"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

Saturday, January 21, 2012

TROW Blow

The financial markets are crawling with high frequency traders, co-located servers, and physicists.  Every so often we're able to gain a glimpse into what happens on the micro-structure level of American stock exchanges.  Thanks to a few rogue programers, many of us early adopters have had the experience of being blown away when we discover and repeatedly witness strategies designed to last under 1 second.  22 seconds now-a-days makes you a long-term trader.  Note that certain HFT are willing to buy in big volume at what is usually the bottom of these type of jarring moves.  When you are the one who causes imbalances and price/order discrepancies, you will be able to prepare accordingly for the modeled outcome, while everyone else brain farts trying to understand what the hell they just saw (because they thought HFT was their friend)

The following breakdown from Nanex takes place on January 19th, 2012 at 10:47:30 AM.  Here is a algo sequence table from HFT Alert that shows the order coming through:


From NANEX:
Nanex ~ Order entry error in TROW exposes HFT speed advantage and how fast the spread evaporates.

At 10:47:30 in the stock T. Rowe Prices (TROW), there appears to have been an order entry error (sell order price entered $1 lower than the market) that caused the stock to suddenly drop.

This event exposed how HFT can adjust their quotes on other markets before other investors will ever see the bad quote (see 1st chart below). Also note how fast quote spreads explode.

TROW on January 19, 2012 (1 millisecond intervals) . This chart shows about 1/2 second of data during the event. Note how Nasdaq quote spread (black shading) drops about 20 ms before the drop in NY-Arca's quotes (red shading) appears (the lower offer price was entered on NY-Arca). It must be magic! Also note how Nasdaq's quote spread oscillates wildly.

TROW on January 19, 2012 (1 second intervals). This chart shows 18 minutes of data.

TROW on January 19, 2012 (25 millisecond intervals). This chart shows 26 seconds of data.  The NBBO is the shaded area and colored black to indicate a  normal market (bid < ask), yellow for a locked market (bid = ask), or red for a crossed market (bid > ask). The quote traffic is shown in the bottom panel.

Note how quickly the quote rate surges (bottom panel).

TROW on January 19, 2012 (1 millisecond intervals) . This chart shows 1/2 second of data before the big drop. Note that NY-Arca quotes (red shading) are lagging behind NQ quotes (gray shading)

TROW on January 19, 2012 (1 millisecond intervals). This chart shows about 1/2 second of data shortly after the drop. Note how wild the spread changes become -- often jumping 15 cents within a millisecond. You can also see that NY-Arca quotes (red shading) are again lagging behind Nasdaq quotes (black shading).
Posted by Paul Revere at 1/21/2012 10:02:00 AM