Click to enlarge:

Source: Nanex


The folks at Nanex explain why the liquidity provided by HFT is illusory:

On September 13, 2012, at 12:25:27, the December 2012 eMini contract experienced an evaporation of liquidity at such an alarming rate that it produced one of the most disturbing charts on market stability we have ever seen.

Basically, about 80% of the orders resting in the book vanished in a second. To be sure, liquidity before major news events always dries up beginning 1 to 2 minutes before the scheduled time, but always, at, a, gradual, rate. This event tells us that either one firm controls 80% of this contract, or that algorithms have become dangerously susceptible to herd behavior and can be triggered to stampede in a heartbeat.

Brought to you by For Profit exchanges that are far more concerned with the next quarters earnings than providing adequate safeguards for investors.

Category: Digital Media, 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.

16 Responses to “Nanex: Disturbing Liquidity”

  1. cynical says:

    This phenomenon existed before hft. Most investors just did not know it because they saw all the hub-bub of the market-makers at the NYSE. They wanted to believe someone was always on the other side. Ahhh most still don’t know it. A “positive” is that it is more obvious now.

  2. COTanalytics says:

    Check out the chart of Asset Manager Longs Category on the scatter diagram. If this isn’t evidence of th PPT nothing is


    BR: Page does not exist. Therefore, there is no PPT.

  3. JFinTexas says:

    HFT only piggy backs existing/real liquidity and shuts off or disengage when real liquidity vanishes, so in reality it provides absolutely zero added real liquidity. It’s just so obvious for me, every time I see one of these guys explaining how HFTs are great benefactors to the market because they provide added liquidity it drives me crazy…

  4. PeterR says:

    “I am putting myself to the fullest possible use, which is all I think that any conscious entity can ever hope to do.”

    2001: A Space Odyssey

  5. DeDude says:

    The idea of allowing the exchanges to be run by for-profit private companies is absolutely insane. The public has a huge interest in having markets function in a fair and efficient way. To think that this interest can somehow be aligned with private greed and profit seeking, you would have to be pretty ignorant.

  6. eddiehaskall says:

    You are correct in that the liquidity was low at the point of the fed announcement, but you are dead wrong about the reason why and the motives. I was trading the emini at the time and saw the anticipated drop in liquidity which almost always occurs before an important announcement or an important number like the unemployment number. It is just common sense that people will pull out their orders at a time when extreme and unpredictable volatility will occur. It is only prudent to do so with the odds being stacked against you if you leave a resting order in any where close to the market. At a gradual rate, that is not true and makes no sense. Many algorithim traders go off the same mathamatics so a herd mentality as you call it should be the norm not the unexpected and the managers of those accounts know to pull out so they are not cherry picked. To accuse the exchange of anything nepharious is unfounded in fact and just lazy reporting

  7. WallaWalla says:


    nobody is saying that the liquidity was unnaturally low for the announcement nor attributing some ulterior ‘motive’ to the event (aside from the exchange allowing potentially destabilizing algorithms for profit). . Sure everybody will pull their orders around the same time, but the graph above shows 80% disappearing in 1 second or less….a wholly unnatural event.

    “Many algorithim traders go off the same mathamatics so a herd mentality as you call it should be the norm not the unexpected and the managers of those accounts know to pull out so they are not cherry picked. ”

    oh please, do you have proof that entities controlling 80% of the orders use the EXACT same untweaked mathematical models? if this should be the norm, what’s been stopping it until now? How does that make it any less dangerous to the markets?

  8. WallaWalla says:

    another interesting breaking news event:
    Oil Plunges $5 in Rapid, High-Volume Selling – REUTERS:

    “Ten thousand lots traded in one minute during the drop, up from 152 lots the minute before prices plummeted.”

  9. Savage1701 says:

    I don’t dispute the chart, but I would not have an active or resting order in at that time of the day pending that sort of announcement.

    I also watched liquidity dry up, and knew from my squawk that the pit was quiet as well. I don’t particularly care for HFT, but if I am not trading into that sort of thing, why should I expect a computer to stick its neck out either?

    To my way of thinking, this chart perhaps goes a long way towards re-affirming any lingering doubts about the impact of HFT. However, I can’t ascribe an evil motive to either people or algos that don’t want to be hung out to dry in front of an event.

    If we want to assume that 80% of the resting orders on “the book” are from computers, than we now have further information and should trade accordingly.

  10. cognos says:

    I dont understand the concern here.

    Current $ liquidity is massive, under normal circumstances. Events are typically large opportunities.

    So we had a flash crash… one should’ve just bought right? Sometimes… the markets present opportunity. Duh!

  11. [...] Nanex: Disturbing Liquidity  Anatomy of the next flash crash. Yup, thanks to the internet you can have the news before it happens. [...]

  12. ToNYC says:

    This is exactly the liquidity that Dick Fuld talked almost exactly 4 years ago. 17 Billion looks like a lot until the wires hit, ask Jonny Corzine when you see him. “It came from out of nowhere”, is what all the insurance adjustors hear. Do the math: fake liquidity divided by ZIRP to infinity and beyond.

  13. ToNYC says:

    HFT Shops are SOES bandits on steroids. Goldman’s REDI book in the face of Archipelago in 2003 was a clue and then there was embedding their SLK under the the American Exch floor. Asymmetric information not so good for the evolution of the species. Plus ca change…

  14. danimal says:

    The front month still had 2-3 times as much volume, did this happen in the sept contract too? And how is this much different from when the pit used to provide lots of liquidity, and sometimes they’d be “hands down”, Or how about “no bid, no bid”. Same lack of liquidity at those times, but theres no real charts of that from those days.

  15. My two cents:

    There is an insightful book called “Dark Pools” written by Scott Patterson about HFT and how it came to existence and the threats it poses to the financial system. Here’s the amazon link for those interested:


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