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- Art Buchwald

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- Tyler Durden

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- Boondock Saints

Wednesday, August 31, 2011

The Wizard Speaks

On August 10, 2011, at 9:50:16.467, someone sent 8,557 quotes for 522 option contracts on the stock BIDU (Baidu) in 1 millisecond. This is equivalent to 8.5 million quotes per second, about twice OPRA's current capacity. The quotes were sent from each of the 9 option exchanges that trade BIDU options. The net result was the overload of OPRA multicast line #7 which affected all option contracts that are quoted on that line (Symbols BH - BTZ). The line first became saturated (full) for 50 ms, then went completely dead for 60 ms, and finally took another 40 ms to recover.

The same morning, there were quotes from 440,516 option contracts for 3,470 stocks and indicies.  This event was caused by just 522 option contracts on one stock. In fact, the top 133 of these contracts had enough quotes (an average of 39 each) to cause a problem. What would be the impact of a similar event involving 10,000 contracts? Or 100,000 ? Or all 440,516 ?

This event shows just how easy it is for someone to overload a critical data feed and go unnoticed by others, even the exchanges.

The cause of this event had to be intentional as it involved the close coordination of sending a measured number of quotes to each of the 9 options exchanges. It also appears that traffic from each options exchange hit that exchange's unique outbound capacity to OPRA. This event may have been a test to measure latency, but August 10th, which was already a very stressful trading day, would have been a poor choice to unleash a test that would certainly overload OPRA and everything else processing that data. Also, each of the quotations used were clearly marked as either regular or auto-executable quotes.

Finally, the trading action in the equity BIDU during this event was nothing out of the ordinary, and certainly didn't warrant the avalanche of quote traffic.

Someone has the ability to shut down or severely degrade the transmission of financial information of options data in the United States, and isn't afraid to use it. We worry that the same capabilities exist in other markets.

 Chart 1. One minute OHLC chart of BIDU. The time of the event is circled in red.

 Chart 2. Peak 1 ms quotes per second for each contributing options exchange, plus the total.

Chart 3. Close-up view of the chart above. The left graph includes the total.

Chart 4. Peak 1 ms quotes per second for each of the 48 OPRA multicast lines, plus the total.

Chart 5. Peak 1 ms quotes per second for OPRA multicast line #7, plus the total.

Note the flat tops in line 7 which indicate saturation. Also note the gap, indicating complete silence, which is rare and unusual during market hours.