Market Rigging Explained
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We received trade execution reports from an active trader who wanted to know why his large orders almost never completely filled, even when the amount of stock advertised exceeded the number of shares wanted. For example, if 25,000 shares were at the best offer, and he sent in a limit order at the best offer price for 20,000 shares, the trade would, more likely than not, come back partially filled. In some cases, more than half of the amount of stock advertised (quoted) would disappear immediately before his order arrived at the exchange. This was the case, even in deeply liquid stocks such as Ford Motor Co (symbol F, market cap: $70 Billion, NYSE DMM is Barclays). The trader sent us his trade execution reports, and we matched up his trades with our detailed consolidated quote and trade data to discover that the mechanism described in Michael Lewis's "Flash Boys" was alive and well on Wall Street.
Let's take a look at what we found from analyzing 5 large trades executed at different times over a 4 minute period in Ford Motor Co. Before each of these trades, the activity in the stock was whisper quiet. Here's a chart showing millisecond by millisecond trade and quote counts in Ford leading up to one of these 5 trades:
You can clearly tell when the trade hits: activity explodes to over 80 quotes in 1 millisecond (this is equivalent to 80K messages/second as far as network/system latency goes). But the point here is that nothing was going on in this stock in the immediate period before this trade hits the market.
In this particular example, there were a total of 24,800 shares advertised for sale at $17.38 (all trades and offered liquidity will be at this same price) from 8 exchanges. The trader wanted 20,000 of these shares. What he got was only 12,133 shares and 600 of these were on a dark pool (which wasn't part of the 24,800 shares of liquidity on the lit exchanges)! Worse, someone ELSE was filled for 1,570 shares during these same milliseconds! Remember, nothing was happening in Ford until this order came into the market. Based on the other 4 examples, we are sure that no trades would have occurred during these few milliseconds of time if it wasn't for this trader's order.
What happened to the 24,800 shares offered and why couldn't he get at least 20,000 of them? How is it that others were able to get shares during this time? This is especially disturbing when you consider these other traders (HFT) only bought shares in reaction to the original trader's order.
Detailed Analysis of a Trade
To answer these questions, let's take a look at the individual order executions and cancellations at the $17.38 limit price. In the table below, there are 7 columns. The number in the 1st column we'll use to reference a record. The 2nd column is the timestamp of the event - this is from CQS/CTA, the consolidated quote and trade SIP (Securities Information Processor). The 3rd column shows which reporting exchange sent the information in this record. The 4th column shows the total number of shares offered at $17.38 among the exchanges that trade this stock (Ford) and the 5th column (Add/Cancel) shows the number of shares added to, or removed from the total offered. If the 5th column is blank, it's because this record represents a trade execution.
The 6th and 7th columns show information about one order execution resulting in a trade at $17.38 (these columns are blank if the record is a quote update). The 6th column shows the number of shares executed, and the 7th column contains either a number which corresponds to the trade report # received by our trader, or an "X" which indicates someone else got this trade execution.
Note that other than the first entry (which is a reference to how long the 24,800 shares were sitting in the books waiting for execution), there is only 3 milliseconds of time shown here! The entire trade is reported in about 15 milliseconds (82% completes in 5 milliseconds).
Looking at the table data, we note the first trade is 100 shares on BOST (NQ-OMX Boston) and belongs to our trader. Note, however, it was the 4th trade reported back to him ("4" in the last column). The first 3 trades, not shown here because they end up being reported dead last(!), were dark pool prints from Sigma-X (Goldman's dark pool).
The next trade is 67 shares at EDGE (New Bats Edge-A), but they weren't from our trader's order: someone else bought those shares ("X"). How does that happen?
Lines 4 and 5 are order cancellations of 100 shares and 600 shares from ARCA and NYSE respectively - all in the same millisecond!
Lines 6, 7 and 8 are trade executions from EDGE and belong to our trader - note the first trade (line 3) was also from this exchange but, as noted above, went to someone else. This also means that order cancellations from NYSE and ARCA happened before any size appeared.
The next 19 entries (lines 9 to 27) show a flurry of order cancellations coming in from NYSE, ARCA, BATS, NQEX and EDGX. This is before the first trade execution at any of those exchanges! This flurry of cancellations removes 10,300 shares from the number of shares offered (Shares Avail. column drops from 21,400 down to 11,100)! Also note how the cancellations rotate through many different exchanges. That's one sure way to throw off, confuse, stall a smart order router.
Within 2 milliseconds, half of the shares have disappeared, someone else stole 67 shares, and our trader has only 13.5% (2,700 shares) of his order filled!
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