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Was The Flash Crash Caused By “Quote Stuffing”?




I offered my own explanation of the crazy market we saw in early May, now known more commonly as the "Flash Crash". There is still no consensus on what exactly caused it and there is an ongoing investigation by the SEC and the CFTC (below, after the jump).

Now we have another potential explanation offered by Nanex, a ticker plant and quote data vendor. According to Nanex, the fault lies with delayed NYSE quotes. In a recent report on their website, Nanex claims that the NYSE started crossing quotes at 2:42 PM on May 6th. Since the quotes were timestamped with the time they exited the queue, instead of when they were created, the algorithms had no idea they were stale. This created an arbitrage mirage because it appeared that the NYSE bid was slightly higher than the competing exchanges. Naturally high frequency trading systems jumped at the chance and created a vicious cycle:

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. On 05/06/2010 the delay was enough to cause the NYSE bid to be just slightly higher than the lowest offer price from competing exchanges, but small enough that is was difficult to detect (See Part 3, The Evidence). 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.

This situation led to orders executing against whatever buy orders existed in the NYSE designated market maker (DMM) order book. When an order is executed, the trade is reported to a different system (CTS) than quotes (CQS). Since trade report traffic is much smaller than quote traffic, there is rarely any queueing or delay.

Because many of the stocks involved were high capitalization bellwether stocks and represented a wide range of industries, and because quotes and trades from the NYSE are given higher credibility in many HFT systems, when the results of these trades were published, the HFT systems detected the sudden price drop and automatically went short, betting on capturing the developing downward momentum. This caused a short term feed-back loop to develop and panic ensued.

Here is a chart of Chevron (CVX) showing the difference of quotes between the NYSE (green) and PACF (light blue) NASDAQ (dark blue):

CVX flash crash NYSE quote delay

According to Nanex, this wasn't the first time that NYSE quotes have gone stale. They claim that it happened twice before, on October 30th, 2009 and again on January 28th, 2010. So what could be the cause of the stale quotes?

Nanex believes it is due to "quote stuffing" - a manipulative technique (similar to DDOS) that high frequency systems are using to try to overpower each other:

Competition between HFT systems today has reached the point where microseconds matter. Any edge one has to process information faster than a competitor makes all the difference in this game. If you could generate a large number of quotes that your competitors have to process, but you can ignore since you generated them, you gain valuable processing time. This is an extremely disturbing development, because as more HFT systems start doing this, it is only a matter of time before quote-stuffing shuts down the entire market from congestion.

Finally, Nanex makes 3 major recommendations to solve this:

  1. Quote and trade data must be time stamped by the exchanges at the time it is generated. This will ensure delays can be detected by everyone.
  2. Quote-stuffing should be banned.
  3. Add a simple 50 millisecond quote expiration rule: a quote must remain active until it is executed or 50ms elapses. If the quote is part of the NBBO, it may be improved (higher bid or lower offer price) at any time without waiting for the expiration period.


Here is the preliminary report from the SEC and CFTC, "Findings Regarding the Market Events of May 6, 2010":

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