Defaulting banks - where will it stop?

[Jan Klimkowski]

Karl Denninger asking the right question:

Was The Flash-Crash A "Forced Error"?

A provocative question, to put it mildly.

It looks like it might have been. In fact, Nanex appears to have solid information that implies quite strongly that the "Flash Crash" may have been engineered.

Specifically:

As small lags in time from quotes sent through CQS happen every day, the NBBO system cannot be relied upon and is meaningless until the time stamping mechanism has been fixed. This situation also makes the potential for latency arbitrage even more suspect as participants receiving premium NYSE products (as opposed to CQS) can detect these delays where-as others cannot. In the age of HFT's, where quotes can be sent at rates exceeding 5,000 quotes per second for one issue and can effect the BBO, delays of even 200 milliseconds (or less) become a lifetime.

CQS (Consolidated Quotation System) is the method in which 99.9% of all US market participants receive their data and is also responsible for calculating the NBBO for all listed stocks. There are however premium products direct from the exchange which are not disseminated through CQS. One such product is OpenBook from NYSE. In comparing time stamps of quotes from CQS to OpenBook, it is clear this time delay exceeded 20 seconds in many cases.

Note that underlined section.

Now read this:

Conclusion: Put simply, if CQS (Consolidated Quotation System) does not determine that quotes from a given exchange are stale, the possibility of it choosing those quotes as the BBO is inevitable. It is obvious from these charts (and from those presented in out original Flash Crash Analysis) that the NYSE quotes are stale. Furthermore, since the quotes are time stamped when exiting CQS, other market participants could not detect the NYSE quotes (and therefor the current BBO) were stale.

Got it?

The only people who would know there was an exploitable problem are those who receive "premium" quote services - which is 0.1% of the market participants. That explicitly doesn't include you, me, or any other retail trader.

Further, those who "knew" there was an exploitable problem with the data could not have acted on it unless they knew it was possible - that is, it happened too fast for the computer to be reprogrammed at the time.

Therefore, those very same someone's had to know in advance that this could happen, otherwise the selling and buying that happened during the event, which was essentially all machine-driven since we humans were a full twenty to thirty seconds behind real-time, couldn't have occurred.

So we now appear to have established two things:

There was/is an exploitable problem in the quote feeds

and


Some market participants knew it existed and how to exploit it before the flash-crash happened, and in fact programmed their computers to exploit it if and when it happened.

There's an open question as to whether intentionally exploiting such a data dislocation is a violation of existing law. I can make a colorable argument either way, given the requirements of securities law and the fact that issuing bids and offers with an intent not to execute but rather the manipulate the price (irrespective of how you do it) is a black-letter violation of those laws.

But with one final piece of the puzzle - which Nanex hasn't yet found and identified to the best of my knowledge - we will then have what appears to be evidence of serious felonies. That question is this:

Did one or more market participants cause the quote dislocation?

That is, did one or more participants not just take advantage of an arbitrage situation but rather did one or more participants not only subscribe to such a service but also cause the dislocation itself?

Nanex has raised the possibility of "Quote Stuffing" being part and parcel of the HFT game these days - that is, attempting to intentionally flood the quote system such as to cause other market participants to be unable to keep up with your quote flow (with said quotes not intended to execute, but rather to play "screw your buddy.") Such an act, if in fact it is happening, appears to be a clear-cut violation of securities law in that it is by definition intended to manipulate price through the indirect method of overrunning other participants' ability to respond.

If in fact this has occurred in the past and is occurring today it would then seem to be rather obvious that we have a smoking gun - and one that demands investigation, identification of the parties involved in public, and the laying of charges.

So where is the SEC and Department of Justice in looking into this?

And incidentally, why is it legal in the first place to sell a "premium" quote service which has as it's only selling feature, and therefore the only reason to pay for it, the promulgation of market data before anyone else has it, when the market is supposed to disseminate information to all participants at the same time?

NANEX material used with permission.

http://market-ticker.org/archives/2592-W...Error.html