In the summer of 2014, Puzz had another puzzle to solve. From March to July, the frequency with which an IEX customer could have gotten a better price less than 10 milliseconds after a trade posted rose from about 3 percent to as much as 10 percent. This wasn’t meant to happen. IEX was supposed to protect investors from what’s known as stale quote arbitrage; that’s when a high-frequency trader takes advantage of milliseconds-long delays in how markets update prices to reflect movements on other exchanges. These tiny delays allow high-speed traders to see a price fluctuation on one exchange and then quickly send an order to another market—often a dark pool—that it knows updates its prices more slowly, hoping to pick off the orders resting there at stale prices. It’s a bit like betting on yesterday’s horse race against someone who doesn’t know the result.
IEX prevents stale quote arbitrage with its “magic shoe box,” a metal container in its data center in Weehawken, New Jersey. Crammed into it are 38 miles (61 kilometers) of coiled fiber-optic wire, creating IEX’s speed bump of 350 microseconds (about one one-thousandth of the time it takes to blink). The idea of countering super-fast traders by creating a slower market might seem like a paradox. It’s not. IEX uses the same high-speed data feeds as HFT firms do to monitor other exchanges for price changes. But because IEX didn’t want to be in a technological arms race with the high-frequency traders to process this information faster than they do, it uses the speed bump to slow down all new orders—just enough to ensure IEX has time to update its prices to reflect any movements on public exchanges. This prevents orders on IEX from being traded against at stale prices.
So how, Aisen wondered, could HFT firms be picking off IEX orders despite the magic shoe box? It didn’t take Puzz long to solve the riddle. He discovered that some HFT algorithms could predict price changes—like surfers sitting out past the break, scanning the swell for their next ride—and target orders before the magic shoe box’s speed bump could protect them.
Of course, honest traders change their minds all the time and cancel orders as economic conditions change. That’s not illegal. To demonstrate spoofing, prosecutors or regulators must show the trader entered orders he never intended to execute. That’s a high burden of proof in any market.
Monday, August 24th brought you one of the weirdest trading day ever seen in the past several years.
So to sum up what happened today, here are a few charts, courtesy of Bloomberg, ZeroHedge and NANEX — time of the events may vary :
- It all started sometimes in China, when it’s business as usual these days :
- S&P Futures followed, kissing the dirt :
- Which then started a major liquidity squeeze on the US market, as seen on the following charts by NANEX :
- Causing buy-sell orders to never quiet match — courtesy of ZeroHedge :
- Shortly after the opening bell, something like this on the Dow Jones :
- And an impressive rise on the VIX :
- In the meantime, major (mini) crashes :
- To prevent further deterioration, just press the “HALT” button across major indices, including 3 consecutive press on the NASDAQ and 1’200 times during that day :
- Then the master of markets, Tim Cook, dropped an email to Jim Cramer stating the following :
I get updates on our performance in China every day, including this morning, and I can tell you that we have continued to experience strong growth for our business in China through July and August. Growth in iPhone activations has actually accelerated over the past few weeks, and we have had the best performance of the year for the App Store in China during the last 2 weeks.
- Then, all of a sudden, while unrelated from the previous event — well, who knows :
- …While European markets will stay stucked for a little longer :
There’s more to it for sure, but here are some events, mostly correlated, to show the newcomer what’s up for today on the trading side.
Finally here’s a fun tweet from Josh Brown :
@ReformedBroker: Look, it doesn’t matter what you bought or what you sold. The important thing is that you panicked.
In mid-July, Amar Kuchinad, a former Goldman Sachs Group Inc. banker turned bond entrepreneur, was sporting a thick beard. He refused to shave, he said, until his new company, Electronifie Inc., turned a profit.
As Electronifie competed among the dozen or more new electronic bond-trading systems to come on the scene in the last year, Kuchinad’s beard was growing conspicuously bushy. The new trading venues face the unenviable challenge of changing the behavior of bankers and investors who for decades have bought and sold corporate bonds over the telephone or by instant message.
→ Traders Magazine
That same day, Sarao and his firm, Nav Sarao Futures Limited Plc, used “layering” and “spoofing” algorithms to trade thousands of futures S&P 500 E-mini contracts. The orders amounted to about $200 million worth of bets that the market would fall, a trade that represented between 20 percent and 29 percent of all sell orders at the time. The orders were then replaced or modified 19,000 times before being canceled in the afternoon.
About three weeks later, Sarao told his broker that he had just called the CME and told them to “kiss my ass,” the affidavit said.