Thursday, July 19, 2012

More weird behavior in high frequency markets

Today's Coke and IBM markets are jumping every hour on the hour.  Does anyone know what the heck is going on? One guess received: another case of algorithms gone wild. But whose, and on the hour, exactly? And are there no humans left to counter this sort of thing? Looking at the google finance plot (source here) this started exactly at the open today and seems to have petered out. (Thanks Giovanni Puma for sending me the pictures.)

Update (Friday AM). Bloomberg article on it. They have no idea either, beyond suspecting an algorithm has a bug in it. But why can one trader move a large market so much?

Update 2 (Friday 10 am) Better coverage and better graphs in the Wall Street Journal, suspecting " a computer algorithm known as a time-weighted algorithmic program, or a TWAP. These programs are designed to parse trades out over a set period of time, helping explain the clockwork-like consistency of the trading. “I think some large institutional buyer is using a new algorithm,” mused Eric Hunsader, chief executive of market data service Nanex.

Translation, I think: this is a "fundamental buyer" (known as "liquidity trader" or "mark") trying to parcel a big position out by spreading the trade out through the day, using an algorithm to do so, and not really watching the results. Still... a puzzle to me why people use such algorithms. Randomizing is the only way not to get front run. And a bigger puzzle that markets for coke and IBM are effectively so illiquid in the middle of the day that even big mistakes can move prices. Stay tuned....


  1. There are no humans left. All of us traders just watch. Screw em. The regulation and structure is so messed up, the humans can't keep an orderly market. Our markets as they exist today are broken. Some act no better than casinos-where instead of investment and probability, they are games of chance. Money flow.

    Does anyone think a flash crash couldn't happen again? If they think the system is fixed, they are sadly mistaken,

  2. Only the Soros knows.

    Sans information on volume in all markets, I won't have an answer until I talk with Putin, tomorrow.

    Perhaps it is the regular heart beat predicted by Hayak in a market without government interference.

  3. Seems like a great opportunity for arbitrage. I would expect real humans to start some profit taking.

  4. But modern finance theory tells us that sort of pattern is impossible so it must not be happening ...

  5. Theory does not cover everything all the time. If you look at the currency markets and check the squared intraday exchange rate returns, we see the cyclical patterns during the day due to opening, closing lunch times. etc. Similar pattern can be observed in intraday stock volatility too, like U shape patterns. But these patterns of Coke and IBM are different. It is not intraday periodicity story or something. I am really wondering why this occurred and what it is. We still do not know the reason behind?

  6. Perhaps it petered out due to arbitrage.

  7. The entire market has been frustrating for a half a year now. Up and down, up and down, but not really making any headway. I have stopped buying now and I am sitting pat on the stocks which I already bought.

    This uncertainty is killing the market.

  8. I think you,re on the right track. I've been trading this pattern for several years. Looks like it might be a combination of a sell side simple logical participation algorithm (to come close to VWAP or TWAP) and,quite possibly, some buy side algorithms to take advantage of the liquidity. Sometimes, the pattern emerges on the half hour. The pattern predates modern high frequency trading. This is merely a hypothesis. As further examples, look at the hourly bar charts of SPY or MDY. There are numerous other examples, many going back for years.

  9. Coke and IBM are two big markets and any movement in them will affect the other markets...


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