"We risk becoming the best informed society that has ever died of ignorance"
- Rubén Blades

"You can't make up anything anymore. The world itself is a satire. All you're doing is recording it"
- Art Buchwald

"It's getting exciting now, two and one-half. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium"
- Tyler Durden

"It is your corrupt we claim. It is your evil that will be sought by us. With every breath, we shall hunt them down."
- Boondock Saints

Monday, October 3, 2011

High Freak Volatility

It's still bad.  The anger isn't so much at the rogue HFT agents and bots in the system as it is at the regulators.  I have more trust in the one firm from Chicago (NANEX) than I have in the SEC, at least the former gives us data to analyze and comes clean with what he can prove.  Luckily the people now have something available to them, at a fraction of their cell phone bill to help trade around algo's.  The software comes via an investment firm and it is called HFT Alert.  These two firms have offered more help in analyzing and understand HFT than the SEC, which we fund, could ever dream of.  I had a question for the guys at HFT Alert over the weekend and their response could be measured in hours (it was non-market hours so that's fast considering everyone else would have made me wait until Monday).  Interaction with either of these two organizations is easier and more productive than trying to interact with the SEC.  This is why when Eric Hunsader and his crew release case studies, I read them.  Here is another chapter in the on-going book of Algo Art.

On October 3, 2011 beginning at 11:10:00.450, in the stock CA Technologies (symbol CA), a bizarre interaction between multiple HFT algorithms caused a wild oscillation in the NBBO with over 1,000 trades executing in a 35 cent range. Just before and after the event, the bid-ask spread was a narrow 1 cent, and trades executed normally in a 1 cent range. Essentially HFT caused the bid-ask spread to widen from 1 cent to over 35 cents in the blink of an eye.
HFT caused the spread to widen from 1 cent to over 35 cents in the blink of an eye
During the event, the quote rate exceeded 25,000 quotes/second, which caused significant quote delays of up to 500 ms for this stock (and probably others processed on the same exchange equipment). Note that this is similar to an event which occurred in YHOO that we described as HFT trading faster than the speed of light (satire).

The chart below shows trades (circles) and the bid-ask spread (vertical lines) from Nasdaq in CA in 1 millisecond intervals. Match the upper case letters to the lower case letters to get an idea of the extent of the delay. We could fantasize that this is HFT trading faster than the speed of light and call the negative difference fantaseconds, but we know better. 

The chart below is a 2 ms interval chart of the NBBO in CA 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.