Nanex Research

Nanex ~ 16-Oct-2012 ~ Destroying Options Pricing the HFT Way

At the request of one of our customers, we took a detailed look at option quotes for October 10, 2012, which was an unremarkable, quiet trading day. We were shocked to see the number of fake quotes, and how often available capacity was exhausted! On an inactive day. There doesn't appear to be anyone actively monitoring the aggregate number of option messages per second. What will happen when a shock to the system multiplies activity by a factor of 10 or more?

See also our analysis of option quotes for October 26, 2012.

The table below shows quote and trade statistics for the entire session. It compares all 7,834 NMS stocks, with Apple stock and Apple Options.

There were over 600 million Apple Options quotes, which is 20% more quotes than all NMS stocks combined!

10-Oct-2012 Symbols Quotes NBBO Trades Shares
All NMS Stocks 7,834 505,786,573 129,329,092 22,855,724 5,722,116,254
Apple Stock 1 942,777 263,901 101,510 17,126,557
Apple Options 3,747 602,555,911 117,413,854 143,806 653,562

We also found:

There were 9 options exchanges and approximately 528,000 individual option contracts on that day. Network capacity is currently set at 6 million messages/second. That allows about 10 quotes per option contract per second. With 9 exchanges, each exchange can send no more than 1 quote per option contract per second at the same time. Yet there were 4,754 instances where one Apple option contract had over 1,000 quotes in a second. If all contracts quoted at that rate, there would be 528 million quotes/second.

1. Total Number of Apple Option Quotes and NBBO Quotes per second.
This chart indicates saturation when the number of quotes in 1 second exceeds 140,000.

2. Total Number of Apple Option Quotes, NBBO Quotes, and Trades per second (log scale).
Note the saturation limit shows up clearly.

3. Total Number of different Apple option contracts quoted each second and for the session.
Note: It is odd that the maximum number of different Apple option contracts per second hits a wall at about 1470, even though the total number of different Apple option contracts for the session is hundreds higher.

Nanex Research