China’s main stock index, the Shanghai Composite went for a wild flash rise of 6% in two minutes on Friday and while it’s not clear if (HFT) high frequency trading manipulation is at fault, market confidence has been eroded just the same. The crazy gyrations come at a vulnerable time, as the index has lost 40% of its value since 2009 and 2 million mainland trading accounts have been closed. For the day, a little over 15 billion shares traded in Shanghai which is 50% higher than the average volume over the last 30 days. The cause thus far has been identified as a $1.3 billion buy order erroneously placed by Everbright Securities Co Ltd (SHA:601788), China’s 9th largest broker.

“The timing was not good for trading errors in China,” said Brian Jacobsen, who helps oversee $221.2 billion as chief portfolio strategist at Wells Fargo Advantage Funds..”There are already a lot of skeptics out there and an event like that can erode some people’s confidence.”

The whole scenario is eerily similar, at least in price movement and “official cause”, to the Flash Crash experienced in U.S. equity markets in 2010. The chart below from Zerohedgeshows the movement in China’s Shanghai Composite Index.HFT Shenanigans Shanghai Composite 600x286 HFT Shenanigans: Shanghai Flash Rise Versus U.S. Flash Crash

This chart is of the Dow Jones Industrial Average (INDEX.DJI) from May 6, 2010, the day of the Flash Crash. Can you see the similarity?

HFT Shenanigans Dow Flash Crash 600x296 HFT Shenanigans: Shanghai Flash Rise Versus U.S. Flash Crash

How about now?

HFT Shenanigans Dow Flash Crash Versus Shanghai Composite1 600x641 HFT Shenanigans: Shanghai Flash Rise Versus U.S. Flash Crash

Given the circumstances, it seems fitting to discuss the Flash Crash, which is something we’ve yet to tackle in an HFT Shenanigans post. The topic is very complex when it comes to the cause and what was actually happening in markets for those few minutes around 2:00 on May 6th, 2010. However, it’s worth discussing that the official cause found by the SEC’s investigation appears to be clearly erroneous.

According to months of work, the SEC pinned the final blame on one order placed by an investment firm in Kansas named Waddell & Reed to sell 75,000 E-mini S&P 500 (.INX) Futures contracts. While the order may have been large, the sell program used by Barclay’s to execute the sale was not aggressive in nature as the SEC claimed and only took advantage of slightly higher prices rather than slamming the market down with continuous selling. The chart below from Nanex’s exhaustive work using the same data as the SEC clearly shows this. Every blue diamond on the chart represents a sale by the Barclay’s algorithm of the Waddell & Reed order.

HFT Shenanigans Waddell Reed trades during Flash Crash 600x388 HFT Shenanigans: Shanghai Flash Rise Versus U.S. Flash Crash

The following chart clearly shows that during the most precipitous price decline of the day, the sell program slows down.

HFT Shenanigans Waddell Reed trades during Flash Crash 2 600x285 HFT Shenanigans: Shanghai Flash Rise Versus U.S. Flash Crash

For a very in-depth look at the Flash Crash in particular and high frequency trading in general, the documentary below is excellent. Money & Speed: Inside the Black Box is also available as an iPad app which contains interactive charts and further information that isn’t presented in the 48 minute documentary.