Hey Michael, We Missed You But We’re Glad You’re Back

While doing the tour to promote his new book “Flash Boys, ” Michael Lewis showed up today on CNBC with the star of his story in addition to  the head of BATS.  What transpired was pure tragicomedy.  While the Lewis team mounted a full frontal attack against the High Frequency Trading machine, the dude from BATS went apoplectic.

I’ve read Lewis’ book and agree with many of his findings.  It’s well-written, taken from a unique perspective, and well worth the $10 Kindle price.  But I have to ask:  What took you so long Michael?

HFT has been the bane of traders’ existence for many years now.  We’ve been squawking about it since 2011.  See:  


Hard stop on the shameless self-promotion.

Anyway, here is the clip from CNBC for your viewing pleasure.





Revenge of the Squirrel Part Deux?

Trumbull Connecticut is a quaint little town.  It’s home to about 35, 000 folks who play in its wetlands, enjoy its stone bridges, and bask in the natural beauty abundant in the geography.  It’s an almost idyllic setting around the winter holidays – very Norman Rockwell.

Or so it would seem on the surface.

But Trumbull around the holidays is not all about caroling and wassail.  You see, Trumbull has squirrels – evil, conspiring, anti-Capitalist squirrels.

It’s December 9, 1987, 10:48 a.m.  Investors are still grappling the magnitude of October’s market crash and stock volumes are (back in those days) at historic highs.  Yet, thoughts are turning toward the welcome mental reprieve the holidays promise to bring.

Then it happened.

The NASDAQ went black.  Gone.  Vanished.

Call it mint jelly; it was on the lam.

For 82 excruciating minutes, the automated quote system went missing.  Over 20 million trades were stranded, as other markets felt the effects of the absence of pricing for OTC options.  For all intents and purposes the US stock markets were closed.

The local CT utility desperately tried to restore the juice, but an unintended power surge blew up the NASDAQ servers and crippled its backup generators.

By 12:05 p.m., a backup computer was placed online and trading slowly returned to the NASDAQ.  By the end of the day, normalcy had been more or less restored.

All that was left was the effort to find a cause.  After extensive forensic investigation it was determined the cause was…   a suicide squirrel.    It seems that a Trumbull squirrel, possibly mentally fragile and radicalized against the free markets (due to the rapidly rising costs of hickory nuts?), decided to do its impression of an under-amped fuse and closed a circuit that would have best been left open.

Fast forward to August 22, 2013, 12:09 p.m.  I was placing a trade to cover some calls we had shorted a month ago, when the call’s bid suddenly jumped from 13 cents to $998.00 (no, that’s not a typo).  The asking price stayed at 15 cents, only to disappear entirely moments later.  Confused, I cancelled my unexecuted trade and turned to the Bloomberg terminal to get a better sense of what was happening.  What came across the Bloomberg was surreal.  In less than a minute, 969 NASDAQ traded stocks were halted, citing “Extraordinary Market Activity.”  Specifically, it was called a “T6 Halt.”  From NASDAQ’s website, here is the definition of a T6 Halt:

Halt – Extraordinary Market Activity
Trading is halted when extraordinary market activity in the security is occurring; NASDAQ determines that such extraordinary market activity is likely to have a material effect on the market for that security; and 1) NASDAQ believes that such extraordinary market activity is caused by the misuse or malfunction of an electronic quotation, communication, reporting or execution system operated by or linked to NASDAQ; or 2) after consultation with either a national securities exchange trading the security on an unlisted trading privileges basis or a non-NASDAQ FINRA facility trading the security, NASDAQ believes such extraordinary market activity is caused by the misuse or malfunction of an electronic quotation, communication, reporting or execution system operated by or linked to such national securities exchange or non- NASDAQ FINRA facility.

The T6 Halt affected over 3, 000 stocks and countless OTC options.  What was most stunning; the problem wasn’t corrected for 3 hours and 19 minutes, making the 1987 outage pale by comparison.

Over half of the trading day was rendered inoperative.

While it is too soon to accurately attribute a cause to this halt (misuse, malfunction, hacking, an error in an AAPL trade, etc.), today’s experience served to make me just a little more cautious.  When the market re-opened, the NASDAQ surged to a 1.6% gain.  The other US indexes closed positive as well.

Intuition and experience might lead a person to believe that investor confidence would be reduced by a 3 hour 19 minute outage in the second largest stock exchange.  It would therefore follow that reduced confidence would be reflected in lower stock prices after the outage was resolved.

Alas, intuition and experience were wasted.

Having witnessed the collective yawn in response to what I (and many other professional investors) perceived as a frightening milestone event, I am led to one of two conclusions.

Conclusion 1:  The markets are now so thoroughly controlled by algorithmic and high frequency trading that experience and common sense have become archaic during periods of low trading volume.  Evidence of this can be seen in stocks like AAPL that immediately traded up to their VWAP once the market re-opened.  No change in fundamentals – just a return to VWAP.

Conclusion 2:  The sleeper cell of evil, anti-Capitalist squirrels has re-awakened.  Supporting this notion is the fact that I looked out at my bird feeder this evening and the usual collection of red and gray squirrels was conspicuously absent.  I’ll admit this data point is rather anecdotal, but 26 years ago we saw just what kind of damage a determined squirrel with an agenda can do.

Maybe Nassim Taleb would consider this a “Black Squirrel” event. – LL


$45 Billion in Less Than 1 Second

Today we should all be cheering.  The Dow closed up 121 points — a new (yawn) record high.  But all is not well in stock-land.

Pity poor Anadarko Petroleum Corporation (APC).

At 3:59:59:10 p.m. this afternoon, APC was worth $45 billion.  50 milliseconds later, the company was worthless.  As evidence, I present the following chart courtesy of Bloomberg:


The area circled in red shows the value of APC dropping from over $90/share to $0/share in 50 milliseconds.

Neat trick.

We may laud the great bull market of 2013, cheer the daily all-time highs, and toast the 120% gains achieved since the market’s nadir in 2009.  But when you sweep away all the celebratory confetti, you see a system that is extremely vulnerable.  This flash crash was not in some $2 stock with 32, 000 shares trading each day.  It was Anadarko-freaking-Petroleum — a stock with an average daily volume of nearly 4 million shares.

But, no worries.  I was just notified by DECS that all trades below $87.56 “will be busted.  This decision cannot be appealed.”

Hey!  Why fix the system when you can simply bust trades that occur because your system is a joke.

Speaking of jokes…  Two HFT algorithms walk into a bar…



An Upside-Down World

Earlier this week the market flashed-crashed on a fake tweet from a hacked AP account.  When the word got out that the tweet was a fake, the market bounced back to its pre-tweet level.  During the round-trip the market moved a total of $400 billion.  A couple of things…

·          When did we start trading on tweets?  I must have missed that meeting.

·          Why do we continue to allow the high frequency traders to remove all liquidity from the market in a matter of seconds? (Check out Nanex.net for a great pictorial.)

·          How did it come to pass in such a short period of time that social media is actually being relied upon for ANYTHING?  Do the words “Manti Te’o” ring a bell?  Or how about that girl in NJ who faked her own kidnapping causing 34, 000 people to retweet her “tweet for help?”

Earlier today it was released that numerous central banks around the world are stepping up their purchases of equities using their reserves.  This was generally received as a good idea.   The Fed is prohibited from buying stocks, but Japan’s central bank isn’t.  So…  a wink and a nod to Abe about the JPY devaluation and voila’ – the JCB is down for doubling its ETF exposure to 3.5 trillion yen.  Israel has been in the game since last fall.

·         This is a good thing?  Banks diversifying their reserves into a stock market that is now up more than 100% since March 2009?  That seems as crazy as yelling “Movie!” in a crowded Firehouse.

It was reported this morning that Spain’s youth unemployment has risen to 57%.  The European Stoxx 600 closed the day up 0.76%

And now for the clincher.

I received an email today from a marketer who was trying to sell me on his firm’s option trading acumen.  Yesterday, I rejected the idea.  He is now requesting that I send him $500/hour for each of the four hours he spent trying to get our business. As one of my partners said, “we should charge them for wasting the last month of our lives with them and receiving no value.”

You just can’t make this stuff up.  – LL


The Market’s Amazing Technicolor Dreamchart

With High Frequency Trading accidents occurring at an accelerating rate (Flash Crash, BATS IPO, Facebook IPO, Knight Capital, and endless single-name examples), it might be nice to see a timeline illustrating just how prevalent these bots have become.

Lucky for us, the good folks from NANEX, specifically Felix Salmon, put together an animated example — using real-time data.

The video that follows illustrates trading volume across all major exchanges (the exchange ID’s are color-coded in the legend on the upper right corner).  The lower left corner shows the dates of the trades as they progress from reasonable volume in 2007 through being monkeyhammered by 2011.

It will take 30 or 40 seconds to get through all four years, but the wait will be rewarded as you see the explosion in volume as the dates approach the most recent.

Draw your own conclusion…

Here is the link: