On July 13, 2015, the U.S. Department of Treasury, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, the U.S. Securities and Exchange Commission, and the U.S. Commodity Futures Trading Commission released a joint report analyzing the significant volatility in the U.S. Treasury market on October 15, 2014 (press release, paper [pdf]). We'll simply call it the "Fed paper".
Our main issue with Alpert's article is that it never states that Marketable Limit orders were excluded (a big deal as explained here). Alpert informs us that this information does exist in the code which was supplemental to the story. But the reader would have to download and install software, then download, compile and run his code to discover that fact. We think that is entirely unreasonable.
The February 28, 2015 weekend edition of Barron's carried an article by Bill Alpert about how trading has never been better for "The Little Guy". Alpert claimed to have arrived at this conclusion after months of studying SEC 605 reports. He further went on to rank the "Stock Wholesalers" (folks that actually execute most retail orders) and proclaimed Citadel the winner. Themis Trading wrote a must-read review of this article, so we'll avoid repeating some of the excellent points they make.
Beginning September 15, 2014, CME's new rule 575 ("Disruptive Practices Prohibited") goes into effect. The document accompanying rule 575 describes many of the issues we have pointed out and published over the years. Although these manipulative strategies have been illegal in the past under existing prohibitions on manipulation (see the CFTC Pather fine), rule 575 explicitly lists several types.
Usually, exchange disciplinary actions are identical to FINRA's except for name changes, however in this case, there was one paragraph in the Nasdaq action missing from FINRA's. And not just any paragraph, but the most stunning revelation about Quote Stuffing to date: Citadel was sending excessive orders (Quote Stuffing) as a trading strategy!
On July 29, 2014, Representative Scott Garrett (R-NJ), Chair of the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, held an equity market structure round-table at the Library of Congress in Washington, D.C.
While internalizers matching retail trades claim they use direct feeds for pricing, there is overwhelming evidence that retail customers, in fact, are getting prices based on the SIP (Securities Information Processor also known as the consolidated quote).
During regular market trading hours on February 13, 2014, we found 633 extreme high frequency trading (HFT) quote spamming events. We define an event when 1 symbol has 6,000 or more quotes and less than 300 trades in 1 second of time. Events like these are rare, usually only a few appear in a trading day. There were 633 such events on February 13.
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.
The SEC actually rubber-stamped Nasdaq's proposal (below) which, for all practical purposes, destroys the core concept that holds Reg NMS together - but only for the Nasdaq exchange. It's interesting that other exchanges have not made this proposal (that we can find). We strongly recommend the New York Attorney General or Congress investigate.
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.
In June 2010, while analyzing the Flash Crash, we noticed that many stocks had extremely high rates of canceled orders (1000+ per stock, per second). We then looked at data back to 2004 and found hundreds of thousands of examples: the first beginning in July 2007, which not coincidentally is when High Frequency Trading (HFT) began exploiting the flaws of Reg. NMS.
From the 1990's through the end of 2006, electronic trading increased transparency which attracted liquidity, leading to to narrower spreads and greater market stability. The graphic in this recent New York Times article shows the steady reduction in trading costs up until about 2006. Since that time, trading costs have not changed significantly on the execution side but on the analysis side (not factored into the New York Times article), both the number of quotes and the cost of receiving and processing them has exploded.1 Spreads have also become considerably less stable.
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.
The March 23, 2012 IPO of BATS was brief. Apple (AAPL) stock began trading at 11:14:18.436 with an initial price of $15.25. Within 900 milliseconds from opening the stock price had fallen to $0.2848. Within 1.5 seconds the price bottomed at $0.0002. 567 trades were executed before the stock was halted (532 are shown below).
During the market close in SPDR S&amp;P 500 ETF Trust (SPY) (and dozens of related ETFs) on February 29, 2012, a delay of about 1.25 seconds developed in quotes from Nasdaq relative to quotes from other exchanges. Execution trade prices from Nasdaq appeared synchronous with trade prices from other exchanges, which shouldn't be possible, since Nasdaq's quote was behind. We also noticed an anomaly in the trade condition.