Freaky Patterns / Themis Thoughts 8/23/10

Freaky Patterns

We are all told that it is a square; maybe it is. But we just feel the insides of it need studying. By the way the above is a drawing by the mathematician, Escher, and it is called the Escher grid. You all remember Escher from high school and college? He drew that freaky castle with stairs, upon which, no matter how you navigated them, you couldn’t get anywhere.

I actually got lost on those stairs in college many times, always on Saturday nights at 2:00am with a Schaeffer in each hand, but I digress…

I hope every trader in the market today has at least heard of the bizarre “quote-stuffing” that Nanex has been highlighting since May 6th, as well as their flash crash analysis, (, and

If, for no other reason than to enjoy watching visual quote patterns on Nasdaq called the Heart Attack, and Almost Human.

If you don’t know what Nanex is about, familiarize yourself with its founder, Eric Scott Hunsader, by doing some simple searches on and Lycos. I believe the gentleman is not new to the world of high-tech in financial applications.

A few days back, The Atlantic has come out with an article titled “Explaining Bizarre Robot Stock Trader Behavior” :

In this article an expert in artificial intelligence, Michael Kearns of the University of Pennsylvania, is questioning Nanex’s analysis. Mr. Kearns thinks that the quote-stuffing thesis is unlikely, as it is not easy to gain that kind of speed and technological advantage. He also “cannot think of an easy way for a firm to ignore their own orders that they have placed without having some risk.” While we disagree a tad with him here, (we’ll show him exchange order types specifically designed for a firm to never trade with itself, as well as others LOL) Mr. Kearns makes a great point: “What’s weird about these patterns, the sawtooth patterns, say,” he said, “where you’re alternating [prices up and down] with no hope of a trade is that If I were going to explore the idea of a large number of patterns to see what works, there’s just no need to place orders that far from the market, especially given how quickly they are being removed.” Bingo. He is acknowledging, perhaps not intentionally, that co-location advantages make these orders and quoting risk-free! You can’t hit them. Which is the problem so many of us have with attaching the term “market maker” to firms who are sending in millions of orders that are cancelled immediately, and can’t be hit.

MIT’s Andrew Lo, the other expert in the article, also has some interesting premises. He thinks that the bizarre rapid-fire quote patterns could be “radar” that is designed as a mesh to capture orders in a stock, guess the hyper short-term trend that would ensue (perhaps with their own help), and prey and capitalize on it. Traders (HFT servers) are placing those orders because they are probing for the split second that a real buyer or seller shows up.

Mr. Lo also eloquently sums up his viewpoint as follows: “The observation to make is that this isn’t as innocuous as it might seem, not so much because there is anything wrong with high-frequency trolling but rather because the regulatory infrastructure that monitors these markets are not designed to deal with this kind of latency and high-frequency,” Lo pointed out. “That can create significant problems, not the least of which is the Flash Crash. There are fairness issues. There are transparency issues. There are stability issues. We need to resynchronize the regulatory infrastructure with the technology of our time.”

We at Themis have been saying this for over two years. Like so many of you, we are still trying to get a grip on the events surrounding May 6th. We have stated all along that our market structure, and the unfair aspects of it, are responsible for May 6th, and will be responsible for the wild gyrations that will accompany the next crash. We are glad that Nanex, and other esteemed professors are examining in such detail the inner workings of our markets. We need more minds getting down into the details, instead of swallowing the narrow-spread-costs-have-never-been-less HFT diversion. Some theories will be false, and some will nail some very serious activity for what it is. We all will stay tuned.

We all sure would like to know why 17,000 quotes (orders) in a 20 second period in any stock are necessary, specifically ones that trade so infrequently. Perhaps market data revenue, and how it is calculated, has something to do with it. Or perhaps even how rebate and perk levels are divided up between SLP’s versus DMM’s. Stuff for us to dig into for sure (and perhaps as well for those who are charged with making our markets fair).

By the way, we in the marketplace do not make the rules and laws that are supposed to protect us all. The exchanges do not, Themis Trading does not, HFT’s do not, and the media does not. It is the regulators AND our politicians who do. And they need a message, in case it is not obvious. The markets are ill; long-term investors continue to flee the equity markets. Read Mark Cuban here:

and the NYT’s rehash of all the Nanex related charts that we have been talking about for weeks (with ZH) here:

So again, in order to not be vague on the message, let us spell it out. If you are a politician or a regulator, you need to get on the right side of this debate now. Forget who donated to your campaigns. Forget who is going to possibly give you a job when you resign from your post that has responsibility to the taxpayers. Time is running out, and no amount of campaign funds will get you re-elected if you do not safeguard those whom you took an oath to safeguard. It is time to be on the right side of history.

Hey, you know what? This two year old party is starting to heating up.

Where we left off 4:00pm EST:

DJIA                                             10,213.62                                           -57.59

S&P500                                          1,071.69                                            – 3.94

NASDAQ  100                                2,179.76                                            +0.81

Futures now at 5:30am EST:

DJIA                                             10,247                                               +45

S&P500                                        1,076.30                                            +5.60

NASDAQ 100                               1,815.25                                         + 12.25

Key Data out today:

08:30: Chicago Fed

Since the prior close, some key stories:

–          Stocks rise on Takeovers.

–          Sweet Lou calling it quits.

–          13 yr-old Chelsea Baker throws perfect games and makes boys cry.

–          Yankees win and Mets lose; can the NY Mets-Yankee Indicator be on the verge of working again?

–          Bret Favre throws a pass.

–          Campbell Soup wants United Biscuits.

–          Brokers face fines over their role in the flash crash, and perhaps lack of risk controls over their customers.

–          Credit Card rates climb (so while banks continue to borrow money at 0%, they raise rates on the taxpayers who bailed them out, and the ones who can the least afford it to boot). Financial reform. Yay.

–          S&P commodity stocks at highest valuation in 6 years.

–          Individuals have pulled $33B+ from domestic equity MFs in the first 7 months of this year; shun stocks for longest stretch in 23 years.

–          Doug Kass turning bullish again (he has been a good short term indicator fyi).


Pre-open: TUES, SAFM, AMLN,


Significant Movers This Morning: