Mysterious Algorithm Was 4% of Trading Activity Last Week# Stock
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Published: Monday, 8 Oct 2012 | 4:27 PM ET Text Size
By: John Melloy
Executive Producer, Fast Money & Halftime
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A single mysterious computer program that placed orders — and then
subsequently canceled them — made up 4 percent of all quote traffic in the
U.S. stock market last week, according to the top tracker of high-frequency
trading activity. The motive of the algorithm is still unclear.
The program placed orders in 25-millisecond bursts involving about 500
stocks, according to Nanex, a market data firm. The algorithm never executed
a single trade, and it abruptly ended at about 10:30 a.m. Friday.
“Just goes to show you how just one person can have such an outsized impact
on the market,” said Eric Hunsader, head of Nanex and the No. 1 detector
of trading anomalies watching Wall Street today. “Exchanges are just not
monitoring it.”
Hunsader’s sonar picked up that this was a single high-frequency trader
after seeing the program’s pattern (200 fake quotes, then 400, then 1,000)
repeated over and over. Also, it was being routed from the same place, the
Nasdaq [COMP 3112.35 -23.84 (-0.76%) ].
“My guess is that the algo was testing the market, as high-frequency
frequently does,” says Jon Najarian, co-founder of TradeMonster.com. “As
soon as they add bandwidth, the HFT crowd sees how quickly they can top out
to create latency.”
(Read More: Unclear What Caused Kraft Spike: Nanex Founder)
Translation: the ultimate goal of many of these programs is to gum up the
system so it slows down the quote feed to others and allows the computer
traders (with their co-located servers at the exchanges) to gain a money-
making arbitrage opportunity.
The scariest part of this single program was that its millions of quotes
accounted for 10 percent of the bandwidth that is allowed for trading on any
given day, according to Nanex. (The size of the bandwidth pipe is
determined by a group made up of the exchanges called the Consolidated Quote
System.)
(Read More: Cuban, Cooperman: Curb High-Frequency Trading)
“This is pretty out there to see this effect this many stocks at the same
time,” said Hunsader. High frequency traders are doing anything to “tip
the odds in their favor.”
A Senate panel at the end of September sought answers on high-frequency
trading as investigators look into the best way to stop wealth-destroying
events such as the Knight Capital computer glitch in August and the market
“Flash Crash” two years ago.
(Read More: Ex-Insider Calls High-Frequency Trading ‘Cheating’)
Regulators are trying to see how they can rein in the practice, which
accounts for 70 percent of trading each day, without slowing down progress
and profits for Wall Street and the U.S. exchanges.
RELATED LINKS
Cuban, Cooperman: Curb High-Frequency Trading
Do Markets Need a 'Kill Switch'?
Ex-Insider: HFT Is 'Cheating'
Will Glitches Get Worse?
“I feel a tax on order stuffing is what the markets need at this point,”
said David Greenberg of Greenberg Capital. “This will cut down on the
number of erroneous bids and offers placed into the market at any given time
and should help stabilize the trading environment.”
Hunsader warned that regulators better do something fast, speculating that
this single program could have led to something very bad if big news broke
or a sell-off occurred and one entity was hogging this much of the system.
By: John Melloy
Executive Producer, Fast Money & Halftime
14
0
Share
A single mysterious computer program that placed orders — and then
subsequently canceled them — made up 4 percent of all quote traffic in the
U.S. stock market last week, according to the top tracker of high-frequency
trading activity. The motive of the algorithm is still unclear.
The program placed orders in 25-millisecond bursts involving about 500
stocks, according to Nanex, a market data firm. The algorithm never executed
a single trade, and it abruptly ended at about 10:30 a.m. Friday.
“Just goes to show you how just one person can have such an outsized impact
on the market,” said Eric Hunsader, head of Nanex and the No. 1 detector
of trading anomalies watching Wall Street today. “Exchanges are just not
monitoring it.”
Hunsader’s sonar picked up that this was a single high-frequency trader
after seeing the program’s pattern (200 fake quotes, then 400, then 1,000)
repeated over and over. Also, it was being routed from the same place, the
Nasdaq [COMP 3112.35 -23.84 (-0.76%) ].
“My guess is that the algo was testing the market, as high-frequency
frequently does,” says Jon Najarian, co-founder of TradeMonster.com. “As
soon as they add bandwidth, the HFT crowd sees how quickly they can top out
to create latency.”
(Read More: Unclear What Caused Kraft Spike: Nanex Founder)
Translation: the ultimate goal of many of these programs is to gum up the
system so it slows down the quote feed to others and allows the computer
traders (with their co-located servers at the exchanges) to gain a money-
making arbitrage opportunity.
The scariest part of this single program was that its millions of quotes
accounted for 10 percent of the bandwidth that is allowed for trading on any
given day, according to Nanex. (The size of the bandwidth pipe is
determined by a group made up of the exchanges called the Consolidated Quote
System.)
(Read More: Cuban, Cooperman: Curb High-Frequency Trading)
“This is pretty out there to see this effect this many stocks at the same
time,” said Hunsader. High frequency traders are doing anything to “tip
the odds in their favor.”
A Senate panel at the end of September sought answers on high-frequency
trading as investigators look into the best way to stop wealth-destroying
events such as the Knight Capital computer glitch in August and the market
“Flash Crash” two years ago.
(Read More: Ex-Insider Calls High-Frequency Trading ‘Cheating’)
Regulators are trying to see how they can rein in the practice, which
accounts for 70 percent of trading each day, without slowing down progress
and profits for Wall Street and the U.S. exchanges.
RELATED LINKS
Cuban, Cooperman: Curb High-Frequency Trading
Do Markets Need a 'Kill Switch'?
Ex-Insider: HFT Is 'Cheating'
Will Glitches Get Worse?
“I feel a tax on order stuffing is what the markets need at this point,”
said David Greenberg of Greenberg Capital. “This will cut down on the
number of erroneous bids and offers placed into the market at any given time
and should help stabilize the trading environment.”
Hunsader warned that regulators better do something fast, speculating that
this single program could have led to something very bad if big news broke
or a sell-off occurred and one entity was hogging this much of the system.
