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Was The SEC "Explanation" Of The Flash Crash Maliciously Fabricated Or Completely Flawed Out Of Plain Incompetence?

Tyler Durden's picture


Regular readers know that since the beginning, Zero Hedge has been vehemently opposed to the official SEC explanation of the chain of events that brought upon the Flash Crash of May 6, 2010, in which the Dow Jones Industrial Average lost 1000 points in a span of seconds, and during which billions were lost when stop loss orders were triggered catching hapless victims unaware (unless of course, one had a stop loss well beyond a reasonable interval of 20%, in which case the trades were simply DKed). It is no secret that one of the main reasons why the retail investor has since declared a boycott of capital markets, which lasts to this day, and manifests itself in hundreds of billions pulled out of equities and deposited into bonds and hard assets, has been precisely the SEC's unwillingness to probe into this still open issue, and not only come up with a reasonable and accurate explanation for what truly happened, but hold anyone responsible for the biggest market crash in history in absolute terms. Instead, the SEC, naively has been pushing forth a ridiculous story that the entire market crash was the doing of one small mutual fund: Waddell and Reed, and its 75,000 E-mini trade, which initially was opposed to being scapegoated, but subsequently went oddly radio silent. Well, if they didn't mind shouldering the blame, the SEC was likely right, most would say. However, as virtually always happens, most would be wrong. Over the past few days, Nanex has one again, without any assistance from the regulators or any third parties, managed to unravel a critical component of the entire 104 page SEC "findings" which as is now known, indemnified all forms of high frequency trading (even as subsequently it was found, again by Nanex, that it was precisely HFT quote churning that was the primary, if not sole, reason for the catastrophic chain of events) with a finding so profound which in turn discredits the entire analytical framework of the SEC report, and makes it null and void.

In essence, what Nanex finds is that the paper's authors completely botched the logical chain of events in their definition of "who did what" in those fateful minutes between 14:43 and 14:45, strayed from all classical definitions of liquidity to allow them to goal seek their conclusion, and ultimately misdiagnosed everything that happened on May 6, also known as Flash Crash day.

Nanex' approach is simple and elegant: they unravel the fundamental argument at the core of the entire paper, and thus the SEC's conclusion, with definitive factual proof and material evidence. And in doing so they make all the primary and tangential conclusions of the SEC invalid.

The only open question is whether the SEC, which certainly co-opted the authors of the paper to reach the desired conclusion, real facts be damned, acted out of malice and maliciously fabricated the data knowing very well the evidence does not support the conclusion, or, just as bad, was the entire supporting cast and crew so glaringly incompetent they did not understand what they were looking at in the first place.

Unfortunately, either option is equally sad, and since one of the two has to be right, and neither one will make the retail investor even remotely comfortable with dipping their toe back into stocks, we can definitively say that the true culprit here, High Frequency Trading, will continue to drive ever more true sources of capital out of stocks and into other markets, until the very fabric of the market stretches so thin that the entire thing explodes under its own weight.

And with that the proudest chapter of America's once revolutionary, and now just plain sad, capital markets, will officially be over.

Below we present Nanex's complete write up and observations, as well as full chain of communication with one of the paper's co-authors. We urge readers to read it in its entirety as it shows either just how incompetent the SEC truly is, or how corrupt. We leave it up to our readers to decide which is worse.



Nanex ~ The SEC Redefines Liquidity (when it's convenient)

April 12, 2012

While rereading the SEC's flash crash report,  Findings Regarding the Market Events of May 6, 2010, and a very similar report written at the same time by some of the same authors, we came across statements that are clearly false, and grossly mischaracterize the algorithm that executed the 75,000 S&P futures contracts and blamed for causing the flash crash. Be sure to see our recently updated detailed analysis and charts of the contracts sold by the algo.

We contacted one of the co-authors and things grew murkier. The email exchange was very disturbing because the explanation was basically a new and bizarre definition of liquidity in an attempt to try and make the paper's text agree with the facts. That, or the authors have based the foundation of the entire paper on a very unusual interpretation of liquidity: something that would completely nullify any conclusion. The SEC report for example, uses the word "liquidity" 249 times in 89 pages: a word that may now have a completely different meaning from anyone's current understanding of that term.

This bizarre definition of liquidity basically states that if a High Frequency Trader (HFT) aggressively buys contracts by executing against existing orders posted by a seller, then the HFT could be classified as a liquidity provider, and the seller classified as a liquidity taker.

Read that again, because it is exactly opposite of the industry accepted understanding of liquidity, not to mention, basic common sense. It's like saying up is down and down is up.

This revelation makes you wonder what other non-standard definitions were used. It seems they were trying to fit the data to match a foregone conclusion. What follows is the email exchange between Nanex and the co-author. W&R refers to Waddell & Reed. Timestamps are Eastern Daylight and date is M/D/YYYY.


On 4/9/2012 1:24 PM, Nanex wrote:

I recently reread your paper with Andrei Kirilenko titled: The Flash Crash: The Impact of High Frequency Trading on an Electronic Market.

Something stood out that I didn't notice before.

Page 36

Thus, during the early moments of this sell program’s execution, HFTs and Intermediaries provided liquidity to this sell order.


As they sold contracts, HFTs were no longer providers of liquidity to the selling program. In fact, HFTs competed for liquidity with the selling program, further amplifying the price impact of this program.

We know the algo used by W&R never took liquidity (it always posted sell orders above the market, never crossing the bid/ask spread). That directly opposes the statement above. Can you help me resolve the two?

On 4/10/2012 10:24 AM, Co-author wrote:

Perhaps we need to express ourselves more clearly.

It is possible for the HFTs to provide liquidity to a sell order by purchasing at the sell order's offer, as a result of which the HFTs accumulate inventory. Our graphs show that after accumulating inventories of 3,000+ contracts, the HFTs avoided further inventory accumulation.

Thanks for pointing this out.

I am cc-ing my other co-authors in case they have information to add.

On 4/10/2012 10:42 AM, Nanex wrote:

This is a first. I must admit, I have never seen liquidity defined that way. And it doesn't seem to match other definitions, implied or otherwise, in your paper. Just one example I found in less than a minute:

From page 15:

In order to further characterize whether categories of traders were primarily takers of liquidity, we compute the ratio of transactions in which they removed liquidity from the market as a share of their transactions. (footnote 7).

footnote 7:
When any two orders in this market are matched, the CME Globex platform automatically classi?es an order as ‘Aggressive’ when it is executed against a ‘Passive’ order that was resting in the limit order book. From a liquidity standpoint, a passive order (either to buy or to sell) has provided visible liquidity to the market and an aggressive order has taken liquidity from the market.

On 4/10/2012 11:32 AM, Co-author wrote:

I agree that our terminology is confusing. We need some clear language to distinguish between hitting a bid or lifting an offer (aggressiveness) and providing liquidity by being willing to take on inventories when others want to sell.

By the way, exactly the same issue came up in the 1987 stock market crash.

On 4/10/2012 12:17 PM, Nanex wrote:

Actually you do have clear and consistent language with respect to liquidity and aggressiveness. The only issue is that the W&R trades don't fit into the characterization. That algo was always passive and always provided liquidity to buyers.
On 4/10/2012 1:14 PM, Co-author wrote:

So perhaps we need to change the language we use to describe what happened at the beginning of the flash crash.

These are useful comments, so I will share them with my co-authors.

On 4/11/2012 9:05 AM, Nanex wrote:

I've shared our email exchange with a few market savvy colleagues and they are equally confused by your statement regarding liquidity:

It is possible for the HFTs to provide liquidity to a sell order by purchasing at the sell order's offer, as a result of which the HFTs accumulate inventory.

In addition, the above statement still doesn't clear up my original question:

Page 36

Thus, during the early moments of this sell program’s execution, HFTs and Intermediaries provided liquidity to this sell order.

As they sold contracts, HFTs were no longer providers of liquidity to the selling program. In fact, HFTs competed for liquidity with the selling program, further amplifying the price impact of this program.

We know the algo used by W&R never took liquidity (it always posted sell orders above the market, never crossing the bid/ask spread). That directly opposes the statement above. Can you help me resolve the two?

The W&R algo never took liquidity so it couldn't possibly compete for it. If no more buyers showed up on May 6, 2010, it wouldn't have completed the full order. It would have ended the day selling fewer than 75,000 contracts.

Here are the commonly accepted definitions of liquidity makers and takers:

Posting sell orders to the book increases (provides more) liquidity available to buyers. Buyers can buy more without impacting the market.
Posting buy orders to the book increases (provides more) liquidity available to sellers. Sellers can sell more without impacting the market.

Hitting sell orders decreases (removes) liquidity available to buyers. Buyers can buy less before impacting the market.
Hitting buy orders decreases (removes) liquidity available to sellers. Sellers can sell less before impacting the market.

We never received a reply to our last email. We hope, maybe, a light bulb went off. We have more questions.

Saying that a HFT execution of a sell order resting in the book is adding liquidity is just plain wrong: even if you know that the sell order is from a fundamental seller. There is simply one less sell order available to another buyer, it's as simple as that. It might help to understand this if we reverse the direction: If a HFT hits a buyer order, would that ever be considered adding liquidity? Of course not!

Does it matter if the trader is HFT or not?  Intention is impossible to determine without an interview, even with audit trail data. Besides, even knowing the intention still opens a Pandora's box. For example, what if a fundamental buyer executes against an order placed by a fundamental seller? Is one adding liquidity and the other removing it? Which one? What if the HFT executes against an order placed by another HFT? What if a HFT seller places and cancels 1,000 sell orders in a second with no intention of any being executed? Do you get the picture?

Orders added to the book, regardless if they are buy or sell orders (so long as they are legitimate),  add liquidity. Executing against any resting order is removing liquidity. Their paper actually says this in the footnotes at the bottom of  page 15 (which was pointed out in our second email)!

From a liquidity standpoint, a passive order (either to buy or to sell) has provided visible liquidity to the market and an aggressive order has taken liquidity from the market. 

This whole thing reeks of less than honest research. To base any future regulations on either of these papers would be ill-advised and reckless. Someone needs to do some serious house cleaning at the SEC and CFTC.


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Thu, 04/12/2012 - 21:07 | 2340126 phungus_mungus
phungus_mungus's picture

all the world is a masquerade made up of fools and philosophers, were it to rain on our charade all washes away except our true colors...

Thu, 04/12/2012 - 21:11 | 2340137 Richard Chesler
Richard Chesler's picture

The mission of the U.S. Securities and Exchange Commission is to give the illusion they protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

Thu, 04/12/2012 - 21:22 | 2340167 BoNeSxxx
BoNeSxxx's picture

I'll take "the entire supporting cast and crew so glaringly incompetent they did not understand what they were looking at in the first place." for $1,000 Alex.

Thu, 04/12/2012 - 21:30 | 2340189 ACP
ACP's picture

No need to worry, there's enough news about what George Zimmerman bought in the jailhouse store and about who Kim Kardashian screwed last night to keep the public's minds off what is really important.

Thu, 04/12/2012 - 22:48 | 2340430 bernorange
bernorange's picture

What? No fat fingers?

Thu, 04/12/2012 - 23:29 | 2340567 CIABS
CIABS's picture

Dumb or devious, as they say.

Fri, 04/13/2012 - 01:35 | 2340783 AldousHuxley
AldousHuxley's picture

liquidity = unnecessary fluctuations artificially created by TBTF meant to profit the market exchanges and not the participants.


You don't need sub-second liquidity for markets to function. It is all for banksters trying to make money on volume of money flow.

Thu, 04/12/2012 - 23:07 | 2340494 AlaricBalth
AlaricBalth's picture

The authors knew precisely what they were looking at and chose to obfuscate their findings. When these so called "civil servants" venture out into the private sector, they do not want to risk being black balled due to an unfavorable report implicating the very industry in which they wish to be employed.

Thu, 04/12/2012 - 23:29 | 2340568 CIABS
CIABS's picture


Fri, 04/13/2012 - 13:59 | 2342322 Excursionist
Excursionist's picture

Honestly, I'm not so sure..  Your view is predicated on the authors' fully understanding equity market mechanics.  The question I ask myself is, "What kind of a person opts to slave away at the SEC or at a third-party consultancy that advises the SEC?"  Is it a retired "A" player who made millions trading for a prop desk, hedge fund, etc. and now wants to show his altruism within the halls of a government bureaucracy?  I think it's highly unlikely..

Think about this alternate possibility:  if you're a high-level official at a regulatory agency, which may be co-opted by those it regulates, AND wish to propagate a particular narrative that happens to be at odds with the fact base AND for career reasons wish to have plausible deniability in case of blowback, then what better way to achieve your ends then to assign the investigation to Larry, Moe and Curly?

Let's say the findings surfaced by NANEX actually gain traction.  Where do you think the buck will stop at the SEC?  With the SEC study's authors or the authors' supervisor?  My money is on the former.  The surpervisor would claim something along the lines of the flash crash study being just one of 25 under his / her purview, can't possibly be accountable for every report generated by trusted 'experts', etc., etc.

Just as important as understanding market mechanics is understanding bureaucracy mechanics if you wish to uncover the truth.

Fri, 04/13/2012 - 03:37 | 2340886 Gringo Viejo
Gringo Viejo's picture

Incompetent? No. Malicious? Beyond measure.

Thu, 04/12/2012 - 21:27 | 2340178 ShankyS
ShankyS's picture

So if Peter Noth pulls out is that removing liquidity? Maybe the SEC can get the situation right in that context. 

Fri, 04/13/2012 - 00:36 | 2340711 Dingleberry
Dingleberry's picture


I wonder how many fellow ZHers have seen the "great white north" and his liquidity to fully appreciate your analogy.

Thu, 04/12/2012 - 21:29 | 2340186 Shizzmoney
Shizzmoney's picture

The mission of the U.S. Securities and Exchange Commission is to give the illusion they protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

And to download porn.  Which has been the only thing they have successfully been good at the last 25 years.

Fri, 04/13/2012 - 07:38 | 2341067 tooktheredpill
tooktheredpill's picture

i reckon a bit of both. The gov would want a bunch of numpties over there (like the ratings agencies) so they can be manipulated more easily. There would need to be a filter somewhere though to ensure the truth does not come out. Where the gov is paid to despise regulation the SEC cannot be taken seriously.

Thu, 04/12/2012 - 22:20 | 2340343 candyman
candyman's picture

For some, here is a prime example of the diminishing returns we are getting from our education system and Government. For's exactly what has been planned. For old schoolers this is completely FUpped!

Thu, 04/12/2012 - 21:11 | 2340131 HelluvaEngineer
HelluvaEngineer's picture

You know, the better question is why after that event, whenever something begins to flash crash, why does the hand of God step in?  There is obviously a federally-backed buy program in place.  In other words, in bureaucratic terms, this constitutes "fixing" the problem.

Thu, 04/12/2012 - 21:32 | 2340190 Imminent Crucible
Imminent Crucible's picture

A malicious fabrication or plain incompetence? Why can't it be both: An incompetent fabrication with malice?

The SEC co-author should be flogged for his devious dodging and weaving. Along with every other bloodsucking leech at the SEC.

Thu, 04/12/2012 - 21:11 | 2340138 SolidSnake961
SolidSnake961's picture

what do u expect from the securities and porn watching commision?

Thu, 04/12/2012 - 21:14 | 2340146 Bubble
Bubble's picture

Plain Incompetence. Sorry, no time to explain, trading a stock and need to put 300x ADV out in 3c increments in the next 0.3 of a second....

Thu, 04/12/2012 - 21:21 | 2340160 Bubble
Bubble's picture

Feck, actually got lifted on my offers. Well, a teeny bit of them. Pulled the rest after I realised there was a mkt buy order. Jumped in front of it and bought back my shorts and went long in front of him. Praise zero latency DMA. Lucky I don't pay brokerage fees so my broker can tell his real customers what a big mkt share they trade....

Thu, 04/12/2012 - 21:15 | 2340147 T-Bond
T-Bond's picture

The whole thing reeks of a payoff.

Fri, 04/13/2012 - 08:11 | 2341118 Metalredneck
Metalredneck's picture

If only we could follow the money.

Thu, 04/12/2012 - 21:20 | 2340159 The Axe
The Axe's picture

What can I say, these are basic..the very basic understanding of the market...yet authors and co-authors answer questions like ,,,like idiots... If they cannot fathom the passive bid and offerings of a book, as liquidity  vs the agressive lifting or hitting of a trader or algo. What chance do they have of understanding a complex question/?  omg fucking nuts.....SEC is a fuckhole of stupid.

Fri, 04/13/2012 - 10:26 | 2341501 Archduke
Archduke's picture

Dunno about the US, but I do know a few Traders who switched to a ratings agency, the FSA, and back again.

To me this indicates that the regulatory authorities are not entirely staffed with ineptitude and incompetence.


I would be tempted to assume not gratuitous malice, but rather interested complicity, collusion and corruption.


Thu, 04/12/2012 - 21:33 | 2340162 slewie the pi-rat
slewie the pi-rat's picture

  <----<  malicious

 <----< incompetent

when we are on this square 2 years after (!):

On 4/10/2012 1:14 PM, Co-author wrote:

So perhaps we need to change the language we use to describe what happened at the beginning of the flash crash.

These are useful comments, so I will share them with my co-authors.


well, since it doesn't describe what happened, perhaps slewie isn't the only one for whom the "sincere, innocent effort" excuse doesn't always get a moronic free pass

i'm voting for malice;  this is bullshit;  $100 Mil of goobermint trolling!  at least!   bull. shit.

Thu, 04/12/2012 - 23:11 | 2340509 Likstane
Likstane's picture

Hate'm or love'm, it's the real mouse!

Fri, 04/13/2012 - 04:22 | 2340905 Overflow-admin
Overflow-admin's picture

Actually, I would say both: they must be malicious to make such bold false statements (google is your friend) AND they must be completely incompetent (in social engineering) to be unable to desguise their lies.


I vote malice for it's the root cause IMHO.

Fri, 04/13/2012 - 04:36 | 2340921 RECISION
RECISION's picture

+1 Malice

The SEC is doing exactly what it is designed to do.

Deflect the heat off the top crooks.

- Kill investigations when necessary/possible.

- Prosecute no-bodies who bring the wrong sort of attention.

- Spread B/S, smoke and mirrors, whenever possible.

- Sit on any sort of process for as long as possible (forever if possible).

But most importantly:

-Prevent any other Law Enforcement agency from investigating, because this is their bailiwick, and they will fight tooth and claw to keep any outside eyes away.

That is NOT incompetence or accident.

It is Malice aforethought.

Whether it started out more or less legitimate, and was then captured...

Or was Corrupt from the start...

It is unquestionably now a criminal conspiracy to provide a teflon-overcoat/get-out-of-jail-free pass, to the top mafia crooks.

The Cops are bought and paid for - they serve and protect - their Bosses.

Capo's for the Don(s)

Thu, 04/12/2012 - 21:22 | 2340163 spastic_colon
spastic_colon's picture

Yes we know all investigations conducted by any "official" agency all follow the script of the Kennedy assassination analysis.

Thu, 04/12/2012 - 21:23 | 2340168 Yes_Questions
Yes_Questions's picture



SEC: Captured Entity, Seriously.

Thu, 04/12/2012 - 21:28 | 2340184 Raynja
Raynja's picture

Complicit or complacent theres no fucking difference.

Thu, 04/12/2012 - 21:36 | 2340200 Yes_Questions
Yes_Questions's picture



You're right: there are no Innocent Bystanders.  Certainly not when it comes to an agency ostensibly chartered to oversee the conduct of participants engaged in activities so near the heart of the monetary economy.


What's the relative equivalent here of torches and pitchforks?



Thu, 04/12/2012 - 21:55 | 2340270 illyia
illyia's picture

A flood of this post to the SEC in all it iterations.

Thu, 04/12/2012 - 22:07 | 2340297 espirit
espirit's picture

Illiquidity will starve the bloodsuckers.  Let the Hunger Games begin.

Thu, 04/12/2012 - 23:22 | 2340414 Yes_Questions
Yes_Questions's picture



And may the odds be ever in OUR favour..

Thu, 04/12/2012 - 21:34 | 2340196 TheCanimal
TheCanimal's picture

I completely lost faith in the stock market & it's feeble regulators after the flash crash and soon after cashed in chips that had been in the game for nearly 30 years.  The only thing worse is Jon Corzine still walking the streets after stealing customer funds.  I won't be returning. 

Thu, 04/12/2012 - 21:40 | 2340213 sof_hannibal
sof_hannibal's picture

"Everybody knows the good guys lost; Everybody knows the fight was fixed; The poor stay poor, the rich get rich.."

Thu, 04/12/2012 - 22:06 | 2340298 Uber Vandal
Uber Vandal's picture

No, no, no.

The problem is that the poor have too much and the rich do not have enough.

Fri, 04/13/2012 - 08:09 | 2341113 Metalredneck
Metalredneck's picture

This too, shall pass.

Thu, 04/12/2012 - 21:37 | 2340204 sof_hannibal
sof_hannibal's picture

Shocking... yawn.. let the algos trade this bitch to zero 0... kill the host and the parasites die !

"This was freedom. Losing all hope [ium] was freedom..."

Thu, 04/12/2012 - 21:38 | 2340205 DavidC
DavidC's picture

Nanex, and Joe and Sal at Themis Trading, have been absolutely at the forefront of HFT and Algo trading since before 2008.


Thu, 04/12/2012 - 21:38 | 2340209 tpgaynor
tpgaynor's picture

Ron Paul....the final solution!

Thu, 04/12/2012 - 21:44 | 2340221 tony bonn
tony bonn's picture

in a world where the magic bullet theory and the pancake theory are declared with straight faces, this latest bucket of shit from the nazi high command can be heard without guffaws....

Thu, 04/12/2012 - 21:55 | 2340267 sof_hannibal
sof_hannibal's picture

Quick To the FED printing Führer's bunker

Thu, 04/12/2012 - 21:56 | 2340272 ziggy59
ziggy59's picture

Choice D). all the above

Thu, 04/12/2012 - 22:02 | 2340283 navy62802
navy62802's picture

Kudos to NANEX for not dropping this and doing their brilliant research. Glad to see they are still pursuing this.

Thu, 04/12/2012 - 22:04 | 2340290 pashley1411
pashley1411's picture

I wish someone would explore the potential of asymetric market participants; while there are rules set to preserve an orderly market, certain participants are presumptively self-policing and so allowed to trade outside those rules.

Those asymetric particpants (CIA, JP Morgan, space aliens) use their priviledged status to game the market to their advantage.   These particpants aren't to display their nature, that would frighten the cattle, but occasionally inadvertently display their presence when the market displays anomalous behavior.

Thu, 04/12/2012 - 22:40 | 2340398 rlouis
rlouis's picture

Someone at the SEC is bucking for a promotion.   Thank you for keeping an eye on the government players "at work."

Thu, 04/12/2012 - 22:50 | 2340437 ZDRuX
ZDRuX's picture

Ok, this was a bit confusing to someone who hasn't had past experience with this terminology but I think I finally got it.


As long as there are open sell / buy orders in the market, this is ADDING liquidity.

When those orders get filled by a buyer / seller, that is REMOVING liquidity.

Thu, 04/12/2012 - 22:51 | 2340438 Joebloinvestor
Joebloinvestor's picture

Did Gensler go to school with the authors?

Expect some BS reason from him to not get involved.

Thu, 04/12/2012 - 23:05 | 2340481 GlenD
GlenD's picture

In war governments take control of all markets and make no mistake, the US is at war, not against their hired terrorist, but against their own people. The US announced this war when they signed the patriot act. Their weapons of choice is fiat, they will use their fiat to control the value of everything, including gold/silver, until they cause their fiat to become worthless .... on purpose.

If one wants to look at the bigger picture, you need question, why nations in europe just handed over their sovereignty to an external EU when in past they fought wars to maintain that sovereignty? It makes no sense unless you examine religous scriptures.... The great whore, Roman Church has replaced christianity with a newly conbined christian-jewish amalgamated religion to convince leaders on religous grounds to create a new center of power in Europe. The US centre of power is being sacrificed for a new central seat in europe. Israel (Gog) will control the world through its banking system and forced slavery to usury. But Magog (Russia) will one day bring war against Gog.

The only way to survive this war is to refuse to play their game. Reduce your reliance on fiat - grow your own food, generate your own electricity, empower your own survival. If you want to play in their rigged casino by all means do so, but first realize, you lost before your entered the door.

Peace to all.

Thu, 04/12/2012 - 23:15 | 2340520 Bárðarbunga
Bárðarbunga's picture

To be treated like children, told things that are 100% contrary to what we know is reality – this is what the Media, the Government, and people in “Authority” give us. When we can substantially describe reality with detail, these fucking morons will look at you straight in the eye and give you something out of a science fiction novel.

They have different rules that they live their lives by. Their reality is set by some other metric that we cannot fathom. When we discuss things like a flash crash or manipulated markets among ourselves, we understand each other. When we bring attention to our findings and facts to the Powers that Be, we can be looked upon like filthy little children playing with a pig in an alley.

They don’t want anything to do with us. We are not part of their plan. They mock us and give us dumb little stares and sarcastic, meaningless answers. We tear these apart with no problem whatsoever, but it doesn’t change the facts. The engineered facts that are force-fed to us daily. Parsed into twenty second sound bites for our consumption. After that, maybe they’ll feed us a fucked up commercial for some drug to make us happier and give us longer and harder erections.

I’m fucking sick of being talked to like I’m a child. Given little green pieces of paper and told that it’s money. Working my ass off all day to make some goddamn bureaucrat more powerful in his little mansion on the hill. This is all so goddamn tiresome.

You respect a guy trying to get to the bottom of a CFTC paper that is constructed like a house of cards. But to what end? What exactly can be done when the glaringly obvious is exposed for all to see? Move along; nothing to see here.

Fri, 04/13/2012 - 00:01 | 2340641 CIABS
CIABS's picture


Fri, 04/13/2012 - 00:06 | 2340655 Yes_Questions
Yes_Questions's picture




Move along; nothing to see here but my longer and harder erection.


OK, just had to as I would if you said this strait to my face.


Thank you.  Thank you for giving a lift of the veil to the glaringly obvious.

+greens not at my discretion here!

Fri, 04/13/2012 - 01:07 | 2340750 LowProfile
LowProfile's picture


What exactly can be done when the glaringly obvious is exposed for all to see?

Eliminate your paper assets, educate your family, friends and neighbors, build self-sufficient community networks that are outside the system, and wait.

And buy gold.  Lots and lots of gold.

Fri, 04/13/2012 - 08:06 | 2341106 SeattleBruce
SeattleBruce's picture

Hear, hear.  Excellent.

Fri, 04/13/2012 - 08:01 | 2341100 SeattleBruce
SeattleBruce's picture

"The engineered facts that are force-fed to us daily. Parsed into twenty second sound bites for our consumption."

That and 5 word 'headlines' on MarketWatch, Yahoo and Google "News!"

Fri, 04/13/2012 - 08:55 | 2341206 De minimus
De minimus's picture

Simply, Thank You.

Thu, 04/12/2012 - 23:25 | 2340550 jack stephan
jack stephan's picture

They smoke and still smoke chantix, watch out earth!!!!!!!!!  Side effects are suicidal, just like daily report of squids.  I have a far away xmas, or maybe half that, but better than most.       

Fri, 04/13/2012 - 00:07 | 2340584 Yes_Questions
Yes_Questions's picture



wrong place....

Thu, 04/12/2012 - 23:55 | 2340629 holdbuysell
holdbuysell's picture

Digital wealth was so 20th century.

The 21st century's wealth will be about physical 'stuff'.

Fri, 04/13/2012 - 02:54 | 2340860 amanfromMars
amanfromMars's picture


Digital wealth was so 20th century.

The 21st century's wealth will be about physical 'stuff'. .... holdbuysell, Thu, 04/12/2012 - 23:55

No, it isn't, holdbuysell.

The 21st century's wealth is all about Astute and Advanced and Anonymous InterNetworking of SMARTer Intelligence and Virtual Machine ProgramMING with and for Cyber Space Cloud Control of Global Operating Devices, Servicing and Drivering/Servering EarthedD SCADASystems Parasitically Dependent upon Artificial Fiat Currency Power and Human Consumption Markets for Progressive Flows of Liquidity and Upward Mobility Exchange/Ownership Title Transfer of Illiquid Assets ….. Ubiquitous Baubles and Flashy PostModern Beads.

And there is nothing at all that anyone can do to change it, or to stop it on its SMARTer Course and Novel Ways, for IT has the Power to Crash any Bourse with Catastrophic Cascading Consequences to All Leading Systems of Human Administration.

You are Free to BetaTest and Exploit such Clouds Hosting Advanced Operating Systems at your Peril/Discretion for All are hereby Advised that as Ephemeral and Intangible as Virtual Control Systems are, are they Never Ever Defenceless and Never Ever Allow Ill-Advised Abusive Attack and Proprietary Intellectual Property Assault without a Dire Destructive HyperRadioProActive Response.  

Fri, 04/13/2012 - 00:46 | 2340685 BlackholeDivestment
BlackholeDivestment's picture Great reporting. What a true service ZH and NANEX provide. World class, just fantastic.

SEC's story sounds like bad lyrics for a punk song. Lol.



                           nones as ones as liquiqidty

                                  ''flash crash''

                                no accountABILity  

             Favor falls to the corruption robbing our security

                                 that's comedy

                                 ...and tragedy 

                           false trades for humanity 

                             casino shut down robbery 

                                 now DIVEST DIVEST 



Fri, 04/13/2012 - 00:22 | 2340686 MedicalQuack
MedicalQuack's picture

You know I wished we had some real techs around as all we get is "magpie explanations" and Nanex does a good job and they know what they are doing. 

We all know the SEC is not up to the latest in technology for sure and I think figurehead executives or department heads will soon be on their way out as you need need some hybrids in there that know a little bit about code and data systems, otherwise the wool is pulled over their eyes. 

I still like that Kevin Slavin Video from TED about algorithms, it's the best and I put it on the permanent front page of my blog as it belongs there as I talk algos in healthcare all the time.  There's also a great video from NYU professor mathematician Charlie Siefe, who wrote the book, "Proofiness, the Dark Arts of Mathematcial Deception" that one if you have not done it already.  I probably have mentioned it no less than half a dozen times on my blog as well and probably sold him a few books:) The SEC should be reading this book:)

We have an imbalance of tangibles versus intangibles and that's why we cant' get manufacturing up and going and business just runs circles around the SEC.  I said start devaluating some of the algorithms and the rest may fall into place a little better. 

Fri, 04/13/2012 - 00:39 | 2340715 mendigo
mendigo's picture

End the SEC
Waste of taxpayer dollars.
Banks are neccesary. Equity market is green slime.

Fri, 04/13/2012 - 01:32 | 2340781 dcb
dcb's picture

papers by the sec are the samea s the federal reserve. they aren't desigend to state the truth, but to either justify whatt hhey want to already do,  or cover their asses for allowing hft in the first place.

Fri, 04/13/2012 - 02:10 | 2340828 MeelionDollerBogus
MeelionDollerBogus's picture

I wonder if the real job of these fraudsters is actually to stir in new ingredients to a huge vat of faeces, trying to discover ever more caustic aromas for our entertainment.


Fri, 04/13/2012 - 03:20 | 2340877 suckerfishzilla
suckerfishzilla's picture

stop loss orders are for bitchez anyway.  Pedal to the metal. 

Fri, 04/13/2012 - 04:57 | 2340925 Zero Govt
Fri, 04/13/2012 - 05:29 | 2340950 catch edge ghost
catch edge ghost's picture

incompetent fabrication. a microcosm of the central plan.

Fri, 04/13/2012 - 05:35 | 2340957 Benjamin Glutton
Benjamin Glutton's picture

In summary...these are not the transactions you are looking for to explain Flash Crash 1.

Fri, 04/13/2012 - 05:48 | 2340967 divedivedive
divedivedive's picture

The document, which was the subject of the above email, was written a year ago by four academics associated with the CFTC (not SEC). Judging by their names I doubt english is their first language and there is a disclaimer on the cover sheet which states that the views expressed are their own and not the CFTC.

Fri, 04/13/2012 - 08:08 | 2341110 nanex
nanex's picture

You need to dig much deeper than that. This is a cesspool of biblical proportions -- your comments are a view through binoculars a mile away.

As far as the flash crash final report goes, the SEC and CFTC are, practically speaking, synonymous.

As far as the two papers go, I would recommend running the text through plagiarism detection software. Note the two papers were published 1 day apart. Be prepared to suspend or expel the guilty.

With respect to any discussion of W&R and the S&P futures, these two papers are one study with different names. It just so happens that the email correspondence was with someone who was not officially named in the SEC report. But we know the personal relationships involved. We know a lot more, which we've chosen not to print. We've known some of the key actors in this story for almost 2 years.

Finally, we only print what we feel is irrefutable, and keep hoping beyond hope, that there is a real live reporter somewhere out there who wants to make a name for themselves or have a shot at a Pulitzer. Because there is a story here, one involving billions of wealth and millions of people. And corruption, oh boy, is there corruption.

We are about done.

Fri, 04/13/2012 - 09:32 | 2341303 divedivedive
divedivedive's picture

I'm not trying to give you a hard time, and I'm not disagreeing with you. It is just that I prefer honest facts rather than sensational tweet like headlines. I'm sure there are many facts in your message (both mentioned and unmentioned). 

Personally I suspect that a lot more time and money is put into exploiting / breaking the system rather than beefing it up. The speed aspect has gone beyond providing timely information to being something used by a handful to manipulate things to their advantage. (But you know that).

I'm not advocating anything but perhaps the world would be better if there were more 'flash crashes'. A flash crash a week might put a spot light on the situation.

btw - I did very quickly scan that CFTC paper (which I didn't find particularly well written) and was surprised to learn that the HFT community was made up of 16 entities. Is that just those who are focused on futures ? Who are these 16 entities ? How many of them are DMMs ? And lastly - where can I find info on which DMMs are responsible for which securities ?

Fri, 04/13/2012 - 10:24 | 2341494 nanex
nanex's picture

The exchange won't give out a list of which DMM's handle which securities - at least that is what major media reporters have told me.


But you might be able to sleuth it out.


1. Capture the admitted to trading messages available on NYSE's site. They include "post" and "panel" information.

2. Capture the system event messages that include a list of affected symbols. If the problem is in the DMM network, match any of the affected symbols to your list in step one, and you now have one list. Rinse and repeat.

3. Be sure to send me the list!

Fri, 04/13/2012 - 07:23 | 2341043 Schmuck Raker
Schmuck Raker's picture

Thanks Nanex.

If not for your efforts, and your willingness to share, I don't see how so many of us would know about all the damage HFT causes.

Fri, 04/13/2012 - 08:27 | 2341153 backlight
backlight's picture

See Eric Hunsader (Nanex) and Gregg Berman (SEC) being interviewed in the iPad app "Money & Speed: Inside the Black Box". Dig deep into beaufitul data vizualisations of AAPL, P&G etc during the flash crash.... download the free app by Vpro's Backlight... makers of "Quants: The Alchemists of Wall St." Enjoy!

Fri, 04/13/2012 - 08:42 | 2341173 De minimus
De minimus's picture

"...HFT seller places and cancels 1,000 sell orders in a second with no intention of any being executed? Do you get the picture?"

I remember watching a video from the net which showed this as it was happening. So if evidence is a crucial factor, I would guess it is abundant and resolves any questions regarding the "oops" defense.

Fri, 04/13/2012 - 15:55 | 2342623 citta vritti
citta vritti's picture

Kudos to nanex, and doubly so for participating in the blog postings, above. 

I saw the movie version of Freakonomics last night and this report and nanex's disembowelment of it, reminded me of two segments

The one titled "Pure Corruption" (22 minute segment here: deals with the problem and process of fixing matches in sumo, but the broader issue is the Japanese duality of "honne and tatamae" -- the conflict between truth (or true feelings) and the facade, the official version of reality fostered by the Shinto religion underpinning sumo. Carefully interspersed in this segment are visuals and voiceovers drawing the sadly all too easy parallels to Wall Street (Madoff, of course, but mack, fuld, greenspan and others). 

One of the money lines here: "In the realm of both sumo and high finance, the illusion of purity can not only hide corruption, it can help to make it possible." 

The other pertinent segment is one of the authors talking about using bribes of M&M candies to potty train his daughter. ( In three days the three year old went from having no bladder control, to being completely in control of flow and completely gaming the system by sprinkling a few drops and demanding her reward. (Sounds weirdly like Wall Street and the Fed with all the back and forth about stock versus flow.) The authors conclude that economists and others, and especially people in government, haven't a clue about how incentives will play out beyond, maybe, the first instance or two. 


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