Will Nasdaq Be The Next Casualty Of The SEC's Anti-Latency Arbitrage Push?

Tyler Durden's picture

Back in 2009 Zero Hedge was first the only, and shortly thereafter, one of very few non-conformist voices objecting to pervasive high frequency trading and other type of quantitative market manipulation in the form of Flash Trading (which has recently reemerged in yet another form of frontrunning known as "Hide not Slide" practices) quote stuffing, and naturally latency arbitrage: one of the most subversive means to rob the less than sophisticated investor blind, due to an illegal coordination between market markers, exchanges and regulators, which effectively encouraged a two-tier market (one for the ultra fast frontrunning professionals, and one for everyone else). A week ago we were amused to see that the SEC charged the NYSE with a wristslap, one for $5 million dollars and where the NYSE naturally neither admitted nor denied guilt, accusing it of doing precisely what we said it, and all others, had been doing for years: namely getting paid by wealthy traders, those using the prop data feed OpenBook Ultra and other paid systems, to create and perpetuate a two-tiered market, all the while the regulator, i.e., the SEC was paid to look the other way.

The graphic summary of the empty action against the NYSE which will do nothing to change the broken market:

This action was nothing but a desperate, and futile, attempt to regain some investor confidence in the market. It has failed, and since said "enforcement" action has done nothing to restore confidence, expect to see more exchanges slapped with fines for actively perpetuating latency arbitrage opportunities for "some" clients.

Well, since the SEC will be desperate to come up with more means of "restoring credibility" of both the market and its regulator, another exchange it may want to look at is the NASDAQ, which as Nanex demonstrates, may well have been engaging in comparable (most likely not pro-bono) latency arbitrage benefitting some: those paying for its direct feed aka TotalView, and thus not harming others, or those relying on the Consolidated Feed (UQDF) for data dissemination.

From Nanex:

TotalView vs Consolidated Feed

In Facebook at 13:50:01 on May 18, 2012, when we compare Nasdaq's quote sent to the direct feed (TotalView) with the same quote sent to the Consolidated Feed (UQDF) we find a difference, or delay, of at least 120 milliseconds. That is, quotes sent to the direct feed appeared 120 milliseconds before the same quotes appeared in the consolidated feed. Comparing quotes and trades from other exchanges allows us to rule out the consolidated feed causing this delay. In other words, the delay must have occurred sometime before it reached the consolidated feed processors. Last week, the SEC fined the NYSE for sending a quote faster to their direct feed than the consolidated feed.

Here, are a few more examples of quotes, appearing before trades.

The first 2 charts compare the Nasdaq Quote from TotalView (Red) and the consolidated feed (gray). All charts show data at 1-millisecond intervals over 1/2 second of time.
1. Nasdaq Quote spread from TotalView (red) and the Consolidated Feed (gray).
The offset of the gray shading to the right of the red shading represents the amount of delay.

2. Same as chart 1, but includes trade executions. Data from Totalview is red, data from Consolidated feed is black/gray.
Note how trade executions line up with the direct feed, but appear ahead of the consolidated quote.

For more visual proof of latency arbitrage via Nasdaq go here.

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LawsofPhysics's picture

Black pools run deep, bitchez, careful where you step.

slaughterer's picture

Time for QQQ rebalancing: sorry, AAPL.  Short as of $704.80 (mentioned this trade today earlier). 

ParkAveFlasher's picture

If I understand "latency arbitrage" correctly, I'm doing it right now with this comment.

veyron's picture

What's not mentioned here is that most of NASDAQ's and NYSE's revenues (for more than a year now) almost entirely came from colocation and market access fees (not from the per-transaction fee spread)

rocker's picture

They want us to believe the Facebook FB fantasy was a floor exchange problem. Well, kind of.

What happens when the HFT's themselves jam the system with so many buy and sell orders to the tune of 1000 for every 1 real trade.

You get what wall street has done before, rip the innocent public off. Make off with millions and blame the exchange as cover.

Even one of the traders on Fast Money confirmed it and said. Now the public sees what wall street does all the time.

This has happened before and will again. I told my wife they would do this before hand. I said they would do this and jam the system.

I would have never considered buying the stock. Especially when they did over allocate it and wall street was pimping it.

Pure fraud. If they wanted to be honest. They should have cancelled all orders and started over. Like that was going to happen. LOL

Wall street is a Fraud and they revealed themselves as vultures. The squid lives on.

The squid multiplies every day. GS, JPM, MS, BCS, all of them.  It's a sickness. Greed is Good for them alone.

Ham-bone's picture

Multiple accounts of apple stores with plenty of phones but short or no lines...not a ton of customers???  folks who didn't pre-order walking out w/ phones???  something is amiss in the universe...maybe they are all waiting to shop this weekend?  Geez, wonder what a iphone slip would mean to the Nazdack?

Bananamerican's picture

i'm a mac dude, always have been.....laptops, desktops, iphones, ipads, the works....

i have little to no interest in the iphone 5....

i've also started to notice some presentational/institutional kludginess from Apple, "post-Jobs".

He was no saint but, remarkably, he was able to maintain his imprimatur on Apple, even as it grew so large.


"Jobs is a concept, by which we measure our gain"-John Lennon

not fat not stupid's picture

Hope some of the frontrunners read this.

guess what? some of you are going to jail. sooner or later.

yes, I mean YOU asshole.

NotApplicable's picture

You sound high on Hopium.

"Wrist-slap" = "cost of doing business"

Nobody except perhaps a back-office guy from a foreign land is going to jail, otherwise, they'll ALL go to jail, and well, that's never going to happen, as the world lives within a criminal, just us system.

Dr Benway's picture

Yeah hopium and crackspectations. Noone is going to jail. The crooks control the legal and political system. They define what is right or wrong, what is true or false. In the official narrative, ZH is just Internet wackos and their crazy articles.

Bob's picture

Of course it was just a wrist slap fine: It might have hurt the market, its employees, its customers and even the industry and economy as a whole if justice had been served. 

Hence, per Lanny Breuer, DoJ Criminal Division Head, we can't risk prosecution because we can't afford justice.  Yes, that's right. 

And, according to Bill Black,  he made sure to tell a large meeting of elite Corporate Defense attorneys exactly how to word the argument:


This is the only official policy statement of Too Big To Prosecute that I've seen from DoJ. 

NotApplicable's picture

Can't risk upsetting the ponzi that feeds, no?

centerline's picture

Tanks in the streets.  Whose your daddy?

BlackholeDivestment's picture

...and Tank Man blogger in Chinese prison, handed over by Yahoo etc... and not even a wrist slap from Congress, just wordy posturing durring some political hearings on the Hill that define the aborted principle of freedom and liberty for the sake of BORDERLESS FASCISM and the Algo Nova Fed Fiat Beast. http://www.youtube.com/watch?v=7Ljiwe-xzSs


Dr Benway's picture

Thanks for posting that Bob, very interesting. It's funny, because we are going down that same route in Australia with "enforceable undertakings" and letting the criminals walk. (Oz is a mix of US/UK and often emulates the worst of both) Here, the reason for the regulators avoiding prosecution in the favor of 'stern letters' to criminals has been spelt out though: it is cheaper.


The moron regulators base their cost benefit analysis on how much the fine would be and how much prosecution would cost. But they miss the key component of the equation: the incalculable longterm damage to the market when it becomes clear that the regulators are a fucking joke. The main cost of allowing criminals free reign is systemic and catastrophic, so the idiot regulators don't even count it.

Element's picture

It's ok, there's zero corruption in Australia.  Just ask Canberra, or the MSM.

dcb's picture

I have real time quotes from bats, yet my trading is through vanguard there are often discrepanices of 10 cents a share between the two. vanguard as a company also doesn't seem to be concerned with hft market rigging because I am always bringing abnormalities to them

Bananamerican's picture

then why the fuck are you doing it?

kevinearick's picture

Gotta feed the cookie monster...notice jpm anxiety feeding mechanism?

crusty curmudgeon's picture

Tyler, I envy you.  You're doing a lot of good.  It's what gives life meaning.

“The reason welfare is bad is not because it costs too much, nor because it "undermines the work ethic," but because it is intrinsically at odds with the way human beings come to live satisfying lives.” Charles Murray

LongSoupLine's picture

The only thing that can stop greed at these levels is threat of life via revolution.

q99x2's picture

I think I saw the head of the NYSE walking around with one of the documetary people from like 60 minutes. He was a straight up greedy crook through and through that should have been in jail. Ruined it all they did. Let them devour themselves bitchez.

Duke of Con Dao's picture

hey Tyler. I really appreciated the stuff you published in the past on HFTs. 

keep up the great work! 

OhOh's picture

The latency or loops in the public system were known, the deals done are known, the fine should be 100 times the difference. That would ensure the exchange wouldn't do it again, the winners could be charged and the proceeds shared out by the losers.

Element's picture



"Back in 2009 Zero Hedge was first the only, and shortly thereafter, one of very few non-conformist voices objecting to pervasive high frequency trading and other type of quantitative market manipulation in the form of Flash Trading..."


I stand corrected Tyler, you were the first.

Urban Redneck's picture

Funny how the dot com boom and tech companies gave birth to tons of technologies that increased market access and available data for everyone, but once the regulators finally catch up with what was going on half a dozen years before (and after billions in M&A profits for "consolidation"), the only beneficiaries of said technologies are the very instutions they (SEC, Fed, Finra, CFTC, OCC, OTS, Treasury, et al)  are supposed to "regulate".  Perhaps we need a new defintion of REGULATION.

Number 156's picture

Actually, I think the SEC has become an arbitrator.  As the small investors pull out of the markets, all you will have left are the large houses fighting against one other for whatever they can get. If that's where we are now, then I would expect the SEC to act as an arbitrator between some of the large, well connected wall street firms. The SEC never will be and never was for our protection.

Grand Supercycle's picture

Due to recent central bank intervention and short covering spikes, all these daily charts are extremely overextended & a significant correction is expected very soon ~ SPX,DOW, NZDUSD, GBPUSD, AUDUSD, COPPER, CRUDE, GOLD, SILVER.