In case you missed the interview with Eric Hunsander of Nanex a few days ago, we suggest reviewing it again.
Mr Hunsander shares his views on crashes, system overloads and killer Algos.
By now every investor has heard of HFT Algos running the markets. The Trader has covered the topic in depth over the past year. Nanex has been the company that has provided most of the information and charts with regards to the professional HFT crowd. Below is an excerpt from the must listen to interview published a few weeks ago on HFT, Algo, market microstructure and the FB event wort reviewing, with Eric Hunsander of Nanex. Via Erik Townsend of Financial Sense.
The full interview click here.
ERIK: Now, before we dive into the gory details of what happened that fateful day with the Facebook IPO, I want to start by giving our listeners a sense of some of the background issues that came into play that day. Now years ago, a given stock say IBM stock was only traded on one and only one stock exchange. So IBM’s listed on the New York Stock Exchange, so that means the New York Stock Exchange is the only place that you could go to trade IBM shares, but that all changed a few years ago. Please explain to our listeners how and why it changed; what is Regulation NMS and how things work today. [3:45]
ERIC HUNSADER: Regulation NMS is what was debated by the industry in 2005, 2006 and was finally implemented and rolled out in the first, second quarter of 2007. At the core of Reg NMS is this concept called the national best bid or offer, which each exchange trading a specific stock would submit their bids and offers; this information would be aggregated by what they called a SIP — there’s a lot of acronyms coming up here. SIP stands for Security Information Processor. And one of the formal names or actually implementation of the SIP you might hear is CQS, the Consolidated Quote System. That’s the same thing as the SIPs for a specific group of stocks. But anyways, so those SIPs would accumulate the bids and offers from all the exchanges, find the highest bid and the lowest offer and that would become the national best bid or offer so that an order from a customer coming to any exchange would have to trade at the best bid or offer before it could trade at a next lower price. That was called trade through price protection. And that is the core of what Reg NMS is all about. [4:58]
Yesterday we once again spotted several “interesting” patterns in big names, where namely the Nat Gas algo dominated the trading pattern.
This specific Algo uncovered by our friends at Nanex, was explained last year.
Additional charts below.
|Another great insight easily explained by Nanex.
On Friday, Aug 5, 2011, we processed 1 trillion bytes of data for all U.S. equities, options, futures, and indexes. This is insane. A year ago, when we processed half of that, we thought it was madness. A year before that, when it was 250 billion bytes, we thought the same. There is no new beneficial information in this monstrous pile of data compared to 3 years ago. It is noise, subterfuge, manipulation. The root of all that is wrong with today’s markets.
HFT is sucking the life blood out of the markets: liquidity. It is almost comical, because this is what they claim to supply. No one with any sense wants to post a bid or ask, because they know it will only get hit when it’s at their disadvantage. Some give in, and join the arms race. Others leave.
Take the electronic S&P 500 futures contract, known as the emini, for example. This is, or used to be, a very liquid market. The cumulative size in the 10 levels in the depth of book was often 20,000 contracts on each side. That means a trader could buy or sell 20,000 contracts “instantly” and only move the market 10 ticks or price levels. Even during the flash crash, before the CME halt, when hot potatoes were flying everywhere, the depth would still accommodate an instant sale of 2,000 contracts.
HFT rules the broken market. If you still disbelief, please review what has happened over the past years. The exchanges will tell you HFT is providing liquidity, enhancing trading, but unfortunately, this is a great fallacy. Volumes have been diminishing over the past years, liquidity is drying up, and the broken market is becoming even more broken. Wonder if Eugene Fama has seen this chart? Perfect information, rational investors, yeah right. Must see action, continue. Courtesy Nanex via Zero Hedge.
We haven’t reported on the HFT topic during the past weeks. HFT still exists, and is not decreasing the manipulation. Broken markets are continuing, and no, HFT do not provide liquidity, as they are liquidity aggressors (ie they take liquidity). From Nanex;
We have found many more examples of HFT algos running out of control since our recent discovery of algo tests occurring during active regular trading hours. We now know that there are thousands of similar events every trading day: we missed many of these because our filter parameters were set too high. In the example below, you can see how much it affects prices investors receive. HFT proponents would like you to believe the spread of CARB is 5 cents or less (the quiet period between 13:25 and 13:40) And they are right! The spread is narrow.. when there isn’t any trading activity. But once there is a hint of trading activity, the BBO oscillates to such a degree that it has no meaning. It might as well be infinite.
We have detected what looks like algo testing in individual stocks and ETFs. A tell-tale symptom is rapid fire quotes coming from multiple exchanges which flutter the NBBO hundreds and sometimes thousands of times each second. Often, there are few or zero trades during the event, and in several cases, trades occur shortly before and/or after the test event.. These tests can occur at anytime and are frequently found during regular trading hours. Several of the exchanges involved did not previously show a significant level of HFT infestation. This behavior previously involved Nasdaq, Arca and sometimes BATS. This example shows a high rate of nonsense quotes from no less than 5 exchanges. There were no trades during this event. A few small trades did occur near the end of the event at prices outside the range shown here. The black area is the NBBO. Note how the NBBO of this inactive stock goes from a few cents (and stable), to 25 cents (and wildly unstable).
Soon, two years, have passed since the flash crash, but we get very little details of what happened, and even less reports of how we could prevent further flash crashes. If we don’t know what happened, how will we prevent it from happening again?
Nanex is bringing us another great insight. Order books during the event. Courtesy Nanex;
On December 16, 2011, at 11:09:51.500 and again at 11:33:46.190, quotes from ISE flooded OPRA for approximately 50 to 100ms. During these events, there were no quotes from any of the other 9 reporting exchanges.
We’d also like to point out an anomaly in quote rates from the ISE exchange that appears whenever the total OPRA quote rate exceedes about 3 million quotes/sec. When OPRA quotes surge to a peak, the quote rate from ISE will suddenly back off and stay low until the total quote rate declines, where upon it will suddenly surge, often sending total OPRA traffic to new highs.