Submitted by Nanex
Adds a new unit of time measurement to the lexicon: fantaseconds.
On September 15, 2011, beginning at 12:48:54.600, there was a time warp in the trading of Yahoo! (YHOO) stock. HFT has reached speeds faster than time itself. Up to 190 milliseconds into the future, or 0.19 fantaseconds is the record so far. It all happened in just over one second of trading, the evidence buried under an avalanche of about 19,000 quotations and 3,000 individual trade executions. The facts of the matter are indisputable. Based on official exchange timestamps, there is unmistakable proof that YHOO trades were executed on quotes that didn't exist until 190 milliseconds later!
Millions of traders depend on the accuracy of exchange timestamps -- especially after bad timestamps were found to be a key factor in the disastrous market crash known as the flash crash of May 2010. We are confident the exchange timestamp problem has been completely addressed by now: the SEC would have made sure of it. It's not like adding accurate timestamps is rocket science, or even considered a difficult problem. Based on recent marketing materials, the exchanges are practically experts on measuring time. And with hundreds of millions in annual data feed subscriptions paid by the same subscribers expecting quotes with accurate timestamps, there is no shortage of funds to make it happen.
So we can be certain the exchange timestamps were accurate, which means that HFT has truly entered the era of the fantasecond.
But let us suppose for a moment that in reality, quotes became queued (delayed) and were timestamped after leaving this queue. After detailed analysis of the UQDF data feed (see chart below) that transmits this information to traders, we find that the traffic rate for both the total of all output lines and specifically multicast line #6 which carries YHOO, were both well below peak rates. So it doesn't appear there were any capacity problems which have always been an excellent indication of feed delay.
This raises a few thorny questions.
Does this mean there are far more delays than we previously thought? Is there a delay every time we see an explosion of quotes in one stock? Because that sort of thing happens. All the time.
Regulation NMS is pretty clear that direct exchange feeds are prohibited from having a speed advantage over the UQDF data feed. UQDF computes the NBBO after all. So how does one ensure trade-through price protection if the price being protected hasn't even occurred yet? The NBBO lies at the heart of Regulation NMS (Reg. NMS) and is the key concept that assures investors are getting the best price when buying or selling stocks.
Maybe it would be better to just fantasize about fantaseconds after all.
The first chart is a 250 ms interval chart of the NBBO in YHOO which is plotted as vertical lines and colored red if the NBBO was crossed during the interval, yellow if it was locked, and gray if it was normal. The implied quote rate is shown as a histogram at the bottom -- and scaled in quotes/second. We will focus on the time shown in the black circle.
The next chart is the same as the one above, but includes trade executions which are plotted as dots or squares and are sized according to trade size. Each reporting exchange uses a unique color and shape. An exchange code table appears at the end of this page. What is unusual about this chart is that trades are reported ahead of quotes. The dots/squares should trail after the quotes. Up to the point in time that is labeled "A", and after the point labeled "B", trades and quotes were in sync. Between these two points is where the quote timestamps began falling behind.
By plotting quotes and trades from just one of the active exchanges, we can easily measure how far in time the trade messages came before the quotes and therefore estimate the minimum amount of time the quotes were delayed. Below is a 1 millisecond interval chart of YHOO showing only Nasdaq trades (black circles) and the Nasdaq bid-ask spread (gray vertical bars).
Exchange Code Legend:
|4||AMEX||American Stock Exchange|
|8||CINC||National Stock Exchange|
|9||PHIL||Philidelphia Stock Exchange|
|11||BOST||Boston Stock/Options Exchange|
|57||NQNX||NSX Trade Reporting Facility|
|59||NTRF||NYSE Trade Reporting Facility|
|63||BATY||BATS Y Exchange|
|64||EDGE||Direct Edge A|
|65||EDGX||Direct Edge X|
The chart below shows quote message rates for UQDF and multicast line #6 which is the line that carries YHOO quotes. The time of the event is shown at the lower left. Although traffic from YHOO was a significant percentage of all traffic on UQDF, it was still not high enough to indicate any problems. Note that the surge on the right side of the chart is much higher, and there weren't any known problems at that time in YHOO.