05/03/2012 - 16:36 | Link to Comment Darth..Putter
Darth..Putter's picture

Is it possible that this is just part of an organized scheme to transfer large amounts of wealth from one place (person) to another without leaving a paper trail? 

A "money" laundering scheme?

 

Black hole money?

Thu, 05/03/2012 - 15:26 | Link to Comment chunga
chunga's picture

All of us r might belong to markets.

I'm so glad I don't understand any of this bullshit.

Thu, 05/03/2012 - 16:02 | Link to Comment Duuude
Duuude's picture

 

Nah...

 

It's FirstContact...

 

Skynet is being wooed

 

 

Thu, 05/03/2012 - 16:42 | Link to Comment Uncle Remus
Uncle Remus's picture

Oh great - intergalactic Syren song.

Thu, 05/03/2012 - 15:03 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Siphoning wealth and value out of the system at the speed of electrons.  Awesome.

Thu, 05/03/2012 - 16:43 | Link to Comment Uncle Remus
Uncle Remus's picture

Wait - I thought the great sucking sound was...oh never mind.

Thu, 05/03/2012 - 15:02 | Link to Comment q99x2
q99x2's picture

Pretty

Thu, 05/03/2012 - 15:03 | Link to Comment CoolBeans
CoolBeans's picture

Hmmm, this looks like one of those HAARP annomolies on the Doopler radar maps just prior to a horrific storm...

To the basement!!!!

Thu, 05/03/2012 - 16:17 | Link to Comment Problem Is
Problem Is's picture

Survivalist/Conspiracy Theorist with a sense of humor...

+1... I like it...

Thu, 05/03/2012 - 15:28 | Link to Comment Mercury
Mercury's picture

They're right.  It's not HFT so much as the HF Quoting.

Which oftentimes has the effect of begetting HF non-Trading or, low actual volume.  It's no wonder that buyers/sellers head for the dark pools and crossing networks.

It's like being in a bar where a few meatheads run around serially dry-humping and harrassing every girl that walks in...and striking out mostly but discouraging them nonetheless.  Eventually the girls just go home and log into match.com or something - further fragmenting the "marketplace".

Fuckers.

Amazing in a way though.  It wasn't all that long ago when market makers we're complaining about being overwhelmed by "SOES bandits" - actual human beings pounding small orders into the system.

Thu, 05/03/2012 - 15:32 | Link to Comment NotApplicable
NotApplicable's picture

Except in this case, it looks like the algos are actually making trades, at a loss.

Maybe GS sold their code to someone with the logic flipped around?

Thu, 05/03/2012 - 15:37 | Link to Comment Mercury
Mercury's picture

Maybe, what was happening to to the options on these names?

Thu, 05/03/2012 - 15:07 | Link to Comment skepticCarl
skepticCarl's picture

Unlike me, I bet that many readers here had trouble following this article.

Thu, 05/03/2012 - 15:11 | Link to Comment viahj
viahj's picture

"look at the big brain on Brad (Carl)"

Thu, 05/03/2012 - 15:23 | Link to Comment junkyardjack
junkyardjack's picture

Its showing that the market is quite robust and even when there are small errors that occur in the system they are quickly adjusted for eliminating the possibility of an unintential crash of the system, right?

Thu, 05/03/2012 - 16:08 | Link to Comment Piranhanoia
Piranhanoia's picture

You think you're on acid when;   the colors all run and charts look like art

Thu, 05/03/2012 - 15:08 | Link to Comment Godisanhftbot
Godisanhftbot's picture

 This has been going on for YEARS!!!!!!! even beforehft was a hot item.

 

 Where you been?

Thu, 05/03/2012 - 15:09 | Link to Comment mt paul
mt paul's picture

quiet muppet

or we vaporise your account...

Thu, 05/03/2012 - 15:09 | Link to Comment Newsboy
Newsboy's picture

Humans Go Home!

Thu, 05/03/2012 - 15:10 | Link to Comment hmmmstrange
hmmmstrange's picture

FED algorithm to inject QE into the market?

Thu, 05/03/2012 - 15:29 | Link to Comment NotApplicable
NotApplicable's picture

More like "shaking the fuck outta that tree."

Hands feel weak yet?

Thu, 05/03/2012 - 15:10 | Link to Comment in4mayshun
in4mayshun's picture

One of these days I really must learn to read/speak geek.

Thu, 05/03/2012 - 15:23 | Link to Comment Talons Point
Talons Point's picture

I believe 2 semesters of Latin is a prerequisite

Thu, 05/03/2012 - 15:33 | Link to Comment NotApplicable
NotApplicable's picture

Errr... I think you mean two seasons of Star Trek.

Thu, 05/03/2012 - 16:58 | Link to Comment grid-b-gone
grid-b-gone's picture

Application question #23 - Do you own a Romulan dictionary?

Very good. #24, Have you ever worn an adult diaper while writing code or gaming?

I don't mind telling you this is going very well. Let's wrap up with the personal and social questions. Normally, we'd not be allowed to ask this line of questioning, but this is a Wall St. position and there's a little-known exemption...anyway, don't worry, this is the shortest section in the series. Ready?....

Thu, 05/03/2012 - 15:11 | Link to Comment carbonmutant
carbonmutant's picture

Well considering the potential volitility that could be created by this weekend's elections such a tool could be used to dampen volatility... just sayin'

Thu, 05/03/2012 - 17:16 | Link to Comment Matt
Matt's picture

You think the elections this weekend could cause markets to surge upwards dangerously fast!?

Dampen the volitility by buying high and selling low into a surging market?

Thu, 05/03/2012 - 15:16 | Link to Comment debtor of last ...
debtor of last resort's picture

I'll be back.....

Thu, 05/03/2012 - 15:19 | Link to Comment SemperFord
SemperFord's picture

Forget Syria. If the large number of 40 cal rounds purchased by the DH worries any, have any Angelinos seen the increase in LEA's in unmarked Honda Accords, Camrys, etc? All with California plates instead of the CA EXEMP plates and these had blacked out out windows and no way to tell they were not regular cars unles you carefully see the lights under the rear windshield. I have seen them more and more since I saw CHP trooper was lighting one up for speeding, the accord light up its lights and the trooper backed away...just saying.

 

EDIT: Was referencing Syria due to the top post.

Thu, 05/03/2012 - 15:22 | Link to Comment youngman
youngman's picture

That is the Mexican Mafia..not the police...jajaja

Thu, 05/03/2012 - 16:20 | Link to Comment LFMayor
LFMayor's picture

I thought they only drove chopped and dropped '63 Impalas with a portrait of Freddy Fender airbrushed on the hood.

Thu, 05/03/2012 - 15:17 | Link to Comment Sudden Debt
Sudden Debt's picture

Pété!!! Stop messing with the stockmarket!!! People might notice it's rigged!!!
Go play with you printing presses and get off the computer!!!!

Thu, 05/03/2012 - 15:19 | Link to Comment resurger
resurger's picture

i dont understand much of those graphs, but +5 Nanex

Thu, 05/03/2012 - 15:21 | Link to Comment youngman
youngman's picture

If this is allowed...we deserve what we get....to me its should be illegal...absolutly illegal...but then again I do not need political contributions to win anything...

Thu, 05/03/2012 - 15:27 | Link to Comment NotApplicable
NotApplicable's picture

"Illegal" Now there's a waste of a word if I ever saw one.

What are laws but the written decree of a tiny minorty who are never present at its application? They have no relevance whatsoever, as they can be replaced at any time on the whim of yet another tiny minority.

In other words, they are nothing more than attempts to allow one class to act in ways that others are not.

Thu, 05/03/2012 - 15:21 | Link to Comment Poetic injustice
Poetic injustice's picture

Picture algo crashed my browser within few nanoseconds.

Thu, 05/03/2012 - 15:29 | Link to Comment chunga
chunga's picture

DSL is for muppets.

Have to have at least a T1 just to look at this nonsense.

Thu, 05/03/2012 - 15:23 | Link to Comment XtraBullish
XtraBullish's picture

Thanks for that incredible, concise analysis - anyone got a hot stock tip?

Thu, 05/03/2012 - 15:23 | Link to Comment GoinFawr
GoinFawr's picture

The securities list was a nice touch.

Thu, 05/03/2012 - 15:32 | Link to Comment Cult of Criminality
Cult of Criminality's picture

The radiation network site shows Colorado with a nuclear alert at 627

above 100 is pretty bad

anybody know whats up ?

http://radiationnetwork.com/

Thu, 05/03/2012 - 15:56 | Link to Comment Shadowsil
Shadowsil's picture

iF YOU GOOGLE IT! You come up with a couple months/1 yr of checking out colorado and why is it so high in radiation as opposed to the rest of the country/world.

Thu, 05/03/2012 - 16:26 | Link to Comment Cult of Criminality
Cult of Criminality's picture

the alert has dissappeared

Yes it is always higher but not at ...627

anyway, just trying to lookout for people not cause hysteria

Thu, 05/03/2012 - 17:35 | Link to Comment jimmytorpedo
jimmytorpedo's picture

Update: 5/3/12, 1:25 P.M. - False Alert out of Colorado

A quick note to convey that the reading of 500 CPM +/- out of Colorado a couple of hours ago was a false alert.  The Station Operator had undergone a recent medical diagnostics test where a radioactive isotope had been administered into his body, and when he approached his Geiger counter back home, he unwittingly set off the alert.  Sorry.

Not to say that we're not all screwed from cooling pool number #4, just not yet. Buy lots of beans and rice from the 2011 crop. And put a concrete lid on your swimming pool. Or move to Argentina with Doug Casey

Thu, 05/03/2012 - 15:38 | Link to Comment badalgo
badalgo's picture

There is a link there about how to read the tick data charts....  Link

Thu, 05/03/2012 - 15:40 | Link to Comment Money 4 Nothing
Money 4 Nothing's picture

"Either someone likes buying high and selling low, or they have figured out how to significantly increase the volatility in a stock."

 

Hey! I read that chapter in Jim Cramers book "Getting back to zero"

Thu, 05/03/2012 - 15:45 | Link to Comment Cult of Criminality
Cult of Criminality's picture

Guess this is the wrong place to try to warn anyone about a radiation alert

 

 Carry on nothing to see here  Keep looking at the nanex charts and joke.,

Good day

Thu, 05/03/2012 - 16:37 | Link to Comment Likstane
Likstane's picture

What did you really expect?  Mass exodus to Kansas? 

Thank you so much for the time critical radiation event warning possibility.  We are ever so indebted to your faithful watch over the government sponsored monitoring sensors.

How's that? 

p.s it's probably algo driven also.  

Thu, 05/03/2012 - 15:51 | Link to Comment Money 4 Nothing
Money 4 Nothing's picture

Economic etch-a-sketch, tear out the longs then head fake the shorts. 

Thu, 05/03/2012 - 16:08 | Link to Comment icanhasbailout
icanhasbailout's picture

is it my imagination or are the algos drawing out extended middle digits with the bid price?

Thu, 05/03/2012 - 16:15 | Link to Comment earleflorida
earleflorida's picture

"Dysfunctional Feedback Loop?" ___ http://en.wikipedia.org/wiki/Feedback#Software_engineering_and_computing...

and the 'natural' sub-sequential that follows?   http://en.wikipedia.org/wiki/Chaos_theory 

Thu, 05/03/2012 - 16:15 | Link to Comment crzyhun
crzyhun's picture

INDEED.

As they say in Mineesoota, ophta Ollie!

Part 2  16:13...what is really interesting is the VIX spike aft hours...

Thu, 05/03/2012 - 16:11 | Link to Comment AvoidingTaxation
AvoidingTaxation's picture

WTF?

Thu, 05/03/2012 - 16:22 | Link to Comment Darth..Putter
Darth..Putter's picture

It's the PPA.  The Plunge Protection Algo

 

\Based on Fudds Law, "If you push something hard enough, it will fall over."

Thu, 05/03/2012 - 16:42 | Link to Comment Bansters-in-my-...
Bansters-in-my- feces's picture

Great,now my head hurts.

Thu, 05/03/2012 - 16:44 | Link to Comment dbTX
dbTX's picture

It's the Corzine factor at work; doesn't know what happened.

Thu, 05/03/2012 - 16:56 | Link to Comment Arnold
Arnold's picture

May I suggest another Occupy Wall street Fail. They misses the beidge in Cleveland as well.http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2012/05/01/MNDJ1OBRHA.D...

Thu, 05/03/2012 - 17:19 | Link to Comment crawldaddy
crawldaddy's picture

come on.. LET'S ALL SING

 

It's time to play the music 
It's time to light the lights 
t's time to meet the Muppets on the Muppet Show tonight.

It's time to put on makeup 
It's time to dress up right 
It's time to raise the curtain on the Muppet Show tonight. 

Why do we always come here 
I guess we'll never know 
It's like a kind of torture 
To have to watch the show 

And now let's get things started 
Why don't you get things started 
It's time to get things started 
On the most sensational inspirational celebrational Muppetational 
This is what we call the Muppet Show! 


Fri, 05/04/2012 - 00:18 | Link to Comment neevarp
neevarp's picture

None of the charts are being displayed over here. Anyone else facing the same?

Fri, 05/04/2012 - 08:56 | Link to Comment nanex
nanex's picture

We had to move the images. The link was so popular, it took down our ISP. 

http://www.nxcoreapi.com/aqck/3271.html

 

 

Fri, 05/04/2012 - 00:40 | Link to Comment Venerability
Venerability's picture

My sources say it's a group project for an eighth grade math class in Taipei.

They are also the ones leading in Yahoo's Fantasy Finance contest, in which 11-14 year olds are able to skew market Sentiment completely, while amassing imaginary gold coins in World of Warcraft and imaginary herds of cattle at Zynga. 

 

Do NOT follow this link or you will be banned from the site!