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XMFSinchiruna (27.45)

The "Flash Crash" Continues to Reveal the Hidden Structure of our Equity Markets

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August 09, 2010 – Comments (9)

I am absolutely fascinated by this topic ... I can think of few things more important for investors than to comprehend fully what the flash crash was all about and what the implications are of the hidden dynamics of our equity markets that few investors ever gave a moment's thought to prior to that "warning shot" event.

The Atlantic has come out with this quality write-up based upon the research of data services firm Nanex. I think it is well worth a look... that knife pattern, or another like it, could become the knife that stabs our portfolios during moments of heightened market volaility.

Here is the article.

http://www.theatlantic.com/science/archive/2010/08/market-data-firm-spots-the-tracks-of-bizarre-robot-traders/60829/

"The trading bots visualized in the stock charts in this story aren't doing anything that could be construed to help the market. Unknown entities for unknown reasons are sending thousands of orders a second through the electronic stock exchanges with no intent to actually trade. Often, the buy or sell prices that they are offering are so far from the market price that there's no way they'd ever be part of a trade. The bots sketch out odd patterns with their orders, leaving patterns in the data that are largely invisible to market participants."

It's thanks to Nanex, the data services firm, that we know what their handiwork looks like at all. In the aftermath of the May 6 "flash crash," which saw the Dow plunge nearly 1,000 points in just a few minutes, the company spent weeks digging into their market recordings, replaying the day's trades and trying to understand what happened. Most stock charts show, at best, detail down to the one-minute scale, but Nanex's data shows much finer slices of time. The company's software engineer Jeffrey Donovan stared and stared at the data. He began to think that he could see odd patterns emerge from the numbers. He had a hunch that if he plotted the action around a stock sequentially at the millisecond range, he'd find something. When he tried it, he was blown away by the pattern. He called it "The Knife." This is what he saw: [Please click to the article here to see the chart.]

Here are some more of the flash crash intraday millisecond charts that data services firm Nanex has uncovered:

http://www.nanex.net/FlashCrash/CCircleDay.html

And here is the company's ongoing analysis of the flash crash event.

http://www.nanex.net/20100506/FlashCrashAnalysis_Intro.html

 

9 Comments – Post Your Own

#1) On August 09, 2010 at 1:21 PM, ikkyu2 (99.33) wrote:

How bizarre.  I wish I felt like I understood the purpose or motive behind these things.

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#2) On August 09, 2010 at 1:27 PM, fransgeraedts (99.92) wrote:

Dear Sin,

can anybody explain to me what the economic sense is of HFT? Why should we not ban the practice as a whole? It is just an artifact of the digitalization of trading (which is a good thing in itself), is it not? It does in no way help with the efficient allocation of capital, right?

 

fransgeraedts  

 

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#3) On August 09, 2010 at 2:39 PM, angusthermopylae (39.40) wrote:

fransgeraedts

can anybody explain to me what the economic sense is of HFT?

For you, me, and the other average joes, it makes no economic sense--however, if you're a big company with the accounts, pipelines, and [m/b]illions to churn, it's free money!

Why should we not ban the practice as a whole?

But how would Goliath Smackeroos  keep making money?!? Working at serving customers?  Surely you jest...

It is just an artifact of the digitalization of trading (which is a good thing in itself), is it not? It does in no way help with the efficient allocation of capital, right?

I'd say it efficiently allocates your capital into their accounts, and efficiently allocates some of your money into Senators' banks as bri...er...I mean, "campaign contributions."

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#4) On August 09, 2010 at 2:45 PM, rofgile (99.30) wrote:

I tried to contact the SEC after I ran a blog on Nanex's results back in June.  

They never even sent a form response back to me.

-Rof 

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#5) On August 09, 2010 at 3:49 PM, bothisellhigher (28.97) wrote:

Sinch...a truly fascinating post worth a thousand pictures....Thank you!

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#6) On August 09, 2010 at 5:54 PM, rofgile (99.30) wrote:

The Atlantic article is fascinating.  The pictures of the trades remind me of fractals.  These bots might have simple algorithms or rules that result in truly complex fractal results.

Thanks for the info TMFSinchiruna. 

The "NASDAQ Blotter" looks very cool.  

I can't figure out if HFT is the future of trading, or about to get made illegal.

-Rof 

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#7) On August 09, 2010 at 8:57 PM, StopLaughing (< 20) wrote:

There is such a thing as financial terrorism. Many of the bot traders are run by market participants that are owned by foreign governments, not to mention any unofficial market action by intelligence agencies.

The flash crash could have been a test run at disrupting the markets. The American exchanges need to to put circut breakers in. Commodity markets have those. This market now acts like a derivative market and should be traded and treated as such. 

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#8) On August 10, 2010 at 12:02 AM, mhy729 (32.55) wrote:

SkyNet awakens....

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#9) On August 12, 2010 at 4:28 PM, XMFRedwood (93.97) wrote:

Hi Sinch!  Great stuff - I had post on my blog but yours is much more interesting... ;-)  Thanks for sharing the article.  

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