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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 | 2394822 lolmao500
lolmao500's picture

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

More volatility coming :

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

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.|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 | 2394842 Dicite justitiam
Dicite justitiam's picture

All ur markets r belong to us!!

Thu, 05/03/2012 - 15:10 | 2394864 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 | 2394874 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 | 2394897 NotApplicable
NotApplicable's picture

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

Thu, 05/03/2012 - 15:38 | 2394930 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 | 2394997 WonderDawg
WonderDawg's picture

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

Thu, 05/03/2012 - 16:09 | 2395041 lolmao500
lolmao500's picture

Yeah I know...

Thu, 05/03/2012 - 19:21 | 2395457 fourchan
fourchan's picture

shit's bonkers!

Thu, 05/03/2012 - 16:01 | 2395009 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 | 2394938 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 | 2394926 FlyoverCountryS...
FlyoverCountrySchmuck's picture

"Either someone likes buying high and selling low"




Thu, 05/03/2012 - 16:36 | 2395122 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 | 2394866 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 | 2395014 Duuude
Duuude's picture




It's FirstContact...


Skynet is being wooed



Thu, 05/03/2012 - 16:42 | 2395135 Uncle Remus
Uncle Remus's picture

Oh great - intergalactic Syren song.

Thu, 05/03/2012 - 15:03 | 2394837 LawsofPhysics
LawsofPhysics's picture

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

Thu, 05/03/2012 - 16:43 | 2395142 Uncle Remus
Uncle Remus's picture

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

Thu, 05/03/2012 - 15:02 | 2394838 q99x2
q99x2's picture


Thu, 05/03/2012 - 15:03 | 2394843 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 | 2395060 Problem Is
Problem Is's picture

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

+1... I like it...

Thu, 05/03/2012 - 15:28 | 2394850 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 or something - further fragmenting the "marketplace".


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 | 2394920 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 | 2394927 Mercury
Mercury's picture

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

Thu, 05/03/2012 - 15:07 | 2394853 skepticCarl
skepticCarl's picture

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

Thu, 05/03/2012 - 15:11 | 2394868 viahj
viahj's picture

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

Thu, 05/03/2012 - 15:23 | 2394895 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 | 2395029 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 | 2394855 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 | 2394856 mt paul
mt paul's picture

quiet muppet

or we vaporise your account...

Thu, 05/03/2012 - 15:09 | 2394857 Newsboy
Newsboy's picture

Humans Go Home!

Thu, 05/03/2012 - 15:10 | 2394859 hmmmstrange
hmmmstrange's picture

FED algorithm to inject QE into the market?

Thu, 05/03/2012 - 15:29 | 2394913 NotApplicable
NotApplicable's picture

More like "shaking the fuck outta that tree."

Hands feel weak yet?

Thu, 05/03/2012 - 15:10 | 2394861 in4mayshun
in4mayshun's picture

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

Thu, 05/03/2012 - 15:23 | 2394896 Talons Point
Talons Point's picture

I believe 2 semesters of Latin is a prerequisite

Thu, 05/03/2012 - 15:33 | 2394922 NotApplicable
NotApplicable's picture

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

Thu, 05/03/2012 - 16:58 | 2395187 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 | 2394863 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 | 2395233 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 | 2394882 debtor of last ...
debtor of last resort's picture

I'll be back.....

Thu, 05/03/2012 - 15:19 | 2394883 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 | 2394892 youngman
youngman's picture

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

Thu, 05/03/2012 - 16:20 | 2395068 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 | 2394885 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 | 2394887 resurger
resurger's picture

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

Thu, 05/03/2012 - 15:21 | 2394889 youngman
youngman's picture

If this is allowed...we deserve what we 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 | 2394908 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 | 2394890 Poetic injustice
Poetic injustice's picture

Picture algo crashed my browser within few nanoseconds.

Thu, 05/03/2012 - 15:29 | 2394912 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 | 2394898 XtraBullish
XtraBullish's picture

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

Thu, 05/03/2012 - 15:23 | 2394899 GoinFawr
GoinFawr's picture

The securities list was a nice touch.

Thu, 05/03/2012 - 15:32 | 2394914 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 ?

Thu, 05/03/2012 - 15:56 | 2394987 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 | 2395087 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 | 2395277 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 | 2394933 badalgo
badalgo's picture

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

Thu, 05/03/2012 - 15:40 | 2394936 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 | 2394954 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 | 2395126 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 | 2394969 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 | 2395028 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 | 2395030 earleflorida
earleflorida's picture

"Dysfunctional Feedback Loop?" ___

and the 'natural' sub-sequential that follows? 

Thu, 05/03/2012 - 16:15 | 2395032 crzyhun
crzyhun's picture


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 | 2395043 AvoidingTaxation
AvoidingTaxation's picture


Thu, 05/03/2012 - 16:22 | 2395075 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 | 2395141 Bansters-in-my-...
Bansters-in-my- feces's picture

Great,now my head hurts.

Thu, 05/03/2012 - 16:44 | 2395148 dbTX
dbTX's picture

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

Thu, 05/03/2012 - 16:56 | 2395179 Arnold
Arnold's picture

May I suggest another Occupy Wall street Fail. They misses the beidge in Cleveland as well.

Thu, 05/03/2012 - 17:19 | 2395247 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 | 2395864 neevarp
neevarp's picture

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

Fri, 05/04/2012 - 08:56 | 2396364 nanex
nanex's picture

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



Fri, 05/04/2012 - 00:40 | 2395879 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!