Analysis of the NYSE "Flash Crash"
nanex.net
nanex.net
"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."
I don't think this is correct, since it's not a trivial matter to ignore your own quotes. Say there are two orders about to come in, and you place a third. The market data feed then tells you [order 1, order 2, order 3]. It does not tell you which order is yours. So you need to separately run code which remembers when you placed orders, and then guess that "look, order 1 and order 2 match the order I placed, I guess order 1 is mine, lets ignore it when doing the rest of our calculations". That's not fast code.
Besides, if your broker thinks you are DOSing the markets (as well as the broker's system), they will shut you down FAST.
My "stupidity, not malice" explanation: novices didn't throttle the oscillations in their code and feedback loops developed. Some were self-loops - basically, you just don't have the self-order detection code I described above, and try to trade based on your own actions. Some were loops between traders - trader 1 places an order, trader 2 cancels in response, trader 1 cancels in response to 2, trader 2 places an order in response to the cancel, etc. The band-saw patterns look like bidding wars on wildly undervalued stocks (e.g., one system places an order for accenture at 0.05, another at 0.06, another at 0.07, etc), which is actually a very good thing since it pushes prices back up to their proper levels.
Don't you think the people who work with this data (and its consumers) professionally know what's fast enough to run and what's not?
Don't you think they know what behavior gets you shut down, how quickly you get shut down (and therefore how long you can game the system), and what doesn't?
I'm not saying you're explanation isn't possible/plausible, or that you're skepticism is unfounded, but I've seen you post several times about Finance/HFT and I haven't usually found your commments/assertions were very substantive.
I'd imagine the real difficulty would be making sure that the quotes you're putting in are a) relevant enough not to be immediately and trivially screened out by your competitors, b) not in danger of actually getting acted upon, and c) seemingly legitimate even in the face of after-the-fact scrutiny so that you avoid getting butt raped by the SEC for manipulation. a) and b) would likely be pretty easy to satisfy if you didn't have to worry about c), so...I don't know, this doesn't seem terribly implausible to me.
Then again, I don't know much about HFT, there may be factors in play that would make it a lot trickier to manipulate things in this way. And I'm certainly not convinced that this is what was behind the crash - "stupidity, not malice" is a good rule of thumb, and I'd have to see more evidence to assume that someone deliberately manipulated the markets here.
Additionally, your broker starts getting annoyed at you when your fill rate drops below 0.5% or so. If you DOSed the market, you wouldn't even be in that ballpark.
Additionally, your broker starts getting annoyed at you when your fill rate drops below 0.5% or so. If you DOSed the market, you wouldn't even be in that ballpark.
That's definitely true, and I'm sure it would be a serious problem with doing anything of this nature.
Is there always a middleman that cares about what quotes you're pushing through, though, or do some people have closer connections that wouldn't be watched very closely?
I fully agree that it's possible to do. I just find other explanations, like badly written algorithms, much more plausible.
I think the analysis and borderline-accusation of what is termed "insincere quoting" by the exchanges is... laughable. It doesn't speak well to the authors' knowledge of their industry. I've had an exchange disconnect my session for sending 1000+ orders per second by myself, and I would have been quite happy to execute any of them (or else they wouldn't have been sent). To be honest, I'm surprised 5000 is the biggest number they could find. I would have guess an order of magnitude higher.
What happened on 5/6 was that the NYSE finally learned that they aren't the boss in the equities markets anymore. Trying to slow down trading without regard for the other routing destinations was nothing but quaint.
You know those videos you see of suburban shoppers at 6:00a on Black Friday, rushing through the doors to get one of the three available Xbox 360s or whatever? The NYSE was the hapless security guard whose watch was slow telling everyone the store wasn't open yet.
I wrote too hastily when I said Hunsader was producing results at the time that others couldn't dream of; that was a sloppy exaggeration. But his work was very good.
"This situation led to orders executing against whatever buy orders existed in the NYSE designated market maker (DMM) order book."
This is actually the most cogent explanation I've yet heard.
When you can see the spread like that then something has gone terribly wrong. As I read it, that spread is between NYSE on the bottom and the rest of the market on the top.
However, it was only a NYSE problem because they were effectively being DOS'd by some of the other exchanges.
On the subject of HFT systems, 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!
Quotes within a single exchange are disseminated immediately to all interested parties -- if one party was spamming thousands of quotes at a stock, that stream would be repeated for everyone with a feed from that exchange. There's no way to tell which party is sending it, so the only thing you can measure is the quantity being sent by the exchange. Thus it is technically accurate to say that "one exchange was sending an extremely high number of quotes". It's in the exchange's best interest to disseminate quotes as quickly as possible in order to attract order flow and thus collect fees.
On the other hand, inter-exchange feeds are federally mandated and used primarily to comply with Regulation NMS rules that prevent trades from executing at a price inferior to the NBBO (national best bid/offer). In other words, if I send a buy order to NYSE but NASDAQ has a lower price, NYSE is required to either reject the order or route it to NASDAQ for a fee (it's up to the customer which method is used). It's not necessary to send 5000 quotes per second to another exchange because the primary motivation is compliance. Generally, institutions will send their orders directly to the exchange with the best price in order to avoid the extra fee for having it routed by the exchange.
I may be way off on the inter-exchange feeds as I am not a professional, but there are undoubtedly many here who are so please correct me.
Should we worry about all online retailers because Zappos had a computer error and lost some money? - http://www.walletpop.com/blog/2010/05/24/pricing-error-costs...
Well, the stock price is the market value - if it's not then what is? Detecting errors as opposed to genuine changes in value is a non-trivial problem.
Use buy and sell limit orders, you should be already.
The flash crash happened so quickly that a lot of limit orders weren't executed, because the price dropped past the limits too fast.
If you had an order to sell something at $20, and the price dropped from $25 to $1 in seconds then there's a good chance there were no buyers for you at $20, but instead your trade might have been executed at $1. That makes a pretty big difference.
http://online.wsj.com/article/SB1000142405274870395760457527...
Notice that "circuit breakers" wasn't offered up as a solution to the problem.
These things have been working fine and dandy across Europe for several years, where such a situation would not happen.
For the Eurex implementation see here: http://is.gd/d2f1Y [link to google quick view of the pdf]
A circuit breaker would prevent the absolute free-fall that happened during the flash crash. At that stage, nobody knew what the "real" price of a stock was and everybody was guessing, the algos could not handle the situation. If a circuit breaker was triggered, it would lead to a trading halt on the stock and an auction to set the price.
Time stamping quotes solves system errors, but not mistrades or market panic.
this is not a threat to the economy if that's what the concern is. it's only a 'threat' in conjunction with a perceived fear. in this particular case, it had to do with greece. in the 87 crash's case, it had to do with a collapse in the bond markets.
all high-frequency trading or program trades do is quicken the whole process. one can implement safeguards to make the whole thing slower -- or you can let the market participants take care of themselves and/or fix the underlying problems and ignore mass hysteria which will reset as soon as the absence of a rational reason for a correction is made clear.
i feel like the 1987+ 'crashes' are very different from the 1929 crash, etc. they are not in themselves a problem. so far they've always popped back.
which is not to say that our economy has been in good shape since 1987. but that there are deeper issues -- having very little to do with hft.
That actually wouldn't change with a 50ms rule. You still want your order in the queue before the other guy, even if he can't pull his order for 50ms.
This is the scariest part