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So when the HFTs got hold of the futures contracts that the Waddell & Reed algorithm was selling, they would've first looked for legit buyers to flip them too.

by rgarcia 16y ago

So when the HFTs got hold of the futures contracts that the Waddell & Reed algorithm was selling, they would've first looked for legit buyers to flip them too. And, not finding any legit buyers, they just started rapidly buying and selling amongst themselves to at least pick up some rebate money. A couple of things: 1. E-mini futures don't give rebates 2. He seems to suggest that different algos from different companies were knowingly trying to collude with each other to get these nonexistent rebates. This seems pretty far-fetched.

gxti 16y ago
And even if there were rebates (as there are on stocks) you can't make a profit just passing them back and forth because taking liquidity costs more than is rebated to the offerer. If liquidity hot potato were profitable then that would be the sole purpose of the stock market until the exchanges ran out of money, because it'd be coming straight out of their pockets.
- ScottBurson 16y ago
  This must be true. But then, what did happen? Why were there 27,000 trades in 14 seconds (IIRC)?
  - gxti 16y ago
    I'm not saying it didn't happen, just that it's not something that a "rational" algorithm would do, because the one that's taking liquidity is losing money. Unless they're profiting for reasons other than rebates, that is, which is another small but nonzero possibility. My favorite theory is a purely technical one. I don't have much supporting evidence beyond the linked site though: """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. The delay was small enough to cause the NYSE bid to be just slightly higher than the lowest offer price from competing exchanges. 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.""" Original report: http://www.nanex.net/20100506/FlashCrashAnalysis_Intro.html http://www.nanex.net/20100506/FlashCrashAnalysis_Intro.html More news from the same company: http://www.nanex.net/FlashCrash/FlashCrashAnalysis.html http://www.nanex.net/FlashCrash/FlashCrashAnalysis.html In addition to the crash itself, they also have interesting charts from various algorithms behaving strangely.
  - yummyfajitas 16y ago
    Because market makers purchased them at a discount with the hope of selling them for a small profit sometime later in the day. That's what market makers do.
guelo 16y ago
Ok then why where these algos selling back and forth to each other?
- vecter 16y ago
  Trying to understand why an algorithm made a trade at a certain price is practically impossible. Assuming that these algorithms are profit seeking (and not utility seeking, as in trying to transfer risk), the short answer is: because they thought they had a statistical edge they could profit from in the future. Of course, this is a statistical edge. No algo is always right, or even near always right. The algos don't know who they're trading with. They see liquidity and they're willing to take it if they think it's a good price. Now, you might ask, what is the higher purpose of all this trading, if all of it is profit seeking? That's pretty simple also. These trades help to determine the fair market price of a contract. The algos that consistently make the "right" trade survive ("right" defined as predicting future market price), and the ones that don't eventually get shut down. So even when the trading is non-utilitarian, there still is a greater purpose. That purpose is price discovery.

by rgarcia 16y ago

gxti 16y ago

And even if there were rebates (as there are on stocks) you can't make a profit just passing them back and forth because taking liquidity costs more than is rebated to the offerer. If liquidity hot potato were profitable then that would be the sole purpose of the stock market until the exchanges ran out of money, because it'd be coming straight out of their pockets.

ScottBurson 16y ago
This must be true. But then, what did happen? Why were there 27,000 trades in 14 seconds (IIRC)?
- gxti 16y ago
  I'm not saying it didn't happen, just that it's not something that a "rational" algorithm would do, because the one that's taking liquidity is losing money. Unless they're profiting for reasons other than rebates, that is, which is another small but nonzero possibility. My favorite theory is a purely technical one. I don't have much supporting evidence beyond the linked site though: """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. The delay was small enough to cause the NYSE bid to be just slightly higher than the lowest offer price from competing exchanges. 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.""" Original report: http://www.nanex.net/20100506/FlashCrashAnalysis_Intro.html http://www.nanex.net/20100506/FlashCrashAnalysis_Intro.html More news from the same company: http://www.nanex.net/FlashCrash/FlashCrashAnalysis.html http://www.nanex.net/FlashCrash/FlashCrashAnalysis.html In addition to the crash itself, they also have interesting charts from various algorithms behaving strangely.
- yummyfajitas 16y ago
  Because market makers purchased them at a discount with the hope of selling them for a small profit sometime later in the day. That's what market makers do.

guelo 16y ago

Ok then why where these algos selling back and forth to each other?

vecter 16y ago
Trying to understand why an algorithm made a trade at a certain price is practically impossible. Assuming that these algorithms are profit seeking (and not utility seeking, as in trying to transfer risk), the short answer is: because they thought they had a statistical edge they could profit from in the future. Of course, this is a statistical edge. No algo is always right, or even near always right. The algos don't know who they're trading with. They see liquidity and they're willing to take it if they think it's a good price. Now, you might ask, what is the higher purpose of all this trading, if all of it is profit seeking? That's pretty simple also. These trades help to determine the fair market price of a contract. The algos that consistently make the "right" trade survive ("right" defined as predicting future market price), and the ones that don't eventually get shut down. So even when the trading is non-utilitarian, there still is a greater purpose. That purpose is price discovery.