A firm called Nanex has a fascinating explanation for the May 6 Flash Crash:
Beginning at 14:42:46, bids from the NYSE started crossing above the National Best Ask prices in about 100 NYSE listed stocks, expanding to over 250 stocks within 2 minutes (See Part 1, Chart 1-b). Detailed inspection indicates NYSE quote prices started lagging quotes from other markets; their bid prices were not dropping fast enough to keep below the other exchange’s falling offer prices. The time stamp on NYSE quotes matched that of other exchange quotes, indicating they were valid and fresh.
With NYSE’s bid above the offer price at other exchanges, HFT systems would attempt to profit from this difference by sending buy orders to other exchanges and sell orders to the NYSE. Hence the NYSE would bear the brunt of the selling pressure for those stocks that were crossed.
Minutes later, trade executions from the NYSE started coming through in many stocks at prices slightly below the National Best Bid, setting new lows for the day. (See Part 1, Chart 2). This is unexpected, the execution prices from the NYSE should have been higher — matching NYSE’s higher bid price, unless the time stamps are not reflecting when quotes and trades actually occurred.
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Because many of the stocks involved were high capitalization bellwether stocks and represented a wide range of industries, and because quotes and trades from the NYSE are given higher credibility in many HFT systems, when the results of these trades were published, the HFT systems detected the sudden price drop and automatically went short, betting on capturing the developing downward momentum. This caused a short term feed-back loop to develop and panic ensued.Some trading firms have stated that they detected a problem with the accuracy of the data feed and decided to shut down which further reduced liquidity. We think the delay in NYSE quotes was at the root of this detection.
Nanex publishes some graphical representations of patterns in quote time-series, refering to them as “Crop Circles” … somebody’s doing something, but what? They are publishing new interesting Crop Circles daily … for instance:
NASDAQ “Blue Wave”. Very interesting Bid price/size repeater. 30,000 quotes at approx. 480 quotes per second.
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NASDAQ “The Waste Pool”. Over 5500 quotes in 2 seconds, alternating the bid size up for 2 quotes, down for 2 quotes, etc., effecting the BBO along the way.
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“Boston Shuffle”. 1250 quotes in 2 seconds, cycling the ask price up 1 penny a quote for a 1.0 rise, then back down again in a single quote (and drop the bid size at that time for a few cycles).
Most interesting, but I wish their graphics were better quality and there was a little more explanation of just what was being charted. Traders’ games … you gotta love ’em!
Nanex is mentioned in an article in The Atlantic, titled Explaining Bizarre Robot Stock Trader Behavior:
“It’s possible that the observed patterns are not malicious, in error, or for testing, but for information-gathering,” [University of Pennsylvania’s Michael] Kearns observed. “One could easily imagine a HFT shop wanting to regularly examine (e.g.) the latency they experienced from the different exchanges under different conditions, including conditions involving high order volume, rapid changes in prices and volumes, etc. And one might want such information not just when getting started, but on a regular basis, since latency and other exchange properties might well be expected to change over time, exhibit seasonality of various kind, etc. The super-HFT groups might even make co-location decisions based on such benchmarks.”
MIT’s Andrew Lo, who is the director of the school’s Financial Engineering laboratory, offered a variation on that thesis. He contends that the algorithms are being used not to test latency but to probe the actual market conditions.
“What I think is going on is that there are algorithms that have been designed to monitor the markets and essentially create a kind of trolling function to try to identify orders that might be executed and to do that in a regular and relatively systematic way,” he said.
Themis Trading is outraged:
Forget the awesome graphs; ask yourselves this: what economic non-nefarious reasoning could there be for the quote patterns in this link?
It’s poker guys … it’s poker. You can always nail a bluffer eventually, as long you’re patient.
Government-controlled mortgage buyer Freddie Mac is asking for $1.8 billion in additional federal aid after posting a larger loss in the second quarter.
Freddie Mac said Monday it lost $6 billion, or $1.85 per share, in the April-to-June period. That takes into account $1.3 billion in dividends paid to the Treasury Department. It compares with a loss of $840 million, or 26 cents a share, in the second quarter a year ago.
The government rescued McLean, Va.-based Freddie Mac and sibling company Fannie Mae from the brink of failure nearly two years ago. The new request means they have needed $148.2 billion to stay afloat, about $63.1 billion of which is being used by Freddie Mac.
Do you want to know one reason why the regulators get away with extortion? Here’s nine million:
In the hearing today, before U.S. Magistrate Judge Michael Dolinger, the parties discussed possible outlines for pretrial discovery in the case. Reisner said the SEC is turning over 9 million pages of investigative documents to Tourre’s lawyers. He said the agency may seek to take pretrial testimony from 25 witnesses.
Pamela Chepiga, one of Tourre’s lawyers, said Tourre may seek to take testimony from as many as 50 witnesses. Chepiga said the parties may also need to pursue evidence in the U.K. and Germany in addition to the U.S.
And remember, Fabulous Fabio was a salesman. Just a damn salesman. But the SEC will continue to throw lawyers and papers and mud at him until he realizes that the US Government has a lot more money than he does.
The Canadian preferred share market turned in mixed results on below-average volume today, with PerpetualDiscounts gaining 13bp and FixedReset losing 8bp.
It will be interesting to learn what effect the DBRS downgrade of MFC has on the market tomorrow. My guess: not much, but we could see some choppiness and I’ll emphasize the word “guess”. I’m more interested in learning whether they’ll announce a new issue tomorrow!
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1964 % | 2,071.0 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1964 % | 3,137.3 |
| Floater | 2.53 % | 2.14 % | 40,326 | 21.99 | 4 | -0.1964 % | 2,236.1 |
| OpRet | 4.87 % | -1.26 % | 107,230 | 0.22 | 9 | -0.0641 % | 2,360.6 |
| SplitShare | 6.15 % | -1.92 % | 68,723 | 0.08 | 2 | 0.1486 % | 2,255.7 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0641 % | 2,158.6 |
| Perpetual-Premium | 5.82 % | 5.58 % | 98,909 | 5.61 | 7 | -0.0747 % | 1,945.4 |
| Perpetual-Discount | 5.80 % | 5.84 % | 177,199 | 14.03 | 71 | 0.1297 % | 1,868.3 |
| FixedReset | 5.31 % | 3.41 % | 284,181 | 3.40 | 47 | -0.0844 % | 2,232.6 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| GWO.PR.H | Perpetual-Discount | -1.67 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-08-09 Maturity Price : 20.61 Evaluated at bid price : 20.61 Bid-YTW : 5.97 % |
| PWF.PR.O | Perpetual-Discount | -1.43 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-08-09 Maturity Price : 23.95 Evaluated at bid price : 24.15 Bid-YTW : 6.05 % |
| BMO.PR.H | Perpetual-Discount | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-08-09 Maturity Price : 22.96 Evaluated at bid price : 23.86 Bid-YTW : 5.52 % |
| IAG.PR.A | Perpetual-Discount | 1.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-08-09 Maturity Price : 19.75 Evaluated at bid price : 19.75 Bid-YTW : 5.91 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TRP.PR.A | FixedReset | 62,855 | Scotia crossed 25,000 at 25.95; RBC crossed 25,000 at 25.98. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.95 Bid-YTW : 3.81 % |
| TRP.PR.B | FixedReset | 59,770 | RBC crossed 25,000 at 24.98. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-08-09 Maturity Price : 25.02 Evaluated at bid price : 25.07 Bid-YTW : 3.67 % |
| TRI.PR.B | Floater | 51,300 | TD crossed 50,000 at 23.35. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-08-09 Maturity Price : 23.09 Evaluated at bid price : 23.35 Bid-YTW : 2.04 % |
| RY.PR.E | Perpetual-Discount | 34,400 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-08-09 Maturity Price : 20.10 Evaluated at bid price : 20.10 Bid-YTW : 5.62 % |
| BNS.PR.L | Perpetual-Discount | 29,493 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-08-09 Maturity Price : 20.21 Evaluated at bid price : 20.21 Bid-YTW : 5.62 % |
| BMO.PR.J | Perpetual-Discount | 27,317 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-08-09 Maturity Price : 20.26 Evaluated at bid price : 20.26 Bid-YTW : 5.57 % |
| There were 22 other index-included issues trading in excess of 10,000 shares. | |||
[…] Nanex explanation of the Flash Crash was discussed on August 9. It now appears that the mechanism is considered plausible by the CFTC: What this delay means is […]
[…] The latency problem was discussed on August 9. […]
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