HFT: A Clear and Present Danger

Nanex Ongoing Research

On April 24th, 2012 at 15:51:44, the number of quotes for a single second in one stock set a new record: 47,138. The stock, PSS World Medical (symbol PSSI), is not active: only 1,992 trades (317,127 shares) traded the entire day.

This event represents a clear and present danger to market stability, and needs to be investigated immediately. Due to the way stocks are processed, many other stocks were affected by this event. Just one example: PSSI is processed by UQDF line 5 which processes all Nasdaq stocks with symbols between PC and SPZZZZ. That means all other symbols in that range were also affected by what happened in PSSI. Symbols like QCOM, QQQ and SIRI fall into this group. We see more instances of stocks with more than 10,000 quotes in a single second. If HFT blasted just 10 stocks from one exchange at this rate, our national quotation system would collapse. The same thing would happen if this HFT blasted just a few stocks at this rate from all 10 exchanges -- and we are detecting signs that this is occurring, though for now, at much lower rates. It helps to keep in mind that there are 11 exchanges and approximately 5,000 stocks are actively quoted.
We aren't calling for a 5 Alarm Fire just yet, but there is smoke in the air and dry tinder everywhere.
We have written many times how this HFT behavior raises the cost for everyone and this event is one of those hidden costs. However, since our regulators don't seem to be making any progress (they are still defining HFT), and we haven't seen the appropriate level of alarm about these events, we thought perhaps we need to put this event in context so more people can understand just how disturbing it is.

In one second, a HFT (connected to Nasdaq) blasted PSSI with 47,138 quotes from one exchange.
Also in one second:
  • Google processes a peak of about 34,000 message requests.
  • There are no more than 10,000 tweets in the world.
  • Facebook processes no more than about 6,000 updates.
During the height of the flash crash, the highest number of quotes in any one second for ALL Nasdaq stocks was 78,000.

According to published records, for 2011, Tape C (which carries PSSI) had 2,209,787 non-pro subscribers and 369,985 pro subscribers: let's say 2.5 million total subscribers. This is how many people paid money to receive quotes in stocks like PSSI.

If  you printed out this one second of PSSI quotes using a tiny 7 point font, it would fill about 750 sheets (1.5 reams) of paper.
If every subscriber printed out this one second of quotes in PSSI, it would consume about 250,000 trees or a dense forest 4 times bigger than Walt Disney World in Florida. And the stack of paper would reach into space (118 miles above earth).
Scrolling through the 47,138 quotes one second at a time would take 13 hours.

According to the same public document, the peak quotes per second for all Nasdaq stocks was 143,058, and the average daily peak quotes per second for all Nasdaq stocks was 97,370. So this one event in one stock, PSSI, had 33% of the peak and 48% of the average daily peak for all (~2,000) Nasdaq stocks!

If you aren't sufficiently alarmed at this point, we're afraid you'll just have to wait for the next market catastrophe. But our regulators need to be proactive, not reactive and probably won't survive the political fall out from the next system collapse. And it doesn't help when they listen to so called industry experts like Mr. Dehghanpisheh.

Below are five separate charts showing five separate instances this out of control quoting that occurred in PSSI.

Chart 1 - 15:51:44 - 47,138 quotes in 975 milliseconds.

hart 2 - 15:51:43 - 12,255 quotes in 375 milliseconds.

hart 3 - 15:51:40 - 35,016 quotes in 900 milliseconds.

hart 4 - 15:51:48 - 5,643 quotes in 175 milliseconds.

hart 5 - 15:51:49 - 11,919 quotes in 900 milliseconds.

hart 6 - A zoom into 25 milliseconds of time.

Chart 7 - A zoom into 25 milliseconds of time with both price and size.

hart 8 - Plotting PSSI with 1-minute bar chart shows a very inactive stock throughout the day.

How to read these charts

Nanex Ongoing Research