High Frequency Trading

High Frequency Trading
Tyler Durden's picture

How HFT Quote Stuffing Caused The Market Crash Of May 6, And Threatens To Destroy The Entire Market At Any Moment

Even as the idiots at the SEC mope about cluelessly, confirming they deserve not one cent of taxpayer money to fund their massively overbloated budget, and should all be summarily fired to collect tarballs in the Gulf of Mexico (and soon Maine), our friends at Nanex have conducted an exhaustive analysis (must read for everybody concerned about market structure), in which they identify the various parties responsible for the market crash, and, drumroll please, High Frequency Trading stands at the pinnacle of culprits for the 1,000 point Dow drop. From their findings: "While analyzing HFT (High Frequency Trading) quote counts, we were
shocked to find cases where one exchange was sending an extremely high number
of quotes for one stock in a single second: as high as 5,000 quotes in 1
second! During May 6, there were hundreds of times that a single stock had over
1,000 quotes from one exchange in a single second. Even more disturbing, there
doesn't seem to be any economic justification for this.
In many of the cases,
the bid/offer is well outside the National Best Bid/Offer (NBBO). We decided to
analyze a handful of these cases in detail and graphed the sequential
bid/offers to better understand them. What we discovered was a manipulative
device with destabilizing effect.
" In other words: enough with all the bullshit about HFT as a liquidity provider mechanism: in reality this is just a facade for the most insidious, computerized market manipulative device ever created. Nanex' conclusion: "What benefit could there be to whomever is generating these extremely high
quote rates? After thoughtful analysis, we can only think of one. Competition
between HFT systems today has reached the point where microseconds matter. Any
edge one has to process information faster than a competitor makes all the
difference in this game. If you could generate a large number of quotes that
your competitors have to process, but you can ignore since you generated them,
you gain valuable processing time. This is an extremely disturbing development,
because as more HFT systems start doing this, it is only a matter of time
before quote-stuffing shuts down the entire market from congestion.
We think it
played an active role in the final drop on 5/6/2010, and urge everyone involved
to take a look at what is going on. Our recommendation for a simple 50ms quote
expiration rule would eliminate quote-stuffing and level the playing field
without impacting legitimate trading."


Cognitive Dissonance's picture

Welcome To the Insane Asylum – Seeking Moral Courage - Chapter 5

It’s generally understood by all that something that’s taken by force has much less value compared to the same thing given freely and willingly. Never again consider yourself powerless when it’s clear you posses something of such immense power and wealth that it’s constantly being manipulated and seduced from your hands.


Tyler Durden's picture

After Bashing The Entire Market Yesterday, Today Cramer Goes Nuts Against High Frequency Trading

Ok, this is getting scary: first, Cramer bashes the entire market yesterday, saying it is a stupid, rapacious, capricious and a bunch of other words we would butcher absent spellcheckurrrr. Then, the CNBC frontman goes out on a full blown tirade against High Frequency Trading, against ongoing flash crashes (melt downs and ups) in names such as the ones we discussed earlier like Diebold and Washington Post, against the whole concept that the market is sane and stable, and lastly, Cramer agrees with us that the only senator worth listening to is Ted Kaufman, who also happens to be a guest on this particular Cramer show. Are we now mainstream or is Cramer too much of a fan? Is it time to switch our motto to "on a long enough timeline we all succeed and prosper courtesy of a neverending Keynesian ponzi pyramid." Is this the market bottom? Being on the same side of the trade as Cramer is...never good.


Tyler Durden's picture

Senator Kaufman Says Evidence Shows May 6 Flash Crash "No Isolated Event"

Speaking of circuitbreakers, in a speech on the Senate floor Wednesday, Senator Ted Kaufman pointed to evidence that the May 6 flash crash may not have been an isolated event. On June 2, stock in Diebold, a technological services company, experienced a “mini-flash crash” of its own, plunging 35% and recovering fully in only minutes. The sudden decline and rebound appeared to be the result of an “electronic overreaction” to news reports of Diebold’s long-expected settlement with the Securities and Exchange Commission (SEC) over fraudulent accounting practices. “Regardless of what caused Diebold’s ‘bungee jump’ or the May 6 market meltdown, we should all agree that such unusual market activity strikes at the very heart of our market’s credibility. Regulators should add to their list the need to examine whether the precipitous drop in Diebold stock was the result of high frequency traders who can subscribe directly to market data and news feeds and perhaps had programmed faulty correlations into their algorithms to react to breaking news events. With so much of the marketplace dominated by high frequency traders employing similar strategies, an overreaction by a few algorithms looking to trade instantaneously on the basis of imprecise correlations could trigger a dramatic plunge.


Tyler Durden's picture

Senator Kaufman Blasts SEC And Getco For Latest Episode Of Glaring Regulatory Capture

This is another example of regulatory capture at its worst. It is one thing for Wall Street firms to hire SEC staff for their general knowledge and expertise. It is quite another, however, when the leading high frequency trading firm, Getco, reaches into the SEC’s Division of Trading and Markets and hires a senior official who presumably has been close to, or perhaps substantially involved in, a major ongoing Commission review of a broad range of market structure and high frequency trading issues in the equity markets -- a review that should lead to additional rulemakings that will have a direct bearing on Getco’s trading strategies." - Senator Kaufman


Tyler Durden's picture

In Advance Of Today's SEC Hearing On High Frequency Trading

Today, the SEC is convening a one-sided panel whose job is to provide a fair and balanced view of high frequency trading but in reality is just a industry-lobby group which will fight tooth and nail to prevent any changes in regulation to the cushy two-tiered market gambling structure that has developed courtesy of a bunch of math Ph.D. and astrophysicists determining just what market momentum is (or isn't as May 6 so amply demonstrated). In advance of this "panel", the NY Observer's Max Abelson provides an amusing report on HFT in his piece the "High-Frequency Talker" which portrays precisely the kind of people who churn AMZN billions of times of day while having no clue what it is the firm does, what its EBITDA is (or what EBITDA is period), or what its EPS prospects are. For a more serious perspective from one of the few who has consistently warned about the threats of HFT and broken market structure, we provide the following speech prepared by Senator Ted Kaufman. We can only hope that someone at the SEC has at least one tenth the knowledge required to understand just how critical the Senator's warning is. We can only hope that the events of May 6 have forced the SEC to redirect their attention from online pornography for at least 24 hours.


Tyler Durden's picture

Dark Pool Warfare Is Now Official As Investment Bank Dark Venues Begin To Report Trading Data, Even As Third Parties Clamp Down On Disclosure

Following an ongoing outcry over opacity in the dark pool markets, a topic discussed to death on Zero Hedge, six investment banks have finally started providing some modicum of transparency into how much trading actually occurs in their dark pool venues. Today, MarkIt will start disclosing European trades matched in the internal crossing engines of Citigroup, Morgan Stanley, Credit Suisse, JPMorgan, UBS and Deutsche Bank. The first ever report of this kind can be read on the following MarkIt site. The data will be published on a T+1 basis. As MarkIt notes, "The aim of the Markit BCS (Broker Crossing System) product is to provide the market with greater visibility of the total volume crossed within their systems by the reporting brokers." Europe is a good place to start with such disclosure, as estimates on European dark pool trading are extremely wide: as Bloomberg notes, "The U.K.’s Financial Services Authority says the pools account for 1.25 percent of trades, whereas the Federation of European Securities Exchanges, which represents exchanges, estimates the figure is closer to 40 percent. The lack of reliable information on volumes and pricing of securities in dark pools has posed a problem for regulators trying to keep pace with market innovation." Curiously, this major development in dark pool opacity comes on the heels of the announcement that non-investment bank dark pools, those of Chi-X and BATS, will curb market data disclosure. Again Bloomberg: "Chi-X Europe Ltd., the region’s biggest alternative stock-trading system, began suppressing some market data from its dark pool after customer concern about information leaks led to a decline in business. Starting today, London-based Chi-X Europe will no longer disclose customer identification or order numbers in Chi-Delta, its dark pool. Bats Europe, the second-largest multilateral trading facility, will impose similar controls on May 24." We believe this is a byproduct of accelerating cannibalization between investment bank and 3rd party ATS venues (not to mention dinosaurs such as NYSE-ARCA), as margins continue to dwindle in the rapid evolution to a zero margin trading business, be it exchange or dark pool based. In their pursuit of the fastest, biggest, newest, market participants are destroying each other in the process, and further destabilizing market structure in the process.


Tyler Durden's picture

Global Macro Update

The first constatation looking at the EW count is that the downside moves are not complete. We finished this morning pre-open wave 3 for the S&P future and the Dax and subsequently bounced. I had given intraday sell level at 1,080/1,088 in the S&P, for the now this has held or close enough. It seems there could be a possibility to make an excess up to 1,093 on Monday but the top of this bounce could well be in already. People who sold the rebound should target 1,013/1,017 on the downside. This would coincide with both the wave 5 downside extension and the C = A if we assume that since the tops we are simply doing an ABC correction before resuming the bull trend. It is not my view, but I do think we wil bounce once we get to 1,013/1,017, possibly to retest the 200-dma. For now we focus on staying short with a stop on a daily close above the 200-dma. We see a similar price action for the Dax. We may rally a little bit more up to 5,880 but after that we should go test 5,600/5,510 at the minimum. - Nic Lenoir


Tyler Durden's picture

SEC Report On May 6 Meltdown Discusses HFT, Has Not One Mention Of The NYSE's "Supplementary Liquidity Providers"

The SEC has released its Preliminary Findings Regarding the Market Events of May 6, 2010, which find nothing, and just bring the promise of further investigations. The to-date proposed solution to the problem is laughable - more curbs, which do nothing to address the underlying issues at hand, which are that the modern version of market makers, HFT algos, pull liquidity away on a whim, and which can destabilize the market in an instant once "momentum ignition" strategies take over. As we have speculated, the SEC will find nothing material until such time as the next flash crash wipes out not 10% but puts the market into indefinite hibernation. One thing the report does do, is provide an extensive analysis of High Frequency Traders, a concept that was barely known as recently as a year ago. One thing that there is no mention of anywhere in the report, is the NYSE contraption known as Supplementary Liquidity Provider, a program created to give Goldman dominance over the DMM-parallel liquidity rebate system at the NYSE. One would think that the SEC would be aware of this program that was supposed to expire in early 2009, yet continues to be extended and provides Goldman and Getco with, arguably, unprecedented forward-looking information on order flow.


Cognitive Dissonance's picture

The Call – A Fictional Look at the 25 Minute Market Crash

Now that we’re all honorary members of the “Halfway To Hell Club”, a group of nineteen men who seemingly fell to their deaths while constructing the Golden Gate Bridge only to be saved by a crude and rudimentary net halfway down, I present this entirely fictional account of last Thursday’s market crash. Only the names were changed to protect the guilty.


Tyler Durden's picture

Senators Kaufman And Warner Demand SEC/CFTC Investigation Into Causes Of May 6 Market Crash

Computerized trading platforms and various algos are entering the biggest frenzy over assorted technological gimmicks since the October 1987 crash. And the public demands their blood. Or as the case may be, Lithium Hydride. Alas, the agency that is supposed to protect investors from abuses of HFT and various other newfangled technologies is woefully stupid to be able to deal with this great issue. Nonetheless, Senators Ted Kaufman (D-DE) and Mark Warner (D-VA) on Friday proposed an addition to the Senate’s Wall Street reform bill that would direct the Securities and Exchange Commission and the Commodity Futures Trading Commission to report to Congress on several key issues surrounding the May 6, 2010 market meltdown, which sent the Dow Jones Industrial Average tumbling dramatically in minutes. High-frequency-trading algorithms have been the initial focus of questions concerning the collapse. We hope Kaufman is successful. On the other hand, the most likely product of the SEC's work product will be a 1 million page printout of all the jpegs in www.underagetransvestitesforregulators.com, better known in SEC circles as due diligence output. As usual, we hope we are wrong. As usual, we suspect we aren't.


smartknowledgeu's picture

The Near 1,000 Point Slide of the DJIA Compels Further Investigation of the Wall Street Casino Scam

Yesterday’s slide in the US stock markets further proof that the world’s financial markets are nothing more than a rigged casino where the house (Wall Street) holds by far the better odds in every game (currency markets, stock markets, derivative markets, commodity markets) it offers the mark (the retail investor).


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