"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

Wednesday, January 11, 2012

Dud Munition Testing In Financial Markets

It's a whole new set of financial markets.  As the college kids return to Wharton for the spring semester, we suspect by the time they graduate they'll realize the world has changed.  It's not a long term players market anymore (well its hasn't been for a decade).  Too much chaos with large numbers.  The market ought to have integrity and honesty but both have slowly been whittled away and replaced with servers and dark pools.  Nanex has highlighted how the new players, HFT, are testing their algo's in live markets.  These machines are sending completely errant and bogus quotes, which is against the SEC law: "Specifically, the Exchange believes that the proposed rule change would provide an additional basis for bringing enforcement actions against Exchange member organizations that engage in deceptive and manipulative quoting".  But will the SEC doing anything?  Of course not.  We're on our own, which is cool, so we've decided to pass this along to you when the behaviors becomes egregious because thats what social networking is good for.

NYSE filing SR-NYSE-2011-61
NYSE - ARCA Filing SR-NYSEArca-2011-90

These signals are being sent with no intention of being filled and are only designed to trick the people who have genuine appetite for risk or an asset that will help mitigate it.  This type of preditory HFT behavior is what we are against.  There are plenty of very well todo HFT and Algo's runners out there but just like civilian law, the rules are in place because of a few bad apples.  If the good HFT could police the bad, like Greenspans macro economy view, we wouldn't have to come out so strong against them.  This law-breaking behavior is detrimental to the financial market structure and the trust of the participants.  Themis Trading released a new post today that you should read (here) on HFT and crashes.  For the proof of this ridiculously pansy ass behavior, read below.  Below you will see a chart along with 5 tables from HFT Alert that document the recognition of the sequences.  Look at the Trade column and the Count column.  Count is quotes sent and trades are, well, trades made.  BBO is Best Bid Offer.  Try not to get too pissed.

Here is a chart of IMPV from January 10, 2012 late in the AM session:

We picked up the first signs of this test at 10:12:05 (0 trades).

The there were sporadic groups of quotes sent until the 11:25:17 stream started (1 Trade):

Which lead into 11:29 (0 Trades),

followed by 11:30 leading into 11:31 (1 Trade)

and culminated between the 11:31:13 and 11:31:51 mark (0 Trades).

The columns for the table below are described here:

Time:  Time of occurrence in HH:MM:SS
Symbol:  Symbol of stock.
Exg:  Exchange quotes are reported from in the sequence.
Elps:  The elapsed time of the sequence in MM:SS format.
STRG:  #Quotes recorded in the sequence from the specific exchange.
IQTS  #Quotes from other reporting exchanges in the sequence.
BBO:  #Of times quotes were the BBO.
CBBO:  #Of times quotes were the BBO and changed the BBO.
TRD:  #Trades recorded in the sequence.
ETRD:  #Trades recorded in the sequence from the specific exchange.

Raw Quote Burst table from HFT Alert Pro which captured just the bursts from this test algo (12 Trades):

Nanex ~ Algo Testing during trading hours. IMPV on Jan 10, 2012
We have detected algo testing during regular trading hours from multiple exchanges. Several of these exchanges did not previously show a significant level of HFT infestation. 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). 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. 
About 43 seconds after starting, it pauses a few times.

Zoom 2