May 6th Flash Crash Cause Found
I saw this story on Slashdot.org today, and thought it is worth bringing to attention here. A company called Nanex has published their analysis of the May 6th "Flash Crash", and found a compelling cause/storyline. Here is their analysis, I recommend reading it - though it is quite long and detailed.
The basic story is this:
On May 6th, some nefarious HFT companies started sending 1000's of dummy orders per second for a single stock. This would be no monetary gain or point in doing this action, except for the fact that by sending so many bogus orders into the NYSE queue, you could effectively be performing a denial of service attack. The queue would become slowed down, and your competitor HFT companies would be slowed down.
The side effect of this was that when the NYSE queue slowed down, it fell behind the queue's of the other stock exchanges that are electronically synchronized. Worse, there is a problem with the system in that the orders are not time stamped from when they entered the queue but when they finally leave the queue. SO, when the queue got overly bogged down there were old orders that were now above or below the market prices of the other exchanges - and it looked like these orders were new.
Now, the HFT systems start seeing falling prices on the NYSE because the orders there are below the prices of the other exchanges (these are the old orders, that look new with their timestamps). The HFT systems move towards shorting these stocks to go with an apparent momentum (non-existent, simply old orders that are being shown as new leaving the slow queues). Their sell orders start hitting the NYSE and further slowing the queue. These orders also leave with a delay - and a selling cycle starts because of a feedback loop with the slow queue / timestamp issue. Many of the stocks affected were big bellweather stocks - and likely triggered specific responses for selling as well. Further issues was that HFT companies pulled the plug on their trading completely when things looked weird.
This is as good as I was able to get in a quick read, I may have some of it slightly wrong.
But the general conclusion seems to be that there are now some cheating HFT companies that are purposely slowing down the queues - and that the NYSE has should have a simple fix to the particular Flash Crash cause - fix the queue timestamping.
Companies that stuff the queues with bogus orders probably need to have the SEC come after them.