This article first appeared on Floating Path.
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.
5 Charlie Munger Quotes Every Investor Should Know
Charlie Munger is perhaps best-known as the vice chairman of Berkshire Hathaway, where he has been Warren Buffett's longtime business partner. As well as holding this position, he also servers as the chairman of the Daily Journal Corporation and is a director of Costco Wholesale Corporation. Munger started his investment career in the 1960s when, Read More
On October 17, the stock of Wal-Mart Stores, Inc. (NYSE:WMT) was subject of a 5.3% flash crash when it dropped from $75.70 to $71.69 and bounced right back within about 2 seconds. In what seems to be the usual case, exchanges BATS and EDGE were the venues trading the stock all the way down. Curiously, the stock traded within 1 cent of its LULD (Limit Up, Limit Down) trigger which would’ve acted as a circuit breaker. Similar to a recent flash crash in Proctor Gamble, it may be that HFT are exploiting the LULD bands.
Option Market Crashes
The increasing fragmentation of U.S. markets has helped lead to three more market shutdowns this week. On Wednesday, the two options exchanges operated by Deutsche Bourse, shut down intermittently through the morning. As of now, the official release from the German-owned International Securities Exchange is the only reasoning we have.
The International Securities Exchange (ISE) experienced a technical issue that led to a disruption in its outbound market data feed to OPRA commencing at the market open through approximately 10:55 am. The root cause has been identified as a configuration error on the OPRA side that they applied specifically to the communication lines dedicated to receiving data from ISE and ISE Gemini. After implementing a temporary work-around to resolve the issue this morning, ISE and OPRA technology teams are collaborating to restore the proper configuration.
The first chart shows trade activity on ISE while the second is from ISE-Gemini. Notice the gaps in trading.
Similarly, on Friday one of the options exchanges operated by Nasdaq malfunctioned about an hour into the trading day. After multiple attempts to revive the exchange, officials decided to shut it down for the entire day and cancel any open orders in their book. Their official statement is all we have as yet, however it didn’t seem to make sense to Eric Hunsader from Nanex.
On Friday, November 1st at 10:36:57 a.m. ET, NASDAQ OMX halted trading on the NASDAQ Options Market (NOM), one of the exchange group’s three U.S. options markets.
A significant increase in order entries inhibited the system’s ability to accept orders and disseminate quotes on a subset of symbols, which resulted in the NOM halt.
As equities options trading continues on eleven other venues, including NASDAQ OMX PHLX and BX Options, NASDAQ OMX has determined it is in the best interest of market participants and investors to cancel all open orders on the NOM book at 10:36:57 a.m. ET, and to continue the market halt through the close. Equities trading has not been impacted.
Last week we showed you just how ridiculous the amount of options data has become. Due to the number of symbols growing by 200% over the last few years that now must be quoted on 12 exchanges, the system is complicated, stretched, and ripe for breakdowns.
In a Bloomberg story yesterday, Trevor Mottl, head of derivative strategy at Susquehanna Financial Group, was quoted defending the current structure. Is it a coincidence that Susquehanna is one of the most dominant HFT players in the options markets?
“I’d argue that the increased number of exchanges where transactions can occur decreases the impact of issues like this,” Mottl wrote in an e-mail. “I expect that the impact would have been far greater 10 or more years ago.”
Algos Play Nice For FOMC
After the debacle at the previous FOMC decision announcement, the Federal Reserve made efforts to keep this week’s decision and statement sealed until the appropriate time. By all accounts, the new procedures were successful and trading around the 2:00 release was normal.