Cutting Through The HFT Lies: What Really Happened During The Flash Crash Of August 24, 2015

One of the fallacies being propagated about yesterday's flash crash, is that somehow HFTs came riding in as noble white knights and rescued the market from a collapse instead of actually causing it. This particular lie is worth a few quick observations and explanations of what really happened.

What did not happen, is what Doug Cifu, the CEO of HFT titan Virtu, the firm which as we have profiled repeatedly in the past has lost money on 1 day in 6 years...

... told CNBC when he said it wasn't Virtu's fault the market did not work for anyone as a result of countless HFT glitches: "we don't cause volatility, as a market maker we're absorbing volatility and we think we soften it."

The most amusing bit was when Cifu said that "we're really just in the role of transferring risk from natural buyers to natural sellers." Considering Virtu and its "special sauce" has never actually taken on risk with its trading record, discussing risk is a little rich for the owner of the Florida Panthers, and here's why: in a note by Credit Suisse's Laura Prostic (the typos are because she is in S&T) we now know precisely what happened:

HFT is typically 50% of overall volm, but they have to walk away in this heightened vol envt, which dramatically reduces liquidity. Hightened vol was mainly unwinding of hedges, not panic.

Anyone who actually trades (and is not part of the Modern Market initiative) knows that this precisely what happens every time there is a spike in market vol: HFTs simply walk away leading to the dreaded "HFT STOP" moment, creating a feedback loop of even less liquidity, and even more volatility, until circuit breakers are finally hit or asset prices hit limits. Yesterday, for the first time in history, not only the S&P500, but the Nasdaq and the DJIA all hit their particular "limit down" triggers.

Credit Suisse also directly refutes what Doug Cifu said: HFTs, far from not causing volatility, merely step aside when volatility surges  thus leading to such stunners as VIX soaring above 50 overnight (with the CBOE too ashamed to even report what it would have been in the first 30 minutes of trading).

This also ties in with the summary in our last night's post comparing the flash crashes of 2010 and 2015:

The good news is that with liquidity inevitably collapsing ever further to a state of near singularity with ongoing central bank interventions, and with markets broken beyond repaid, we will very soon have a repeat flash crash like today, one which will provide enough satisfactory answers to the question of just happened that lead to a market that was completely broken for nearly an hour, and where the VIX was so very off the charts, the CBOE was afraid to show it for at least thirty minutes.


One thing is certain though: while the market dies a slow, painful, miserable death, the biggest HFTs will continue pocketing millions. Such as Virtu: "Virtu Financial Inc., one of the world’s largest high-frequency trading firms, was on track to have one of its biggest and most profitable days in history Monday amid a tumultuous 24 hours for world markets, according to its chief executive."

As we previously reported, while Virtu may have fabricated its role in yesterday's events, there was one truth: it had an amazingly profitable day because as a result of the total chaos, HFTs were able to frontrun block orders from a mile away and as a result of soarking bid/ask spreads, Virtu raked in millions by simply capitalizing on the chaos it and its peers have created. As Cifu said then "Our firm is made for this kind of market." We quickly corrected him: "your firm made this kind of market."

But back to the lies: earlier today the WSJ reported the following:

The speed and depth of the drop harked back to the flash crash of May 2010, when program-driven trading produced a self-reinforcing wave of selling. This time around, high-frequency trading firms like Virtu Financial Inc. and Global Trading Systems LLC were buyers that helped U.S. stocks rebound midday from their early slump.


“We were catching those falling knives,” said Ari Rubenstein, co-founder of Global Trading Systems.

Actually no. What happened is that in early trading the entire market was in freefall, and the only thing that saved it was the various major market indices hitting their limit down levels for the first time in history - not even during the Flash Crash of 2010 did this happen. The following Nanex chart documents this beyond a doubt.


If HFTs did anything, it was merely to frontrun the buy orders once the selling wave - halted thanks to limit downs being hit - had exhausted itself, and the buying scramble was unleashed around 9:35am leading to a 5% move in less than 10 minutes! It was here that Virtu made its colossal profits, however not from taking the least amount of risk, but merely from frontrunning order flow into a stil chaotic market with gargantuan bid-ask spreads, which incidentally not only does not provide liquidity, but reduces it as it competes with other buy offers for any market offers, also known as "providers" of liquidity, only to immediately flip the transaction to those buyers which Virtu knew with 100% certainty were just behind it. In any other market this would be illegal, except for one in which Reg NMS has made such frontrunning perfectly legal (courtesy of billions spent by the same HFTs who now benefit from it).

So what was the real contribution of HFTs: an unprecedented failure of ETFs to trade with their underlying securities and vice versa. As we said yesterday: "for minutes at a time, there was an unprecedented disconnect in ETF fair value as hedge funds sold off ETFs however correlation arbitrageurs were unable to capitalize on the discrepancy with the underlying leading to historic, and extremely lucrative divergences."

Others added:

... experts are still scratching their heads over what may have caused these ETFs to nosedive. One possible explanation is that liquidity providers -- think high-speed traders and other Wall Street firms -- charged with stabilizing the market weren't there when needed. That's what happened during the flash crash of 2010. "When markets get hairy, sometimes those liquidity providers step out of the way to avoid getting run over," said Matt Hougan, CEO of

So while we await for the first clear break of the ETF model, thanks to none other than HFTs, here is a visual example of what really happened: some 220 ETFs which all fell by 10% yesterday!


But it wasn't just the "transitory" failure of the ETF model: yesterday the Nasdaq ETF, the QQQ, had its widest 1 minute price swing in history. Yes, the NASDAQ!


And just in case there is still any confusion if yesterday's event was indeed a flash crash, the answer is yes, most certainly, as can be seen by the 15% tumble in QQQs right at the open. That, ladies and gentlemen, is the definition of a flash crash.

Again: thank you HFTs.

With that we leave matters into the SEC's capable hands which we know will do absolutely nothing until the time comes when the next marketwide crash does not see a promptly rebound, and the time to finally point the finger at the HFTs comes. It's just a matter of time, plus someone has to be a scapegoat for the real, and biggest, market manipulator in history: the Federal Reserve.

And since, naturally, the complicit and corrupt SEC won't do anything, expect another wave of retail investors to drop out of the market forever and to never come back, having seen yet again what a truly broken and rigged casino it has become.

Finally, while we are delighted that firms like Virtu make outside profits on days in which the market crashes and leads to untold losses for retail investors, we have just one simple request - please don't take us for fools anymore:  by now everyone knows all of your tricks, and can see right through your bullshit.

So, dear Virtu, frontrun whoever you have to, other HFTs, hedge funds, mutual funds, or whoever else is left in this quote-unquote market, and have another Madoff year (one with zero trading losses) but you will have to do it without what was once called the "investing public." They are now permanently gone until two things happen: i) the market is once again a market, not artificially propped up by $14 trillion in central bank liquidity which makes every asset "price" a illusion, and ii) HFT frontrunning is no longer legal, endorsed and blessed by the SEC, the regulators and all law enforcement agencies.