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Flash Trading / High Frequency Trading

See Nanex NxCore for professional services.
We also recommend and use both HFT Alert and HFT Alert Pro to monitor algorithmic activity for our daily trading.
Also surf Themis Trading's Market Structure Analysis

Updated on January 17th, 2012: Stub Quoting Image

Flash Crash Data from Nanex.net:
Any images may be clicked for larger, more detailed view. 

Interactive Chart Here

Welcome.  This section of Calibrated Confidence is dedicated to Flash Trading & High Frequency Trading.  This form of market participation is unknown to many outside of finance and still many within finance.  What is hoped to be achieved here is education and a source on the internet for the information pertaining to Flash Trading & HFT.  This section will be expanded upon as new information become available, however, Calibrated Confidence suggests you bookmark any links you find relevant (news, updates, videos) for future reference and so you can pass this information on.

This has been put together with the expectation that the readers may not necessarily sit and read this page from beginning to end, CC attempts to provide a somewhat linear thought process but really wants this to be a research stop.  If you need to locate something so you can tell others, it can be found here.  The videos and informational writing are meant to add important information that is not in the videos but directly relates to the market (ie "Money & Speed" doesn't mention that the exchanges own data provides and use their own algorithms to front run markets and make profits before Joe Six-pack can even see the data, but it is addressed below).

As you scan this page each link provided either confirms a statement being made (sourced) or it offers a page for which further reading may take place.  With that said, good luck and enjoy the exposure to the inner workings of Wall Street.

What you'll hear in the audio below is from the Traders Audio SP 500 Pit.  The video is the live ticker from 5/6/2010.  Follow closely what is being said and what is happening on the chart.  This guy is able to see what happens in the pit and traders that are not there pay money to hear this.  This is how the pit traders saw the Flash Crash.....

May 6th, 2010 Squawk Box

Here is Apple's stock.  Day high is $100,000.00 and it opened at $253.83

What It Is 

Flash Trading from Investopedia:
A controversial computerized trading practice offered by some stock exchanges. Flash trading uses highly sophisticated high-speed computer technology to allow traders to view orders from other market participants fractions of a second before others in the marketplace. This gives flash traders the advantage of being able to gauge supply and demand and recognize movements in market sentiment before other traders.
High Frequency Trading from Investopedia:   
A program trading platform that uses powerful computers to transact a large number of orders at very fast speeds. High-frequency trading uses complex algorithms to analyze multiple markets and execute orders based on market conditions. Typically, the traders with the fastest execution speeds will be more profitable than traders with slower execution speeds. As of 2009, it is estimated more than 50% of exchange volume comes from high-frequency trading orders.
For most of Wall Street’s history, stock trading was fairly straightforward: buyers and sellers gathered on exchange floors and dickered until they struck a deal. Then, in 1998, the Securities and Exchange Commission (SEC) authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intent was to open markets to anyone with a desktop computer and a fresh idea.

But as new marketplaces have emerged, PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.

The following video is an explanation on how to use the only software that is available to track the performance of HFT activity.


"Efficient" Markets

Germany's market exchange center Deutsche Boerse (similar to NYSE, NASDAQ, AMEX for United States) merger was approved by the NYSE Euronext shareholders  on July 7th, 2011.  The Deutsche Boerse owns AlphaFlash, which states on its website..."Our reporters, using our custom-built applications, send the data from press rooms the very first instant it is allowed. The data flows through our dedicated network lines into our core systems and travels directly to you. We encourage customers to utilize our co location facilities and cross-connect to NTKN for the fastest possible data delivery."  This is big because now the exchanges have access to news the MOMENT it is released.  

When the Federal Reserve has GDP or CPI data to release and other bureaus have indicators to release, reports from various news agencies collect in a room.  They analyze the releases, in a strict fashion that is monitored and regimented, write their articles for their publications, then when the reporters are authorized transmit the data, they sent it and DING, "You've got Mail"!

Visualizing Exchange Routing (from Nanex)

The following charts are samples from Nanex and are meant to highlight the extreme price movement that is created through high frequency trading.  Calibrated Confidence trusts Nanex and the people that work their.  We have followed the company and have been able to confirm they are the only firm capable of producing this material, consistently and accurately to the best of our knowledge (and apparently some others too).  To be clear, HFT here defines the action of computer traders that are equivalent to those of a human trader but executed at speeds faster than human traders can blink.  These traders offer different bid/ask levels with different lot sizes all within 1 second, something we do not want to be accepted as a universal behavior throughout markets.  The manipulative side, or knock-on effect if you want, is what we seek to limit because of what the following charts will show.  Keep in mind, this information comes from a private firm, that operates under the implied characteristics of capitalism and has the keen interest of making sure that markets stay "fair" so that everyone can prosper, this isn't about the money, it's about the long term stability of America's financial highway. 

The all information comes from Nanex and specific sentences we picked (lifted) from their releases are in bold.

Below is a 5 millisecond interval chart of SPY showing Nasdaq trades (circles) and quotes (shaded vertical lines). 
  • The distance between the points labeled A and a is the minimum time that trades came ahead of quotes.

The next chart shows the NBBO at on 1 millisecond basis. Note how quickly and often the NBBO changes. This chart shows about 1 second's worth of data. (Read more here)
  • This chart is for ticker WAB and captures the dramatic changes in the National Best Bid and Offer.

Below is a 1 millisecond interval chart showing trades as circles and the bid-ask spread as vertical lines from one exchange (Nasdaq). To get an idea of the extent of the delay, simply match the upper case letters (where trades occurred) to the lower case letters (where the corresponding quotes occurred). We could fantasize that this is HFT trading faster than the speed of light and call the negative difference fantaseconds, but we know better.  (Read more here).

You won't find these trades in most databases any longer, they have already been scrubbed (they didn't happen).  The following chart plots quotes and trades of the stock CNTY on 06/21/2011. The stock cycled violently from approximately $2.75 to $8.00 several times:

Next is a chart from the Flash Crash on May 6'th 2010.  The first chart at the top of this page shows the detail of various price levels as the exchanges were being overloaded with data.  This chart shows the message rates in the direct feeds.  Notice the tight red lines at 14:42:00, when it all started to pick up
  • Note how often the delay (red line) peaks right at 200,000 microseconds: this is very suspicious and merits additional investigation. Many delays also appear near 35,000 microseconds. Finally, note how often the peaks in message rate are at the same level: this is a common phenomenon on saturated networks.


Keep mind the exchanges can charge hedge funds and large financial institutions to gain access to this data in under 100 milliseconds.  Ethics and conflicts of interest are rampant here.  CNBC reports "Deutsche Boerse will pay a single-digit million dollar amount, including a performance-related payment, for one of the most widely followed barometers of the U.S. economy", said Holger Wohlenberg, managing director, market data & analytics for Deutsche Boerse, in a statement.   Now the exchanges can front run the Chi-town PMI and use their HFT algorithms to team up with their clients (Hedge funds and Banks) to make a hefty profit.

VPRO - Money & Speed (Free On iPads)

HFT has its associations with the dark side mainly because we tend to hear of the bad apples (makes for more sensational stories).  The PDF embedded below (SEC HFT) is a Concept Release from the SEC released in April of 2010 seeking comments from the public to "determine whether regulatory initiatives to improve the current equity market structure are needed and, if so, the specific nature of such initiatives", because the staff are not financial and mathematical graduates, but justice and law graduates.  Further evidence for the argument trumpeted by Harry Markopolous that at the SEC "They’re overlawyered. They’re poisoned by lawyers".  So one of the problems here is that the mathematicians and Wall Street types have a skill that SEC does not specialize in, therefore how can the regulator conceivably be able to competently regulate the participants and the strategies they employ?  The "dark" pools, market data linkage, and order routing issues are at the center of the HFT analysis.


The Vampire Squid (Goldman Sachs) had their code stolen in a high profile case by Sergey Aleynikov.  Market manipulation is nothing new.  After all, America's top TV Financial character, Jim Cramer, has been recorded stating how his hedge firm would "boost the futures before the real sellers came in and then when the real sellers came in, the day would look real bad"..."you gotta control the market..let's say I was short RIMM...if a guy was bidding, you would whip him out immediately...you feed news to the Bob Pasani's of the world".  See the video for yourself below.  When it comes to financial markets, the best of the best know that its a game of perception.  Even Jim knows that if you can get the "bad information" on to CNBC you are only helping yourself.  This is why so many people are misled by the misinformed analysis that come from CNBC.  To succeed in this game, you need to be able to deduce the information yourself.  Eric Hunsader said "It's one thing to be behind and know your behind, its another to be behind and not even know it".  Regardless what the model says, whoever can make the market, can set the price.  This idea is best displayed in the JP Morgan, Comex Silver Manipulation which can be followed here.

Jim Cramer On How To Manipulate An Equity Market

Keep in mind that when you are trading from your home PC and you look at your screen, you will never be able to see HFT in real time.  When you place market orders from home, they are shown to the dark pools first which is why you may get Goodyear Tire & Rubber at $13.02 instead of the $13.04 you set your price at.  Here is an example.  Chart 1 below shows the 1 Day time period for Brown Forman Corp Class A Shares (BF/A).  Instead of 1 minute time frames, you will see 133tk time frames.  This granularity is beneficial because on the minute based chart, it is the rigid imposition of time that causes the bar to move, without taking into consideration the character of the market high frequency traders.  What can be observed here is the single representation of price ranges on Chart 1 and what is missed by this thanks to the incredible software and ingenuity of Eric Hunsader and Nanex.

 Brown Forman - Chart 1

Brown Forman - Chart 2

The Flash Crash occurred on May 6, 2010.  The graph at the top can be found here and offers an interactive look at the delays in pricing caused by quote stuffing and the difficulties exchanges face in trying to reprice not only underlying assets but also their derivatives and then the various ETFs and Indecies that have value based on the derivatives and underlying assets.

Nanex has compiled a truly extensive amount of data in the chart, starting with data on slow quote/bid mode on the NYSE's Liquidity Replenishment Points, Stub Trades, the delay for GE on the CQS, the overall CQS quote rate, as well as the actual trade rate.

Quants: The Alchemists of Wall Street

Sample of HFT Portfolio Performance Over Time