Open Dandy

Not very open though.

Inside the Flash Crash Report:

Another key area that gets short shrift in the report is quote stuffing, a practice by high frequency traders to blast out millions of bids to buy and offers to sell specific stocks, only to cancel them fractions of a second later.  Mary Schapiro, Chair of the SEC, told the Economic Club of New York the following on September 7:

   

“These high frequency trading firms can generate more than a million trades in a single day and now represent more than 50 per cent of equity market volume. And many firms will generate 90 or more orders for each executed trade. Stated another way: a firm that trades one million times per day may submit 90 million or more orders that are cancelled.”

What’s the science behind cancelling 90 orders to get one trade done?  If you blast out millions of orders in microseconds, then cancel them just as fast, you are confusing your competition as to what your true intention is.  Your competition learns from this and fires a similar volley back at you.  (Left in the blaze of digital ticker tape is the average investor, who doesn’t own a trading algorithm.) Questions are being asked as to whether some of these practices may constitute market manipulation, similar to painting the tape, where the sole purpose of the order is to mislead the market.  If retail stockbrokers tried doing this for the small investor, they would be expeditiously led off in handcuffs.

Four days before the official Flash Crash report was released by the CFTC and SEC, Nanex, a creator and developer of a streaming datafeed that brings trading prices to workstations in real-time, put out its own impressive analysis of the Flash Crash. Among numerous areas covered, Nanex highlighted significant quote stuffing that occurred on May 6.  (The full report is available at http://www.Nanex.net) Among the findings of Nanex:

   

“While searching previous days for similarities to the time period at the start of the May 6th drop, we found a very close match starting at 11:27:46.100 on April 28, 2010 — just a week and a day before May 6. We observed it had the same pattern — high, saturating quote traffic, then approximately 500ms later a sudden burst of trades on the eMini and the top ETF’s [Exchange Traded Funds] at the prevailing bid prices, leading to a delay in the NYSE quote and a sudden collapse in prices. The drop only lasted a minute, but the parallels between the start of the drop and the one on May 6 are many.”

A potential implication of the Nanex report is that by blasting out bogus quote data, the data feeds carrying stock prices to investors could be slowed down, giving an edge to traders who understand what’s actually happening.