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"It's Not A Market, It's An HFT 'Crop Circle' Crime Scene" - Further Evidence Of Quote Stuffing Manipulation By HFT



July 31, 2010 – Comments (4)

Zerohedge breaks the story. Fools and and Noobies keep asking why I am not as active in the market. Here is reason #4 . There is no fundamental reason why the market should be where it is. But there is a technical reason....

Recently we posted a required reading analysis by Nanex in which the market trading analytics firm presented irrefutable evidence of quote stuffing by HFT algorithms in tens of stocks, in which thousands of cancelled quotes would reappear each second with a definitive periodicity and regularity, around the time of the May 6 flash crash. Aside from the fact that it is illegal to indicate a quote without a trade intent, this form of quote stuffing is in fact manipulative when conducted by HFT repeaters in specific "shapes" as it actually moves the NBBO actively higher or lower, in cases pushing the bid/offer range up to 10% higher without even one trade ever having occurred, simply by masking a big block order which other algos interpret as bid interest and pull all offers progressively or step function higher (or vice versa, although we have rarely if ever seen the walking down of a stock over the past 18 months). It is as if the HFT lobby has been given the green light by the powers that be that it is safe to activate merely the bid-size quote stuffing algorithms, and not worry: the fact that the market is so one sided in its quote stuffing patterns is sufficient reason to worry of a concerted effort to push stocks higher, initiated from the very top, and effected by not only the Primary Dealer community but by the end-market "liquidity providers."


Today, courtesy of Nanex we demonstrate that this type of illegal stock manipulation continues rampant to this very day, and the SEC still fails acknowledge that it is precisely the HFT market participants that persist in destabilizing stock prices, which have given up responding to fundamentals and merely move up or down based on quote stuffing interventions by those who plead innocence and claim to only be providing liquidity. Well take a look at the millions in fake, and thus illegal, bids demonstrated below and tell us just how any of this manipulation is "providing liquidity" - the second the patterns break, the algos responsible for the churn pattern disappear, thus eliminating numerous levels of so called bid liquidity below the NBBO: break enough patterns and you have another flash crash as the market once again goes bidless.


The rest is here: 

4 Comments – Post Your Own

#1) On July 31, 2010 at 1:33 PM, angusthermopylae (37.48) wrote:

the SEC still fails acknowledge that it is precisely the HFT market participants that persist in destabilizing stock prices

I'm not an expert in HFT or its influences, but now you've got me wondering if the installation of circuit breakers was precisely because of HFT; that, despite all the "we don't know why" in reference to the "flash crash", someone does know, and figured that the CBs would smooth things out...if no trades are actually occurring, then CBs would give the algorithms time to reset.

This goes against my cynicism about conspiracy theories (humans are generally too dumb/selfish/shortsighted to keep one going for long),  but since it's only been a few months, it's still possible that this is an explanation.

Here's the problem, though:  CBs would act as time-outs, not for traders, but for HFT systems.  (Come to think of it, why only 5-10 minutes to reset?  If there is something seriously wrong, wouldn't human traders need a few more minutes to digest the news?)  But HFT systems make their money by churning dollars to gain a few cents per trade.  If a stock gets closed out (even for those few minutes), then the computer system will probably find another stock to churn...and so will all the competing HFT systems.

A cascading failure could result if a) humans are actually trading all over the place, b) HFT systems start hopping from stock to stock to keep themselves profitable for the day, and c) there's a chunk of bad news (or good news) coming down the pipe that pushes people in one general direction or another.

Human trading comes in several forms:  Grandma/day-trader/retiree/hot-stock follower buying or selling; shorts; limit and stops; and others.  The good or bad news could push the first group one direction or another, but there would be actual trades (screwing up the quote-stuffing and CBs) because shorts, limits, and stops would also be triggered.

The "perfect storm" of an HFT shoving quotes higher, then grandma buying that hot stock "right now", then all those shorts and stops initiating might never happen...but it seems pretty likely.  And guess whose trades get thrown out during the review period?

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#2) On July 31, 2010 at 1:47 PM, angusthermopylae (37.48) wrote:

Just thought of a nice Denial of Service (DOS) attack on the exchanges and the American Markets:

1)  Get together a couple of million dollars (chump change for crimianl organizations and enemy states of the US).

2)  Set up a trading account (actually, several) and have your own systems follow the quotes like NANEX did.

3)  When the time is right, make a large number of buys in small amounts--just enough to establish the >10% "actual trade".  Not to worry--you might end up owning 1 share of 10,000 stocks, but most of those will probably be killed during the review.

4)  While there's still money in your account, continue hopping from stock to stock for 5-10 minutes.

5)  Open a beer and laugh as the blood runs across the boards.

6)  When the SEC starts banging on your door, just say, "Oops!  Our HFT system was misconfigured."

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#3) On July 31, 2010 at 1:56 PM, portefeuille (98.83) wrote:

you can't blame high frequency trading for this pattern, hehe ...

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#4) On July 31, 2010 at 4:07 PM, portefeuille (98.83) wrote:

#3 I will no longer post that chart, I think. At least I will try to reduce the posting frequency ...

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