This first appeared on FloatingPath. Every week Floating Path looks to highlight some of the crazier examples of HFT running amok in the markets. We typically do so with the help of Nanex which monitors, analyzes, and visualizes high frequency trading market data.

Nasdaq 100 Spoofing

An HFT algorithm appeared to be spoofing the NASDAQ-100 (INDEXNASDAQ:NDX)  futures contracts this past Tuesday. Much like the Panther Energy crude oil spoofing, these large orders appear out of nowhere, and are cancelled before they can be executed. Through this illegal technique, it is possible for high frequency traders to manipulate the price of an asset without ever having a trade executed. In the case of Panther, the firm was fined heavily and its owner given a one year industry ban.

HFT Shenanigans NQ spoofing 600x670 HFT Shenanigans: NQ Spoofing And Mind Boggling Options Data

HFT Shenanigans NQ spoofing 21 600x670 HFT Shenanigans: NQ Spoofing And Mind Boggling Options Data

Huntington Bancshares Incorporated (NASDAQ:HBAN)

Just after the regular market close on Wednesday, some unusual quoting activity occurred in Huntington Bancshares leading to a yo-yo effect on trading prices. The quotes oscillated, and so too did trades, in about an $.80 or 9 percent range around the closing price.

HFT Shenanigans HBAN1 600x398 HFT Shenanigans: NQ Spoofing And Mind Boggling Options Data

Mind-Boggling Options Data

While we’ve shown before just how wild the options markets can be and that retail traders can get hosed, new data compiled by Nanex demonstrates that the U.S. options markets are essentially the wild west for HFT algorithms. The massive amounts of quote spamming and subsequent data volumes are making it difficult for anyone other than high frequency traders to fairly compete. In addition, regulators face an up-hill battle that continues to get steeper.

..the SEC didn’t even bother to look at option data during the flash crash, because there was too much of it: they didn’t have the ability to process the enormous amount of option data created on that day. Yet today, option data is 3 to 4 times larger than it was on the day of the flash crash!

The following chart shows options quotes relative to actual options trades. The growth in quoting is enormous.

HFT Shenanigans OptQtsAndVol 600x532 HFT Shenanigans: NQ Spoofing And Mind Boggling Options Data

When looking at just the trade volume, you can see that since the passing of Regulation NMS in 2007 (which gave birth to today’s HFT) trading is flat. However, quoting has grown about 300%.

HFT Shenanigans OptVol 600x533 HFT Shenanigans: NQ Spoofing And Mind Boggling Options Data

Each dot on the chart below represents an instance of one stock receiving over 200,000 quotes in a single second. This trend too is increasing, and according to Nanex, 99.9% of these orders are never executed.

HFT Shenanigans Extreme Options Quotes 600x575 HFT Shenanigans: NQ Spoofing And Mind Boggling Options Data

The bread and butter of high frequency trading is arbitrage. The ability to purchase and asset and almost immediately sell it with zero risk is what keeps HFT alive. Much like the proliferation of ETF’s and trading venues provides more arbitrage opportunities, so too does an increase in the number of derivatives or options that trade based on an underlying asset.

For instance, as Google Inc (NASDAQ:GOOG)’s stock changes price, the options markets must re-price over 4,000 contracts. Those 4,000 contracts trade on 12 different option exchanges. Therein lies a myriad of risk-free arbitrage opportunities for the algos fast enough to take advantage. Given this, the growth in symbols should come as no surprise. Take note that despite the tripling of contracts available since 2007, actual trade volume remains relatively flat.

HFT Shenanigans OptSymbolCounts 600x533 HFT Shenanigans: NQ Spoofing And Mind Boggling Options Data


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