Nanex ~ 14-Dec-2012 ~ Quote Stuffing Bombshell
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. In our
published report on the Flash Crash, we came up with a term to describe this anomaly and
coined Quote Stuffing. Two years later, we created
the animation Rise of the Machines to chronicle the growth of this phenomenon.
Zero Hedge (Durden),
USA Today (Krantz),
Barrons (McTague), the
Wall Street Journal (Strausberg & Lauricella), the
New York Times
Risk Magazine (Wood),
Bloomberg Magazine (Foroohar) and
others investigated Quote Stuffing
and asked the regulators (Trading and Markets Division at SEC) and the exchanges about it. The regulators and exchanges vehemently
denied that Quote Stuffing existed and that we (Nanex) were conspiracy theorists. We have had many
discussions with reporters who told us privately the language used
was far from tame. And we are not even listing the reporters or news organizations that
passed on writing a story because of what they were told by the regulators.
More recently, in October
2012, at a meeting between the SEC's Trading and Markets Division and major
players from the Institutional buy-side, an SEC spokesperson besmirched Nanex's
reputation with the same party
line: that our research and findings were the stuff of conspiracy theory. So it is not surprising that respected and established media reporters who work closely
with the street, and talk to them daily as colleagues, may have found our theories and
graphics "out there". It is not surprising that quote stuffing and "bad algos" would be hard to believe and buy into unless you worked with market data every day.
Credit Suisse Bombshell
Now comes along
this paper (see below) from Credit Suisse, one of the global leaders
in electronic trading and research. This paper describes Quote Stuffing as a strategy employed by HFT. Note that the term Quote Stuffing did not exist until we coined it in June 2010. Credit Suisse's paper shows how easy
it is to detect. And that is true, it is that simple
to spot and it continues to occur.
Which is why the last 2 years have been confusing and frustrating to no end.
With abundant evidence to the contrary, why would SEC Regulators deny that Quote
Stuffing exists and that our analyses are "the stuff of conspiracy theories"?
We are not about to engage in conspiracy theory talk now by saying someone is being paid or compensated to shill for HFT/Wall Street and putting the reputation and authority of the regulators at risk.
Here are a few possibilities:
Of course we do not know the answer. Our hope is to arm the media to get at the truth;
we can only examine the data.
Perhaps it is time for the media to dig up their notes and follow up with more questions.
- The regulators don't wish to acknowledge that the playground they created has been
taken over and exploited.
- They don't want to acknowledge their role as enablers.
- They have been working too closely with industry insiders in creating this playground,
and now rely on the foxes for advice on how to safeguard the hen-house.
- Lobbyists hired by HFT firms and exchanges are very good at their job.
Update - new link to Credit Suisse paper
High Frequency Trading – Measurement, Detection and Response
Credit Suisse: HFT DETECTION