Latest HFT Shenanigans: E-Mini Mayhem And NYSE Avoids A Flash Crash

For anyone wanting to keep up to date on nearly real-time gyrations and anomalies in the markets, following Eric Hunsader from Nanex is a recommended method ( @nanexllc). This past week he was working to inform everyone of the massive trading that would be generated by HFT in the final few seconds of Friday’s session.

Below is a chart of all e-Mini contracts traded everyday in the final 7 seconds of each session. The days showing the highest spikes are either the final trading day of the month or the quarter. With so much activity and network traffic, mayhem ensues. Conditions like this are playgrounds for HFT to take advantage of anomalies and mispricing that undoubtedly will occur due to their dramatic spikes in activity.

ES.ClosingContracts HFT Shenanigans 600x393 Latest HFT Shenanigans: E Mini Mayhem And NYSE Avoids A Flash Crash

While this chart does not reflect Friday’s close, as you can see, the volume for the final 7 seconds was literally off the charts.

Now for the good news! On Wednesday, the stock of Pennsylvania Real Estate Investment Trust (ticker: PEI) dropped by about 30%, from $18 to $13 per share. In typical flash crash style, the stock rebounded back to its original level as the whole event lasted only about two seconds. To put that in perspective, the $1.6 billion company lost approximately $500 million of its worth only to regain it all within two seconds.

PEI 2 second flash crash HFT Shenanigans 600x400 Latest HFT Shenanigans: E Mini Mayhem And NYSE Avoids A Flash Crash

The silver lining to this particular flash crash is that a safety device in operation at only the NYSE kicked in and prevented further ridiculous trading. Unfortunately, many of the other exchanges continued to trade PEI all the way down to almost $13. As the chart above shows, Nasdaq was the most egregious offender here allowing large trades down to the bottom. When looking at just the quotes in the chart below, we can see that the NYSE kept the quotes rather steady (green triangles) while ignoring the NBBO (gray shading) as it plummeted down to almost $12 on the bid.

PEI 2 second flash crash quotes HFT Shenanigans 600x400 Latest HFT Shenanigans: E Mini Mayhem And NYSE Avoids A Flash Crash

When zooming in a bit on the action, you can see that during the crash no trades were executed on the NYSE (blue circles)This is thanks to their safety net called the Liquidity Replenishment Point.

PEI 2 second flash crash no NYSE trades HFT Shenanigans 600x400 Latest HFT Shenanigans: E Mini Mayhem And NYSE Avoids A Flash Crash

As Nanex points out, the NYSE’s LRP had been a process that worked in the past, even helping avoid NYSE stocks from trading in a crazy fashion during the Flash Crash in May 2010. Unfortunately the S.E.C. decided this wasn’t a good program and mandated exchanges replace it with a newer model. After the Anadarko flash crash, the S.E.C. back-stepped and allowed the NYSE to reinstate the LRP. In light of these events and their supposed regulatory tool MIDAS, one must ask if the S.E.C. has any interest in actually regulating the markets and keeping them functioning safely. The more the HFT Shenanigans continue, the more regular investors lose.

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