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.
Option Markets Go Dark
On Monday afternoon trading in U.S. equity options suddenly shut down as the entire option market went dark in an event that is quite similar to the Nasdaq SIP outage. As Themis Trading explained, the information processor for option markets is basically the same setup as the stock market, except it is managed by the NYSE Euronext (NYSE:NYX) rather than NASDAQ OMX Group, Inc. (NASDAQ:NDAQ).
While we are still waiting for the official post mortem from NYSE, the problem in the options market yesterday seemed very similar to the NASDAQ SIP problem from August 22nd – the consolidator of the multiple exchanges was overwhelmed and crashed.
As of this writing, the “U.S. Options” portion of the website for NYSE Technologies, the party responsible for the dissemination of quote and trade data, shows no information relating to the outage.
The chart below displays all trades across all exchanges in U.S. options surrounding the outage. Note the brief spike around 1:56 from CBOE and C2 as they attempted to get their exchanges back online. Also, the flurry of activity around 2:20 comes from BOX (Boston Option Exchange) as they seemingly resent all previous activity from that day as if it was new information.
This re-sending of data from BOX confused other exchanges and caused the NBBO to cross or lock for many products. This graph shows the ratio of option quotes to stock quotes. The thick red line is for the day of the outage. The huge spike at 2:20 again shows the BOX error.
As an example of the havoc caused in individual options due to the BOX issue, the following chart is for the Apple Inc. (NASDAQ:AAPL) September 460 call. While the market price was around $2.50 at 2:20, the stale data caused Apple Inc. (NASDAQ:AAPL) trades to be executed all the way up to $7.00, which as you can see is a mirror image of the day’s range up until that point. If any party was aware of this data snafu, they would have been able to take serious advantage of others and make risk-free profits. Imagine being able to sell something for $700 when it’s really only worth $250.
Fed “No Taper” News Was Leaked
The folks at Nanex have what appears to be indisputable evidence of HFT cheating. Their investigation here has generated headlines across financial news outlets, as they often do. However, some non-financial types have also taken notice to the scientific aspects of the Nanex explanation, lending even more credence to their argument.
The following four charts show trading in all stocks and then all futures. The instantaneous reaction to the 2:00 Fed “no taper” news release is crystal clear.
All 8,000 NMS Stocks
All 8,000 NMS Stocks zoomed in to 140 milliseconds
All futures contracts
All futures contracts zoomed in to 140 milliseconds
The issue here is that stocks are traded in New Jersey, futures in Chicago, and the data is released from Washington D.C. The travel time, at the speed of light, from D.C. to NJ is 2 milliseconds and 7 milliseconds from D.C. to Chicago. How then is trading in both cities instantaneous upon the 2 PM data release? According to Nanex there are two possibilities, one of which is significantly more likely than the other. Neither instance however, is indicative of a level playing field that allows all market participants to equally access and trade upon relevant data.
1. Released by a News Organization
The Fed news was condensed by a news service into a simple “No Tapering” message (something easily readable by a machine) and then placed on news servers co-located next to trading machines in both New York and Chicago at some time before 2pm.
2. Leaked to Wall Street
The Fed news was leaked to, or known by, a large Wall Street Firm who made the decision to pre-program their trading machines in both New York and Chicago and wait until precisely 2pm when they would buy everything available. It is somewhat fascinating that they tried to be “honest” by waiting until 2pm, but not a thousandth of a second longer.
We think it was leaked. The evidence is overwhelming.
The financial markets continue to be a stacked deck and every week more evidence piles up that only supports that claim. Attempting to trade around any sort of news event or data release is a sucker’s bet only winnable with high frequency trading. We leave you with a recent interview from CNN with Dave Lauer ( @DLauer ), a former high frequency trader.