Quantum Pranx

ECONOMICS AND ESOTERICA FOR A NEW PARADIGM

After finally covering massive retail outflows, the NYT also “discloses” the Nanex Crop Circle Mystery

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by Tyler Durden
Posted August 22, 2010 on Zero Hedge
See previous post: the original New York Times article

READING THE NYT THESE DAYS SURE IS ENLIGHTENING: first, one gets news about some odd phenomenon, previously unheard of, that for 15 straight weeks retail investors have been pulling money out of retail funds (hmm, where has one seen this before), and now, with much fanfare, the NYT brings the Nanex Crop Circles to the center stage. At least unlike the former story’s 15 week delay, it took the NYT a mere three weeks to rehash what Zero Hedge readers had known since July (how is that whole “value added content” paywall idea going?). Nonetheless, it is satisfying that the criminal stock churning activity reported on first by us, has finally gone mainstream. Of course, the NYT conclusion is typical: “The idea that shadowy computer masterminds were trying to disrupt the nation’s stock trading struck many people as ridiculous. Wall Street experts generally characterize it as a conspiracy theory with little basis in fact.” Interesting: yet a mere four minutes ago we pointed out that Finra is starting to ferret out illicit HFT trading practices… Maybe the NYT can put two and two together (in real-time this time).

More from the article:
The stock market mysteriously plunges 600 points — and then, more mysteriously, recovers within minutes. Over the next few weeks, analysts at Nanex, an obscure data company in the suburbs of Chicago, examine trading charts from the day and are stunned to find some oddly compelling shapes and patterns in the data.
To the Nanex analysts, these are crop circles of the financial kind, containing clues to the mystery of what happened in the markets on May 6 and what might have caused the still-unexplained flash crash.
The charts — which are visual representations of bid prices, ask prices, order sizes and other trading activity — are inspiring many theories on Wall Street, some of them based on hard-nosed financial analysis and others of the black-helicopter variety.

To some people, like Eric Scott Hunsader, the founder of Nanex, they suggest that the specialized computers responsible for so much of today’s stock trading simply overloaded the exchanges.
He and others are tempted to go further, hypothesizing that the bizarre patterns might have been the result of a Wall Street version of cyberwarfare. They say high-speed traders could have been trying to outwit one another’s computers with blizzards of buy and sell orders that were never meant to be filled. These superfast traders might even have been trying to clog exchanges to outflank other investors.
Jeffrey Donovan, a Nanex developer, first noticed the apparent anomalies. “Something is not right,” he said as he reviewed the charts.

Here is what Donovan believes happened, and no black helicopters or anything: Mr. Donovan, a man with a runaway chuckle who works alone out of the company’s office in Santa Barbara, Calif., poses a theory that a small group of high-frequency traders was trying to introduce delays into the nation’s fractured stock-market trading system to profit at the expense of others. Clogging exchanges or otherwise disrupting markets to gain an advantage may be illegal.

We fail to see how this non-conspiratorial version of what transpired should be sufficient to provide comfort that the market is anything but manipulated beyond repair. Of course, this is precisely what we first suggested almost a month ago. And here is some more speculation on the flash crash cause that will lead to a 16th consecutive weekly fund outflow this coming week:

“It’s just madness to say we don’t know what caused it. We do,” said Steve Wunsch, a market structure consultant. “The crash was an inevitable consequence of creating multiple market centers.”

That is one explanation. Others have pointed to the high-frequency traders, who use powerful computers to transmit millions of orders at lightning speed. Some of these traders, who now dominate the stock market, appear to have fled the market as prices went haywire.
Then their computer programs might have dragged down exchange-traded funds, popular investment vehicles that fell sharply during the crash, said Thomas Peterffy, chief executive of Interactive Brokers.
“Computerized arbitrage kicked in,” he said.

But if Nanex’s theory is to be believed, computer algorithms might have been at work as well, knowingly or unknowingly wreaking havoc and creating data crop circles.
“There is a credible allegation that there is seriously abusive practices going on,” said James J. Angel, a financial market analyst specialist at Georgetown University, “to the extent that somebody is firing in a very high frequency of orders for no good economic reason, basically because they are trying to slow everybody else down.”

It gets worse: At a Washington hearing on the flash crash last week, Kevin Cronin, director of global equity trading at Invesco, a big fund manager, warned about “improper or manipulative activity” in the stock market.

The NYT confirms what we have been saying for well over a year: that the market structure is now inherently unstable, and there are potentially malicious forces that may seek to destabilize the market at any moment, leading to the possibility of another flash crash without any notice, and at time of the day (or night, now that futures are the dominant price determining paradigm). The only thing that is missing is a catalyst, which however is known only to a select few, who may or may not use it at their whim.

The idea that shadowy computer masterminds were trying to disrupt the nation’s stock trading struck many people as ridiculous. Wall Street experts generally characterize it as a conspiracy theory with little basis in fact.
But some of the patterns suggested that traders might have been testing their high-speed computers, perhaps to see how rivals would react.
Or it may just be that the computers produced so much data so quickly that exchanges simply could not cope with the onslaught.

So what was thing thing about conspiracy theories again? Or is it in the NYT’s view, that everything is a “theory” until confirmed at least 3 or more times? But we would like to end on a positive note – perhaps after the recent deposition by Nanex to the CFTC, our regulators will finally catch up… to being just ten years behind the curve.

Background: see http://www.zerohedge.com/article/its-not-market-its-hft-crop-circle-crime-scene-further-evidence-quote-stuffing-manipulation-

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