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.





If it were hockey we’d call it a Facewash. In IPO’s it’s called a Zuckerpunch.

The Facebook launch on Friday was much like that of a North Korean missile – much hyperbole, much cheerleading, displays of excited citizens crowding the public square, a launch…  then a thud.

At this point, I have no interest in in opining on Facebook’s pricing, revenue persistence, market penetration, or all that fundamental stuff.  Rather, I thought it may be interesting to point out some of the oddities that occurred during the day of the Taepodong-2… I mean, Facebook launch.

Let’s start with the opening.  Slated to launch at 11:00, the first trade was delayed until 11:20.  While Nasdaq is playing the role of Korean Rocket Scientist today, Telis Demos from Trading Technology wrote a nice piece on the cause of the delay.  Here are a few quotes from the article (although I encourage you to read it in its entirety by clicking the link):

“And it was one quote cancellation sneaking into a five-millisecond window that caused about 20 painful minutes, watched live by the world on CNBC television, of the delay to the opening Facebook’s public offering on Nasdaq’s US market.”

“In brief, the problem was that the system took two extra milliseconds to calculate the opening price. Because of a decision before to allow continuous order placement during IPOs, cancellations kept “fitting in between the raindrops”, in the words of Bob Greifeld, Nasdaq’s chief executive, in the five milliseconds it was taking to determine a price.”

“As a result, Nasdaq had to manually override the process, which took up those 20 minutes. But the manual process meant that individual order confirmations were not sent out until almost 1.50pm, hours after the 11.30am opening print. Confusion reigned, and many blamed it for dampening demand for Facebook stock.”

I’m no rocket scientist myself, but this sure looks like the fingerprints of high frequency trading.  Sneaking a big order cancellation in a five millisecond window would have been impossible for a human being – even the late, great Benevolent Dictator with all his superhuman skills.

The next oddity is brought to us by Nanex Research.  Again, I suggest you visit their site for some great graphic illustration, but I’ll summarize a few of the conclusions here:

  • Between 11:54 a.m. and 1:50 p.m. Nasdaq quotes stopped coming through the conventional channels.  To quote Nanex, “Those who are co-located and get the direct feeds, namely HFT’s, didn’t experience this problem, as trades continued to come from Nasdaq.”
  • At around 1:50 p.m., trades began mysteriously executing 120 milliseconds before the bids printed.  Nanex calls this “fantaseconds, ” or evidence that HFT’s may now be able to 1) trade faster than the speed of light, or 2) orders are being routed in an unconventional manner that may be outside of the regulations.
  • Later that same second (yes, as in 1/60 of one minute), trades were executed 900 milliseconds before the quotes were printed.
  • At the same time, there were stretches where Facebook trades accounted for 100% of all Nasdaq stock trades.

The final extreme characteristic of this launch was Morgan Stanley’s role in supporting the missile’s $38 price.  From Reuters:

  • “Morgan Stanley may have spent billions of dollars to support the stock price by buying shares in the market. Some market participants said that the underwriters had to absorb mountains of stock to defend the $38 level and keep the market from dipping below it.”
  • Morgan Stanley had access to 63 million shares in the over-allotment option, giving them plenty of ammo to hold the line at $38.
  • Reuters also points out:  “As an indication of the cost, had Morgan Stanley bought all of the shares traded around $38 in the final 20 minutes of the day, it would have spent nearly $2 billion.”  That’s a lot of cabbage, if the stink over JP Morgan’s trading loss is any indication.

I think the autopsy of this IPO in the coming weeks will prove to be both interesting and educational.  Has the HFT become self-aware and turned on its creator (Nasdaq)?  What new procedures will be in place to keep a debacle like this from happening on future IPO’s?  How much of a hit to capital will Morgan Stanley ultimately feel?

It’s rare that market sausage-making happens on a stage as large as the Facebook IPO.  Maybe that will help be a catalyst for better understanding our brave new trading world.

A wild wrap-up to a wild week

Yesterday’s market action, while gut-wrenching in its relentlessly downward slide, was more or less orderly.  The open was a little abrupt, as was the close, but on the whole the meltdown was fairly consistent.

Today was a different animal all together.  This was the kind of day that takes out sell-stops at exactly the wrong time, squeezes out shorts at exactly the wrong time, and punishes short-term momentum players.  The graph that follows illustrates the magnitude of the swings occurring intra-day.


Most of the swings were linked in their timing to the news flow of the day.  The 1.5% rally at the open was linked to this mornings rosier jobs numbers and a decline in the supposed unemployment rate to 9.1% (I’ll stay tuned for the revisions before buying into either number).  The rally was short-lived, however, as continuing bad news from Europe drove the market down 3.6% in 2 hours and 15 minutes.  Then, exactly at noon Eastern, the ECB finally announced their willingness to buy Italian and Spanish bonds (after looking rather feckless for the last few weeks).  When the program is initiated, it will be Europe’s version of QE.  Q€1, if you will.  That announcement sent the Dow higher by 3.7% in 53 minutes.  As the market bounced off its high for the day, it immediately retraced, giving up 1.2% in a scant 16 minutes and 48 seconds.

But wait… that isn’t right…  In the following 46 minutes the Dow bounced back up to its daily high.  Then, traders (realizing that being long over the weekend might not be the brightest idea) took the market down 1.8% between 2pm and 3pm.

As the closing bell approached, the markets made a run — attempting to push the S&P 500 above the psychologically (and technically) important 1200 level.  This pushed the market higher by 1.1% before finally tailing off with the S&P failing to reach its goal (closing at 1199.36).

While I’m no a conspiracy theorist, I can’t help but wonder if the robots (HFT traders) were not firmly in control today; causing such ludicrous volatility.  During the day, I pulled up some heavily traded momentum securities on my trading screen and noted large and equal-sized bids and asks being posted and immediately pulled off without an execution.  One security in particular, VXX (the volatility ETN) exhibited this pattern with alarming regularity.

As I often do when I feel like I might need to break out my tinfoil hat, I checked out the ZeroHedge blog to see if they had any comments regarding High Frequency Trading today .  ZeroHedge often keeps up with Nanex’s information on quote stuffing and other robotic evils.  Sure enough, ZeroHedge had a Nanex-linked blog entry, posted at 3:11 pm, with an illustrated graphic of the quote stuffing that had been going on all day.  And they say robots don’t leave fingerprints…

Yesterday, on CNBC, Art Cashin attributed the market’s major losses to HFT traders kicking in after a “head and shoulders” pattern on the S&P 500 was breached.

I know I’ve beaten the HFT drum more than once on this blog.  In fact, when we first started blogging, I was accused of running an anti-HFT blog!  But the truth remains that these algorithms contribute to freakish volatility, lead to little pleasantries like the Flash Crash, distort the true price discovery mechanism of the markets, create a false illusion of liquidity and market depth, and violate the principals (and the rules) of the markets by executing only a small fraction of the trades they put out on the bids and asks.

Maybe some day the regulators will pay attention to this, rather than focusing on “important” things like retooling how investment firms’ Form ADV Part II look (do you even know what that is, or have you ever read one?) or auditing firms for improper use of social media (gulp!).

With that, I’ll conclude my Friday Rant and wish you all a great weekend!



Are You Really Protected From Another Flash Crash?

Obviously the big news today is Osama bin Laden but let’s not forget about the markets. The good people at Themis Trading continue to research the inherent risks HFT pose to the markets. When will the regulators finally put into place some kind of functioning protection? The risk of another major flash crash only grows by the day.

Are You Really Protected From Another Flash Crash?.

Attack of Future Bots

The increased use of computerized algorithms in the markets is not only leading to a false sense of volume but also an increased risk of cyber attacks on our financial system. As we have discussed before, we continue to be concerned about the underlying risks of HFT algorithms. HFT themselves cause us worry about another flah crash until they are regulated  but add in the risk of a cyber attack on our financial system and the magnitude of an event like that is unimaginable.

Data Guru Warns of Future Bots – Barrons.com.

NDAQ Cyber Attack

Nanex Data