Following the May 2010 flash crash, the investing public hoped that as part
of its "exhaustive report", the SEC would find and hold responsible the various
components of a broken market structure, be it HFTs, ETFs, stubbing and
sub-pennying algorithms, and all the other knowns and unknowns we have covered
over the years. Instead, in what would prove to be a move of cataclysmic
stupidity (if sadly understandable - the SEC, like everyone else "in charge" is
used to dealing with a gullible and simplistic public, which has no access to
the real data and analysis, and whose opinion could be easily manipulated, at
least until now), the regulator blamed and scapegoated it all on a Waddell and
Reed trade (we wonder just what the quid pro quo was to get the asset manager to
roll over and take the blame despite protestations to the contrary, at least in
the beginning). The result was that the same investing public realized that
market structure is so corrupt, and so robotically mutated, there is no place
for the small investor in this broken market. Last week's BATS IPO fiasco merely
confirmed this. And as usual, BATS (whose chairman
Ratterman has just been demoted even as he stays on as CEO) decided to take
the "passive voice" approach and blame it all on a faceless, emotionless,
motiveless "software
glitch". Just like that perfectly innocuous BSOD we have all grown to love
and expect any minute. Only it wasn't. To get to the bottom of what really
happened, in a world in which the SEC is far more interested in finding the
latest discount internet porn stream than actually protecting the small
investor, we relied on our friends from Nanex, who have time and again proven to
have a far better grasp of what it is that really happens in the market than
virtually anyone else. And if Nanex' interpretation of events is correct
(spoiler alert - it was not a "software glitch") it takes SkyNet wars from the
silver screen and to a trading terminal near you. What happened is that
a malicious, 100% intentional Nasdaq algorithm
purposefully brought BATS stock to a price of 0.00 within 900 millisecond of the
company's break for trading! This is open SkyNet warfare.
The fact that the BATS exchange itself halted just prior to break only facilitated this (and could potentially be a case of malicious sabotage). But one thing is clear - as the data below shows, there is no doubt that an Intermarket Sweep Order originating on the Nasdaq exchange was unleashed to make a mockery out of BATS. It succeeded, and in doing so may have destroyed not only BATS chances for going public, but ultimately ruined the firm's credibility. Who would stand to gain from this? Why exchanges such as Nasdaq and NYSE of course, which already are scrambling for revenue, and in the aftermath of the failed Deutsche Boerse merger, it means that any dirty trick in the book to extend and pretend is now fair game. Such as the algo that crashed BATS.
We fully expect that in keeping with its galactic stupidity of yore, the SEC will do nothing to address this situation which is nothing short of exchange warfare using rogue and malicious algorithms as agents of war. Further, in doing so, it will once more destroy any latent "credibility" that the stock market may have created with the retail investor following the 4 month ridiculous and centrally planned melt up (we doubt there is much faith to lose - as we pointed out last week, Joe Sixpack no longer wishes to be the big boys' patsy). Oh well - if the market and its regulators wish to make "investing" solely a provenance of central banks, ultra fast algorithms, and Primary Dealers, so be it. They can play in their sandbox all they want. Just don't expect the trillions in "money on the sidelines" but mostly in savings accounts, where it may earn 0% interest, but at least it won't be vaporized courtesy of some vacuum tube, to ever come back to stocks. Ever.
As for the forensic reconstruction of what truly happened to BATS, below we provide a spreadsheet (the excel can be downloaded here), of every single trade post the BATS IPO.
In Nanex' own words:
* * *
And For the chart porn addicts, here is a step by step forensic view from Nanex of how a stock exchange is permanently prevented from going public.
The fact that the BATS exchange itself halted just prior to break only facilitated this (and could potentially be a case of malicious sabotage). But one thing is clear - as the data below shows, there is no doubt that an Intermarket Sweep Order originating on the Nasdaq exchange was unleashed to make a mockery out of BATS. It succeeded, and in doing so may have destroyed not only BATS chances for going public, but ultimately ruined the firm's credibility. Who would stand to gain from this? Why exchanges such as Nasdaq and NYSE of course, which already are scrambling for revenue, and in the aftermath of the failed Deutsche Boerse merger, it means that any dirty trick in the book to extend and pretend is now fair game. Such as the algo that crashed BATS.
We fully expect that in keeping with its galactic stupidity of yore, the SEC will do nothing to address this situation which is nothing short of exchange warfare using rogue and malicious algorithms as agents of war. Further, in doing so, it will once more destroy any latent "credibility" that the stock market may have created with the retail investor following the 4 month ridiculous and centrally planned melt up (we doubt there is much faith to lose - as we pointed out last week, Joe Sixpack no longer wishes to be the big boys' patsy). Oh well - if the market and its regulators wish to make "investing" solely a provenance of central banks, ultra fast algorithms, and Primary Dealers, so be it. They can play in their sandbox all they want. Just don't expect the trillions in "money on the sidelines" but mostly in savings accounts, where it may earn 0% interest, but at least it won't be vaporized courtesy of some vacuum tube, to ever come back to stocks. Ever.
As for the forensic reconstruction of what truly happened to BATS, below we provide a spreadsheet (the excel can be downloaded here), of every single trade post the BATS IPO.
In Nanex' own words:
Nanex' verdict:Start at line 192 -- these weren't stale quotes from Nasdaq by any means. These were highly accurate and precisely updated quotes from a sophisticated algorithm programmed to take BATS's price to 0. You can see the BATS trades just before the algo on Nasdaq starts up. In other words, after the BATS trades print, everything is fine (except of course for BATS' system). Nasdaq's system is just fine. So is CQS (the SIP). That algo did its job with the precision of a master watch maker.
The data and charts make this abundantly clear. The trade(s) that shut down Apple would be considered stale/bad quotes. But not those 500+ trades on Nasdaq.
And visually:It had to be someone who's machines are directly connected to Nasdaq because they used Intermarket Sweep Order orders.
Alas, BATS did fail, and the result was last week's epic embarrassment for BATS which already cost the CEO his chairmanship, and the firm hundreds of millions in fresh equity, but also which destroyed any hope that the retail investor may be coming back to what is now a permanently and terminally broken market.Look at the timing! There are many quotes lasting less than 1/10,000 of a second in there! (10 quotes/millisecond). And note the almost perfect 45 degree line in log-scaled blue line below.
Had to be from same algo. Way too perfect. Way. Too. Perfect.
If BATS' system hadn't failed, this algo would have likely been obscured.
* * *
And For the chart porn addicts, here is a step by step forensic view from Nanex of how a stock exchange is permanently prevented from going public.
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