For the first time, the SEC's new multi-million dollar market data analysis tool, "Midas", allows the regulator to measure a stock exchange's compliance with a core rule that lies at the heart of regulations governing how our stock markets work. We are referring to rule 603(a)(2), which basically states that exchanges cannot send stock quotes faster to special groups than to the public quote.
This is the paper that led to a Fed Policy Change. One of Einstein's great contributions to mankind was the theory of relativity, which is based on the fact that there is a real limit on the speed of light. Information doesn't travel instantly, it is limited by the speed of light, which in a perfect setting is 186 miles (300km) per millisecond. This has been proven in countless scientific experiments over nearly a century of time. Light, or anything else, has never been found to go faster than 186 miles per millisecond. It is simply impossible to transmit information faster.
Links and commentary on an explosive paper that changed everyone's view of HFT. On November 14, 2012, Adam D. Clark-Joseph published Exploratory Trading, which analyzes CFTC audit level trading data in the eMini S&P 500 futures market. This is a special, "regulators-only" data-set that contains all orders and trades, and each order and trade has a trader identifier. What this paper exposes is astounding.
The High Frequency Trading (HFT) firm Virtu published a response to our analysis, Einstein and The Great Fed Robbery, in which we showed that Fed FOMC news had to exist in New York and Chicago before it was released at 2pm in Washington D.C. Although it may appear to some that Virtu’s intent was to discredit our work, we will show that Virtu's own data actually corroborates our findings: Virtu's paper, in fact, agrees with our analysis.
On January 14, 2008, in the early hours of trading, prices of the March 2008 eMini (ES) futures contract began oscillating rapidly. After about 4 seconds and 100 oscillations, the price swings widened to the equivalent of about 400 points on the Dow Jones Industrial Average. The oscillations then abruptly stopped and in less than 2 seconds, the price collapsed 5.3% from its peak: the equivalent of a 760 point drop in the Dow. After reaching bottom, the market was halted for 10 seconds.
On December 23, 2013 at 2:37:51, Treasury Futures skyrocketed on heavy volume. Specifically, the March 2014 contract for the 30-Year (ZB), the 30-Year Ultra (UB), the 10-Year (ZN) and spread between the two (NOB). In 13 seconds, the 30-Year T-Bond moved 5 handles - the equivalent of the high-low range of the last 3 months.
Back on September 20, 2011, we coined the term fantaseconds to describe the phenomenon of trades printing ahead of quotes. We wrote this paper which included ample evidence of fantaseconds in the stock of Yahoo. What many readers of the paper didn't realize at the time, was our suggestion that somehow high frequency traders figured out how to go faster than light, was satire. It didn't help that just hours later, CERN announced the possibility that they detected particles travelling faster than light, and many people conflated the two stories.
On December 20, 2013, the stock of Ariad Pharmaceuticals Inc (Symbol: ARIA, market cap: $1.9 Billion) rocketed higher, triggering 2 Limit Up Limit Down (LULD) circuit breakers which halted trading. Except that NYSE-MKT (AMEX) must not have gotten the message, because ARIA continued trading on that market (see charts 2-4 below).
Early in the morning on December 19, 2013, there were two large 1-second bursts of trading in Gold Futures. In the recent past (April 12, 2013, September 12, 2013, October 11, 2013, November 20, 2013, November 25, 2013 and December 10, 2013) these two events would normally be combined into 1 show-stopping exchange halt. No halt occurred in the active February 2014 futures contract.
On December 18, 2013, about 50 seconds before the widely anticipated 14:00 release of the Federal Reserve's FOMC announcement, the market exploded with activity reaching levels higher than during the actual FOMC news release. Approximately $106 Million of SPY and 3,700 eMini Futures contracts traded in 1 second. What is going on here?
Andrew Haldane from the Bank of England once quipped that High Frequency Trading (HFT) provides liquidity during a monsoon, but withdraws it during a drought. But there's more to this phenomenon, than the whim of a select group of high speed traders. When you have a market that is based primarily on speed, only the very fastest traders are going to want to participate during economic news releases, even so-called market makers whose job is to provide liquidity. This leads to a significant liquidity vacuum during times of market stress.
On December 16, 2013, between 3:00 and 6:36 AM ET, a high frequency trading (HFT) algo ran in a number of futures contracts causing extreme per second quote rates (>2500/second). Stock index, Treasury and Energy futures were affected. This algo was responsible for about 3.6 million order cancellations during the 723 individual seconds it ran.
On December 15, 2013 at 22:08:32 Eastern, a large wave of sell orders hit many stock index futures contracts. Most notably, over 6,000 March 2014 eMini contracts traded in 1 second. After closer inspection, it appears that trading began almost simultaneously in several contracts, with the March 2014 eMini (ES) starting just a few milliseconds before the others. It's unclear whether the trades in the other contracts were a reaction to the eMini or part of the same sell program.
Starting December 9, 2013, the number of crossed NBBO quotes in NMS stocks increased and there was a significant jump in the percentage of crossed quotes involving Direct EdgeX. December 9th was also when Odd Lot trades began reporting to the consolidated feed. We don't know if the two events are related.