What It Looks Like When A High Frequency Trading Algo Bombs A Stock With Fake Quotes
To buy a stock you must quote the right price. The "right" price is known as the National Best Bid and Offer (NBBO) and is determined, of course, by the market's demand for a stock.
Quote the right price, and you can buy. It's as simple as that.
Until it's not.
Nanex, a Chicago-based market research firm, sent us a chart that illustrates what can stand in a trader's way when they're trying to quote the right price.
What's happening below is a snapshot of 1/3 of a second of one stock's life while it's being bombed by a high frequency algorithm. One thousand quotes are firing off at this stock, the SPDR BofA ML Crossover Corp Bond ETF, every tenth of a second and then canceling, so no trades are actually being executed.
Those are fake quotes.
The thing is, the market sees those quotes as demand anyway, and it changes the NBBO. So every triangle you see there (color coded for what exchange they're appearing on) is a quote that is impacting the price (NBBO).
The gray background shows how the price is dipping up and down. According to Nanex CEO Eric Hunsader, those black spaces you see (showing a change in price) are happening in intervals so fast that this chart can't even catch them.
"It happens all the time," Hunsader told Business Insider. "It crowds out legitimate prices... it's like SPAM. Maybe one of these guys is a legit offer but there's no way of knowing."
Check it out below, from Nanex:
Pretty wild. What's even wilder is that looking at a chart that shows activity in minute intervals (like say, a Bloomberg terminal) would miss this activity.
Even over one second, the activity doesn't look so bad. Here's another chart from Nanex:
Another problem with this activity is that in gums up computers at exchanges, slowing activity for this stock and any stock that may be listed near it.
"I think it's a high frequency trader, connected to multiple exchanges testing one algorithm, but I could be wrong," said Hunsader.
It's worth noting that back in September, the SEC and FINRA fined a trading firm for this exact activity, except the firm only sprayed out about a dozen quotes. These charts show thousands fo quotes.
"It's like somebody got a fine for pick pocketing, and this guy is robbing the Fed," added Hunsader.
Fair enough.