"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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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.

Dicite justitiam's picture

All ur markets r belong to us!!

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.

battle axe's picture

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

NotApplicable's picture

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

lolmao500's picture

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

WonderDawg's picture

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

ShankyS's picture

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

ParkAveFlasher's picture

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

FlyoverCountrySchmuck's picture

"Either someone likes buying high and selling low"

 

Can we all say "PLUNGE PROTECTION TEAM"?

YES, WE CAN!

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?

chunga's picture

All of us r might belong to markets.

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

Duuude's picture

 

Nah...

 

It's FirstContact...

 

Skynet is being wooed

 

 

Uncle Remus's picture

Oh great - intergalactic Syren song.

LawsofPhysics's picture

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

Uncle Remus's picture

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

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!!!!

Problem Is's picture

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

+1... I like it...

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.

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?

Mercury's picture

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

skepticCarl's picture

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

viahj's picture

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

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?

Piranhanoia's picture

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

Godisanhftbot's picture

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

 

 Where you been?

mt paul's picture

quiet muppet

or we vaporise your account...

Newsboy's picture

Humans Go Home!

hmmmstrange's picture

FED algorithm to inject QE into the market?

NotApplicable's picture

More like "shaking the fuck outta that tree."

Hands feel weak yet?

in4mayshun's picture

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

Talons Point's picture

I believe 2 semesters of Latin is a prerequisite

NotApplicable's picture

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

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?....

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'

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?

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.

youngman's picture

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

LFMayor's picture

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

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!!!!

resurger's picture

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

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...

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.

Poetic injustice's picture

Picture algo crashed my browser within few nanoseconds.

chunga's picture

DSL is for muppets.

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

XtraBullish's picture

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