The clues to the causes of the mysterious May 6 flash crash are evidently buried in the trading data. Yesterday the New York Times reported that a small, obscure data analysis company, Nanex, located outside of Chicago, has discovered strange patterns in the stock trading data, which it calls crop circles. [See the NYT story: "Ominously, Flash Crass Still Baffles".
Ever since the market inexplicably plunged 600 points that day and recovered within minutes, Nanex, a company headed by CEO Eric Hundsader, a former developer of real-time trading systems, has been examining trading charts and publishing flash crash analysis. Nanex has reportedly attracted Wall Street’s interest in the charts by giving them intriguing names like Continental Crust, Broke Highway and Twilight," the NY Times noted.
The bizarre patterns are giving rise to a theory that high –speed traders overloaded the exchanges as part of a conspiracy to slow down the exchanges and outsmart other investors.
One theory is that high-speed traders bombarded the exchanges with a fusillade of buy and sell orders that were never meant to be executed. They were simply trying to outwit each others’ computers and clog up the exchanges so that other investors couldn’t execute.
Nanex produces charts — samples of which can be seen on its web site —of the bid and ask prices, order sizes and other millisecond-based trading activity. In one chart, posted yesterday, Aug. 23rd, titled "Latency On Demand," Nanex analysts examined the latency between GE quotes printed on the NYSE’s Open Book feed and the Consolidated Quote System (CQS). Then it decided to plot the quote rates for all stocks that NYSE sends to CQG.
Nanex found that whenever the quote rate in NYSE stocks exceeds 20,000/second, a corresponding delay is seen in the CQG quotes. "The higher or longer the quote rate exceeds 20,000/second, the greater the delay."
"Then something very disturbing dawned on us. If the average or base quote rate is around 10,000/second, then it only takes an additional 10,000 quotes/second to reach the magic 20,000 quotes/seconds where a corresponding delay is seen in NYSE quote from CQS. This 10,000 quotes/second can be in any stock or combination of stocks that NYSE sends quotes to CQS for," wrote Nanex in its data analysis. So what’s disturbing is the idea that some high-speed traders are bombarding the exchanges with an artificially manufactured high volume of messages to get the quote rates above a certain level to profit from the quote delay.
While this may be conjecture, it is certainly worthy of further analysis by the regulators perhaps in collaboration with Wall Street’s quants and rocket scientists. So far, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have attributed the causes of the flash crash to a confluence of factors such as the panic over the European debt crisis and the lack of coordination among the fragmented stock exchanges that comprise the market as well as the lack of market-wide circuit breakers. Others blame the crash on the high frequency traders who send millions of buy and sell orders to the exchange, but may left the market when prices went into a free fall. A final report from the SEC and CFTC is expected in September.