How good or plausible is this?: http://www.nanex.net/20100506/FlashCrashAnalysis_CompleteText.html "In summary, quotes from NYSE began to queue, but because they were time stamped after exiting the queue, the delay was undetectable to systems processing those quotes. On 05/06/2010 the delay was enough to cause the NYSE bid to be just slightly higher than the lowest offer price from competing exchanges, but small enough that is was difficult to detect (See Part 3, The Evidence). This caused sell order flow to route to NYSE -- thus removing any buying power that existed on other exchanges. When these sell orders arrived at NYSE, the actual bid price was lower because new lower quotes were still waiting to exit a queue for dissemination. This situation led to orders executing against whatever buy orders existed in the NYSE designated market maker (DMM) order book. When an order is executed, the trade is reported to a different system (CTS) than quotes (CQS). Since trade report traffic is much smaller than quote traffic, there is rarely any queueing or delay. Because many of the stocks involved were high capitalization bellwether stocks and represented a wide range of industries, and because quotes and trades from the NYSE are given higher credibility in many HFT systems, when the results of these trades were published, the HFT systems detected the sudden price drop and automatically went short, betting on capturing the developing downward momentum. This caused a short term feed-back loop to develop and panic ensued."
It's garbage. 5000 orders / second in one name almost sounds an order of magnitude low to me. I've gotten phone calls from CME guys saying "stop sending 1100 orders / second" BY MYSELF. In the much-more-fragmented, not to mention much faster and more responsive, equity markets 5k/s is just not a huge deal, in context. The article is seriously just terrible. An explanation would be twice the length of their piece, and it's just not worth it.
...shocked to find cases where "one exchange" was sending an extremely high number of 'quotes' for "one stock" in a single second -- as high as 5,000 quotes in 1 second! ... In many of the cases, the bid/offer is "well outside" the National Best Bid/Offer (NBBO). I for one am no longer young enough to know it all, so now all I can do is observe, try to learn, and when I'm lucky understand something
When the LMM halts a stock the SIAC NBBO halts with the stock. The reason why the prints were so outside the NBBO is because they are obligated to rout your order to a liquid market, by doing this orders were sent to other exchanges with little liquidity (still more than the halted NYSE) and trades executed while NYSE & the NBBO were halted. That article is BS the author has no clue what he/she is talking about. they misuse quotes for orders and do not seem to understand order flow/order routing since they say HFT jammed the NYSE with quotes.
The article does not say HFT jammed the NYSE with quotes, what I read it saying is that NYSE quotes were backlogged in the outbound queue and timestamped at the point of dissemination vs carrying thru a timestamp from their moment of entry into the system. This they claim caused a number of algorithms to go haywire in attempts to take a quick scalp between the ECN quote and NYSE quoted price. I've seen this same thing take place first-hand in Canada and on a number of occasions when the TSE's quote dissemination queue hit points of saturation and algo's went crazy sending 1,000's of arb orders a second into the Omega ATS ECN. +++++++ Detailed inspection indicates NYSE quote prices started lagging quotes from other markets; their bid prices were not dropping fast enough to keep below the other exchange's falling offer prices. The time stamp on NYSE quotes matched that of other exchange quotes, indicating they were valid and fresh. With NYSE's bid above the offer price at other exchanges, HFT systems would attempt to profit from this difference by sending buy orders to other exchanges and sell orders to the NYSE. Hence the NYSE would bear the brunt of the selling pressure for those stocks that were crossed. Minutes later, trade executions from the NYSE started coming through in many stocks at prices slightly below the National Best Bid, setting new lows for the day. (See Part 1, Chart 2). This is unexpected, the execution prices from the NYSE should have been higher -- matching NYSE's higher bid price, unless the time stamps are not reflecting when quotes and trades actually occurred. If the quotes sent from the NYSE were stuck in a queue for transmission and time stamped ONLY when exiting the queue, then all data inconsistencies disappear and things make sense. In fact, this very situation occurred on 2 separate occasions at October 30, 2009, and again on January 28, 2010. (See Part 2, Previous Occurrences). Charting the bid/ask cross counts for those two days reveals the same pattern as 5/6! Looking at the details of the trade and quote data on those days shows the same time stamp/price inconsistencies. The NYSE stated that during the same intervals, they were experiencing delays in disseminating their quotes! In summary, quotes from NYSE began to queue, but because they were time stamped after exiting the queue, the delay was undetectable to systems processing those quotes. On 05/06/2010 the delay was enough to cause the NYSE bid to be just slightly higher than the lowest offer price from competing exchanges, but small enough that is was difficult to detect (See Part 3, The Evidence). This caused sell order flow to route to NYSE -- thus removing any buying power that existed on other exchanges. When these sell orders arrived at NYSE, the actual bid price was lower because new lower quotes were still waiting to exit a queue for dissemination. This situation led to orders executing against whatever buy orders existed in the NYSE designated market maker (DMM) order book. When an order is executed, the trade is reported to a different system (CTS) than quotes (CQS). Since trade report traffic is much smaller than quote traffic, there is rarely any queueing or delay. Because many of the stocks involved were high capitalization bellwether stocks and represented a wide range of industries, and because quotes and trades from the NYSE are given higher credibility in many HFT systems, when the results of these trades were published, the HFT systems detected the sudden price drop and automatically went short, betting on capturing the developing downward momentum. This caused a short term feed-back loop to develop and panic ensued.
1. You do realize the article is longer then the quoted part? 2. Occam's razor. 3. Showing at least one mistake would have been helpful. So all in all, the article might be wrong, but you failed to establish that....
And so did you. The article misused the word Quote and the author (not referenced) shows a general lack of understanding of the markets - I think this needs no further explanation.
That is some valid criticism... Anyhow, interesting comparison with the 1962 Flash Crash: http://online.wsj.com/article/SB100...272.html?mod=WSJ_hpp_MIDDLENexttoWhatsNewsTop I found the original article on Reddit, since you asked: http://www.reddit.com/r/Economics/comments/ciimi/flash_crash_analysis_what_we_discovered_was_even/