Nanex Research

Nanex ~ 1-Feb-2013 ~ Maker Taker Distortion

On February 1, 2013, between 12:01:04 and 12:01:11, we noticed an extremely high rate of quotes in the stock of Yahoo (symbol YHOO). Upon closer inspection, this appears to be the work of someone playing the maker-taker rebate game.

Every 200 milliseconds, a burst of trades appeared on Nasdaq and BAT-Y. One seconds worth of these trades are shown in the table on the right. BAT-Y pays if you take liquidity, and Nasdaq pays if you add liquidity. 

If your sell order on Nasdaq gets executed you collect a rebate from Nasdaq. If at the same time, BAT-Y has a sell order at the same price, then you could execute against it and collect a rebate from BAT-Y. You sold on Nasdaq and bought on BAT-Y leaving you with no position, but rebates in your pocket.

The only problem is ensuring you can execute against the BAT-Y order before another scoundrel (liquidity provider?) gets to it. Maybe blasting the market with lots of bogus orders would blind everyone else while you collect the prize? A rate of 20,000 orders placed/canceled per second should do the trick.

Which appears to be exactly what went on here.

1. YHOO showing trades color coded by exchange and NBBO (gray shading).
Note the stream of trades between 12:01:04 and 12:01:11 (pink diamonds).

2. YHOO showing trades and quote spread for Nasdq (gray) and BAT-Y (pink).

3. YHOO showing quote spread for Nasdq (gray) and BAT-Y (pink).
The quote rate hits 20,000 per second - most of these are orders placed and canceled immediately (probably sent by HFT rebate player to ensure they get the execution).

4. YHOO showing quotes color coded by exchange.

5. YHOO showing trades, bids, and asks color coded by exchange for 1 second of time beginning at 12:01:05.
Note how the trades occur in bursts about 200ms apart.

Nanex Research