How HFT Quote Stuffing Caused The Market Crash Of May 6, And Threatens To Destroy The Entire Market

[Joanne98]

Even as the idiots at the SEC mope about cluelessly, confirming they deserve not one cent of taxpayer money to fund their massively overbloated budget, and should all be summarily fired to collect tarballs in the Gulf of Mexico (and soon Maine), our friends at Nanex have conducted an exhaustive analysis (must read for everybody concerned about market structure), in which they identify the various parties responsible for the market crash, and, drumroll please, High Frequency Trading stands at the pinnacle of culprits for the 1,000 point Dow drop. From their findings: "While analyzing HFT (High Frequency Trading) quote counts, we were shocked to find cases where one exchange was sending an extremely high number of quotes for one stock in a single second: as high as 5,000 quotes in 1 second! During May 6, there were hundreds of times that a single stock had over 1,000 quotes from one exchange in a single second. Even more disturbing, there doesn't seem to be any economic justification for this. In many of the cases, the bid/offer is well outside the National Best Bid/Offer (NBBO). We decided to analyze a handful of these cases in detail and graphed the sequential bid/offers to better understand them. What we discovered was a manipulative device with destabilizing effect." In other words: enough with all the bullshit about HFT as a liquidity provider mechanism: in reality this is just a facade for the most insidious, computerized market manipulative device ever created. Nanex' conclusion: "What benefit could there be to whomever is generating these extremely high quote rates? After thoughtful analysis, we can only think of one. Competition between HFT systems today has reached the point where microseconds matter. Any edge one has to process information faster than a competitor makes all the difference in this game. If you could generate a large number of quotes that your competitors have to process, but you can ignore since you generated them, you gain valuable processing time. This is an extremely disturbing development, because as more HFT systems start doing this, it is only a matter of time before quote-stuffing shuts down the entire market from congestion. We think it played an active role in the final drop on 5/6/2010, and urge everyone involved to take a look at what is going on. Our recommendation for a simple 50ms quote expiration rule would eliminate quote-stuffing and level the playing field without impacting legitimate trading."

We present the Nanex' full report (please focus particularly on Part 4 and the provided evidence) and urge all readers, as we have many times before, to end all stock trading activities immediately (which at the macro level are nothing but a reflection of the EURJPY trade anyway) until such time as the SEC, CFTC, Finra, and every other corrupt and captured agency finally does something about the HFT menace. Doing nothing is merely inviting certain disaster yet again, and a guaranteed market crash, which next time wipe out the entire market permanently and destroy all confidence in US capital markets in perpetuity.

Analysis of the "Flash Crash"
Date of Event: 20100506
Complete Text


There are 9 exchanges that make markets in NYSE listed stocks: NYSE, Nasdaq, ISE, BATS, Boston, Cincinatti, CBOE, ARCA and Chicago. Each exchange submits a bid and/or offer price for each stock they wish to make a market in. The highest bid price becomes the National Best Bid and the lowest offer price becomes the National Best Ask. Exchanges compete, fiercely at times, to become the best bid or offer because that is where orders will be sent for execution. Exchanges also go to great lengths to ensure they avoid crossing other exchanges (bidding higher than others are offering, or offering lower than others are bidding), because if they do, many High Frequency Trading (HFT) systems will immediately execute a buy/offer and capture an immediate profit equal to the difference. Today, it is very rare to see markets crossed in stocks for longer than a few milliseconds.

http://www.zerohedge.com/article/how-hft-quote-stuffing-caused-market-crash-may-6-and-threatens-destroy-entire-market-any-mom

[Warren Stupidity]

1. How exactly does this shit benefit the economy at all?

[formercia]

3. The only people it benefits are those who make a 'profit' on the transaction.

It's just parasitic trading that drains the lifeblood out of the economy.

[DoctorK]

6. drains how?

On both sides of every trade are willing participants.

One person wants something else more than the stock, the other person wants the stock more than something else. Nothing is 'drained'.

Prices are simply information.

Glomming taxes onto transactions would be a 'drain' as both the participants would get less than either would otherwise to conduct the transaction.

[postulater]

2. Every stock transaction should be taxed.

That is the only way there is any added value to the economy from gambling with stock.

[jmowreader]

5. What do you think, three cents per share?

Since HFT buys stocks, waits for them to go up one or two cents and unloads them, a 3 cent per share transaction tax would (1) make HFT too risky and (2) not fetter legitimate stock trading.

[jtuck004]

4. And if these are the same folks, they are quite unhappy with their compensation

Article here

Apparantly they are getting 6 figure salaries, but others who use their algorithms in house can potentially make millions. So they are using their leverage to gain a bigger chunk of the return...

[DoctorK]

7. they chose the right response

risking their own capital on their own abilities.

kudos!