A report on the Nanex site seems to be going around — its worth mentioning.

Nanex, as several readers pointed out (see this), wrote an Analysis of the “Flash Crash” that blamed the May 6th 1,000 point Dow swoon on High Frequency Trading (HFT).

Given that their business is “supplying a real-time data feed comprising trade and quote data for all US equity, option, and futures exchanges” along with the creation of “numerous tools to help us sift through the enormous dataset,” their perspective has the validity, tools, and skills welook for when confronted with unusual trading patterns. It is well worth considering.

I cannot tell if it is, as alleged, “Algorithmic Terrorism” — but it sure is interesting looking:


BATS “Scissors”. Classic example of BATS quoting, intermitting a stub quote, quoting 1 penny above or below the last valid quote (up on the ask side, down on the bid side) then another stub quote, etc.

“Boston Shuffle”. 1250 quotes in 2 seconds, cycling the ask price up 1 penny a quote for a 1.0 rise, then back down again in a single quote (and drop the bid size at that time for a few cycles).

Source: Nanex

Category: Technical Analysis, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

38 Responses to “Quote Stuffing and Strange Sequences”

  1. traderdc says:

    The guys at Nanex have done some great work.

    Quote stuffing – aka Data Terrorism – allows a small number of HFTs to slow down competitors with bucks of noise data and, more importantly, amplify the variance on latency between a market places gateway and matching engine. This greatly reduces the ability of liquidity seeking smart order routers trying to normalize these latencies, which in turn creates high probability latency arbitrage opportunities for these HFTs to profit off of. The trading venues naively allow, and even encourage, these activities claiming that those proposing reasonable throttles on single user order entry – or minimum order life – are luddites trying to hold back technology…this tune will change quickly when they realize the next logical evolutionary step is (a small number of) HFTs stuffing quotes into trading venues they don’t own in an effort to make those venues they do own relatively faster and more attractive…then, and only then, will we get the needed action on this issue.

    Keep up the great work.

  2. Petey Wheatstraw says:

    After the lottery, the SM is the next sure bet.

  3. ToNYC says:

    Algo spoofing is nothing more or less than fraud. The whistles keep being blown. Are there no injunctive relief options available to stop flagrant abuse with a court order?

  4. What has really happened is that the exchanges, formerly not-for-profits outfits, changed to become For-profits shops (post Dick Grasso comp issues).

    Snce then, as for profit shops, they sell all services to anyone — including HFT, despite the negative impact on markets.

    When the entire investing public takes their ball and goes home, the Exchanges will be totally perplexed.

  5. schmoo says:

    Denninger is all over this.

    My guess is that this is blatant fraud. I also think that this will continue and that nothing will be done until the horse is well out of the barn.

  6. Dennis the menace says:

    Although he sometimes goes off the deep end, I agree with this post of Denningers on HFT.

    BR also called it fraud, and its hard to argue with both of your positions.

  7. Trevor says:

    This is the trading equivalent of e-mail (or web) spam. The next step will be Denial of Service (DoS) or Distributed Denial of Service (DDoS) attacks on the exchange servers; the latter being when the spammers have figured out how to hack into other trading computers to do their dirty work. Look what happened to Lithuania when it experienced a country-wide DDoS.

    The ease with which it could be done is evident. The potential damage boggles the mind. :-(

  8. Trevor says:

    Looking over the analysis, it seems clear that anything like a DoS (i.e. one that had sufficient brute force to delay the quote servers by more than a second or three) could cause another crash. :-/

  9. KidDynamite says:

    point of information, contrary to TraderDC’s (And related to Trevor’s) comment above: I was told the following by an HFT trader:

    “No-one sends orders to fill the order books of other as a denial of service attack. Everyone in the HFT space has plenty of bandwidth to process the quote volumes, and the limiting factor that is hit first is the port on the exchange, which does throttle order flow from each participant.

    So, the only person harmed by what they called quote stuffing is the stuffer, since they are unable to enter other trades as fast as their competitors who have not sent as many spurious orders. ”

    simply: “quote stuffing”slows down the STUFFER, not their competitors, so there is likely another motivation here.

  10. dead hobo says:

    Barry Ritholtz Says:
    August 5th, 2010 at 8:01 am

    When the entire investing public takes their ball and goes home, the Exchanges will be totally perplexed.

    I am already there and anxiously awaiting the day I have confidence that the markets are honest and, also, look honest. I simply am not smart enough to understand anything traderdc wrote or, frankly, anything that describes the internals of HFT. I’m pretty smart, but this is way past me. I need regulators that I trust to keep things honest. None exist at this time.

    Next, I need a comprehensive Fed audit. I need to know if the Fed deliberately manipulated the stock market, directly or indirectly, or knew of manipulation performed by others. I don’t believe Bernanke. If such manipulation occurred, then a get out of jail free card came along with it in case perjury entered the picture. They have no credibility, especially in light of Greenspan’s remarks about the need for high stock prices.

    Once the markets look honest and the prices look fair, then Investment will go beyond Wall Street sales hustlers and asset bubble ponzi schemes and start to create jobs.

  11. dead hobo says:

    KidDynamite Says:
    August 5th, 2010 at 8:42 am

    “quote stuffing”slows down the STUFFER, not their competitors, so there is likely another motivation here.

    My guess is that the quote stuffer is a predator looking for a rube who doesn’t know any better or can’t avoid the markets due to job requirements. The stuffer is after new money that has entered the water. My guess is that the are probing for the lowest buy price and the highest sell price and will jump in the middle when a guaranteed profit of acceptable size appears. Given what has been written about liquidity premiums, I suspect a little churn is also involved.

    I wonder if no volume meltups (phrase from ZH) are created using these techniques.

  12. scharfy says:

    This is like the part from Wargames where the Joshua learns that the only logical solution is not to play….

    Chess anyone?

    Had to put this up


    But seriously, I’d rather get fleeced for a penny by a computer that 1$ from some Italian standing on the floor off the NYSE…. Markets evolve… The exchanges just have to keep the customers in mind when they write the rules at the peril of killing the golden goose…

  13. Trevor says:

    @KidDynamite: ‘Everyone in the HFT space has plenty of bandwidth to process the quote volumes… ’

    This is good to hear, but, as someone who manages a server, I know that there are many ways to attempt a DoS, irrespective of bandwidth, processor speed, or methods of protection currently in place. I have to presume that the managers of the exchange servers are at the height of their profession, but where there’s a system to be gamed, there’s always someone willing to try; again, and again, and again.

    ‘Simply: “quote stuffing”slows down the STUFFER, not their competitors, so there is likely another motivation here.’

    I hope this is true.

  14. traderdc says:

    KidDynamite – I have spoken to many HFTs, and while some agree with you that stuffing doesn’t impact them, many believe differently. In particular where a venue has multiple feeds, each of which react differently to spikes, HFTs can manipulate the variance in latency between feeds – and impact those relying on the now slower feed – via a stuffing attack.

    While it is nice that the HFTs may have bandwith, the long term investors do not…they clearly get stuffed.

  15. ToNYC says:

    Please don’t foul the footpath in this fine venue with your odious ethnic slurs.

  16. wisedup says:

    these phantom trades are directly sniffing the HFT algorithms, feeling them out, working out their trigger points.
    The attacker wins when the HFT machines start taking the bait. Until then the patterns will keep changing.
    The HFT systems take money from the humans and these new machines will take money from the HFT.

  17. “When the entire investing public takes their ball and goes home, the Exchanges will be totally perplexed.”–BR, above

    it would take some, seriously, beyond “Wall $teet Week”-type of ‘idea crunching’, but this is the type of Topic that would be worth putting your Logo on.

    ref. http://www.ritholtz.com/blog/2010/07/glenn-beck-goldline/

    Could Jess Bachman illustrate this ‘situation’ for a Poster?
    Past that, as isn’t said, often enough, “Keep up the Great Work!~”

  18. KidDynamite says:

    dh and others – i think wisedup nails it – it’s a battle of the ‘bots. now, my first point would be that I don’t think these quote patterns are something that the individual investor should worry about at all – after all, we can’t even see these guys changing quotes 5k, 10k or 25k times a second/minute etc.

    So what’s the risk? the risk is that the exchanges themselves get overwhelmed and can’t process data fast enough. ironically, Barry noted that the exchanges had a motivational shift when they became for-profit entities, which is absolutely true, but the exchanges themselves are the ones who SHOULD have the real interest in policing excessive order entry/cancellation.

    now, it’s no secret that i’ve been a proponent of HFT, but I’m not going to defend the practice of entering and canceling tens of thousands of quotes per minute – i would GUESS that the goal of these algos is , like wisedup said, get other algos to bite – to try to get Algo2 to process and react to Algo1′s order – which is probably ALREADY be illegal under current rules, if Algo1′s order was entered with the intent to manipulate Algo2.

  19. KidDynamite says:

    traderdc – i just want to point out that your claim:

    “While it is nice that the HFTs may have bandwith, the long term investors do not…they clearly get stuffed.”

    is quite false. long term investors don’t get stuffed because they aren’t trying to process 30,000 quotes a second.

  20. DeDude says:

    Just tax the sh!t out of this cr@p. A tax of 0.1 cent per quote is enough to incentivize someone away from making 1250 quotes every 2 seconds. Tax every trade, that will incentivize people away from gambling and into investing. The kind of stuff we are allowing these Wall Street banksters to do to rob ordinary working people of their pensions is amazing. Is it time yet to just level Manhattan and start all over again somewhere else with another group of monkeys in suits?

  21. ACS says:

    Of course it could be that the people behind these patterns feel it is worth sacrificing some of their own bandwidth to try to disguise what they are doing from other bots.

  22. constantnormal says:

    Another piece worth perusing on this subject is at the tech geek site, ars technica:


    One thing’s fer sure — we ain’t in Kansas any more, Toto … this is about as close to a statistical “free market” as SkyNet is to a weather front. Whether it is a Good Thing or a Bad Thing seems to be directly related to whether one is benefitting from it or getting gored by it, as is the case with most things.

    However, there has yet to be any societal benefit demonstrated by it, despite a lot of empty claims. There’s a lotta work ahead for thoughtful and skeptical economists and B-school folks (assuming that any thoughtful and skeptical instances of those folks exist) in doing the analytical work to completely understand what is going on here, where the risks and rewards truly reside.

    That probably lies decades in our future, after the worst effects have been amply demonstrated. That is usually the case with serious investigations — nobody gets really interested until there’s bodies floating in the river …

  23. constantnormal says:

    @Petey Wheatstraw 7:42 am

    “After the lottery, the SM is the next sure bet.”

    SM? What does sadomasochism have to do with this?

  24. traderdc says:

    KidD – I know dozens of asset managers and pension funds (i.e. long term investors) that are trying to process quotes as they update….they may not all consume full depth, but many historically have and now cannot. In markets like Canada (And the U.S. if some have there way) where full depth trade through rules prevail all trading firms have to consume some depth if not full depth…they are getting stuffed. But as I noted in my original post the real intent is to amplify latency deviation which greatly impacts the effectiveness of the smart order routers used by long term investors…create latency, then arb it. That said, clearly we both don’t like quote stuffing, so no need to disagree on the finer points.


  25. gordo365 says:

    @ DeDude – Sarcasm on — with teary eyes and wet hanky in hand

    “But, but, a transaction tax would reduce the competitiveness of US markets and stifle innovation. Investors would take their investing business to Canada or Euorpe… Sniffle Sniffle ”

    Seriously – I always thought we should put a transaction tax in place until costs of bailout have been recovered. Timmy G. says we have already made money on bailout – so I guess my logic doesn’t work.


  26. DeDude says:

    “While it is nice that the HFTs may have bandwith, the long term investors do not…they clearly get stuffed”

    “The HFT systems take money from the humans and these new machines will take money from the HFT”

    And that is the goal and the point. All the money that these leaches get, whether from regular traders or other leaches, come from somewhere. As pointed out by dead hobo, some of the human investors are getting more than a little tired of it.

  27. DeDude says:

    When will someone start up a regulated stock exchange with once a day trades. All bids and all offers of stock come in during the day. And at the end of the day you settle from top to bottom until there is no bid high enough to cover the best offer. The rest fall through and will have to get back again next day. Or how about a law that simply prohibits any other type of trading in stocks, then we could keep the old exchanges.

  28. Reinko says:

    Ha ha DeDude, that is a funny idea because the financial entertainment tv channels won’t like that.

    But how did you have this in mind exactly?

    You go top down, so the highest bidder buys it from who?
    Of course that must be the lowest seller of the day.

    Yet what is the settlement price? The bid or the offer of the seller?
    Of course it has to be the bid price, otherwise this would be a very unstable kind of market.

    Ha DeDude, a funny idea! Congratulations…

  29. DeDude says:


    The highest bidder and the lowest offer split the difference to meet in the middle (except for a tiny commission to the exchange). Then the next highest bidder meet in the middle with the next lowest offer , etc, etc, until there are no bidders left that meet the price of the remaining offers (that’s the end of it and we start all over next day). All bids and offers are locked away in two different departments, and there is absolute no info going out of those lockboxes until they are closed and it becomes settlement time.

    I know it is just a fun little idea that doesn’t have a chance exactly because it would force the exchanges to serve the “end costumers” rather than serve them on a silver platter to the Wall Street sharks. It would also force those idiots on financial TV to get a real job and do something of use to society (the same for all those day-traders, “innovators” and other human waste sucking huge sums out of those of use working and doing something useful for society).

    I have yet to hear any coherent argument for why it benefits true long-term investors, companies or society as a whole, to allow any individual share to be traded more than once in a day. The only people that it benefits are lazy bums extracting huge sums of money from other peoples work.

  30. Reinko says:

    Ok the highest bidder and lowest seller meet at settlement time.

    It’s a nice idea to have the average price upon bidder/seller, or meeting halfway, but is meeting halfway enough to ensure stability of the entire market?

    I don’t know, if people pay too much for their stuff it might be handy to settle the settlement prices simply at the highest price people were willing to pay this day.

    So the highest bidder will pay the lowest askers the maximum price…

    Ahem, isn’t this kind of stuff the financial television channels all the time most of the time?

  31. DeDude says:

    It probably would make sense to ensure that all trades that day were settled for exactly the same price (determined as the price that allowed the most shares to be traded for their minimum asking). I will admit that I have not worked out a detailed plan although I would move all my business to such a system and do all I could to ensure that any retirement system I am in would be moved to there too.

  32. DeDude says:

    correction: “at least their minimum asking”

  33. ACS says:

    Exactly how long would an exchange stay in business with DeDude’s model? Can you say zero?

  34. DeDude says:

    @ACS, not if that was the only legal way to run an exchange. Write your congress man and demand that “DeDude’s model” becomes the mandated way for all exchanges.

    - just kidding -

  35. Darkness says:

    Jiminy Cricket, put in a transaction tax already. Freaking annoying seeing such an easily solved problem going unsolved.

  36. “put in a transaction tax already…”


    Charge Commission, even, on ‘Cancelled Trades’..

  37. dbk says:

    Tobin tax, FTW. Good work, DeDuderino – cause I’m not into that whole brevity thing

  38. jkennebeck says:

    @dbk – brilliant! abide.

    a transaction tax already exists, SEC Sec 31 fees on all sales of equities. you meant to say a quote tax. bad idea as that can be passed on to the investor. easier solution: minimum order life of 50ms as nanex proposed.