In the knockout – behind 9 seconds

6 May 2010 years from the American stock market exactly 20 minutes evaporated 862 billion dollars. The Dow Jones fell a thousand points (biggest fall in history), bidding stopped, the financial life of the entire planet in the literal sense of the word was in limbo.

The culprit was found almost immediately: furious US Securities and Exchange Commission (SEC) pointed a finger at HFT - computerized trading algorithms, which in our time provide from above 70% exchange turnover.

But after a "thorough investigation", the anger was replaced by mercy: the lightning-fast depreciation of the stock market was officially blamed on an unfortunate mistake, which was admitted in trading by a modest and unknown futures broker Waddell&Reed. "The crime", perfect W&R, was to sell 75 thousand contracts for E-mini S futures&P. Volume, certainly, not the smallest, however, not even close to sufficient, to have any serious impact on the market, all the more so - completely collapse it.

W&R initially vigorously denied any guilt, and then somehow loosened up, quieted down and dived back there, from where a capricious fate drew him for a few moments: into the crowd of other unknown and unimportant participants in exchange trading. Meticulous financial journalists gossiped for a long time afterwards, trying to figure out the size of the "payoff", which got W&R in exchange for agreeing to play the role of everyone's scapegoat.

As for the true culprit in the market crash - HFT, then he was still a little patted on the sidelines of the Congress and Senate, frightening with almost a legislative ban, and consigned to public oblivion.

Why betrayed is clear: the main figures in high-frequency trading in America are Goldman Sachs, Morgan Stanley and a dozen of the largest banks - they provide 70% daily exchange turnover.

For almost two years, no one remembered HFT, and events 6 Martha 2010 years remained in the collective memory as an annoying technical error or someone's oversight. And recently, 23 Martha 2012 of the year, an event happened, which clearly demonstrated: "Technical error" quietly evolved into a weapon of such destructive power, what, seems, was borrowed from the arsenals of the fantastic "Star Wars" of the future.

Событие, in question, did not have textured showiness (a lightning-fast collapse of the market by a thousand points is a completely different calico!), therefore, it was noticed only by narrow professionals of stock trading. And in vain the public paid so little attention to him! According to the far-reaching consequences and potential of the incident 23 Martha 2012 years is an order of magnitude superior to the HFT pranks of two years ago.

We are talking about the failed attempt of the American company BATS Global Markets to conduct an IPO. The attempt to list shares on the stock exchange continued exactly … 9 seconds, during which the company's securities in the literal sense of the word have depreciated almost to zero, trading on them was suspended, and after a while, the company's management confusedly announced its complete refusal to go public in the foreseeable future.

Blame, as well as two years earlier, officially blamed on "software glitch", however, unfortunately for the SEC and all the structures involved in the drama, a casual witness was found, which not only logged the incident down to the millisecond, but also analyzed each of 567 exchange transactions, committed for 9 seconds with BATS securities. The analysis showed, that there was no "software glitch" at all, and the IPO crash was the result of a hidden malignant computer algorithm, launched from the terminals of an unidentified company, having direct access to the electronic exchange NASDAQ. Алгоритма, who purposefully fulfilled the clear task assigned to him: destroy IPO BATS!

I did not accidentally say, that the potential of the incident is an order of magnitude greater than the HFT pranks of two years ago. In Fat Finger, I showed the readers, how high frequency Trading can cause total confusion on stock exchanges due to the nature of their own trading algorithms. So, collapse 6 May 2010 of the year was caused by a simple shutdown of several key HFT terminals, as a result of which the market lost the lion's share of its usual liquidity and simply fell into the abyss of the imbalance between supply and demand. At least, so it seemed then.

BATS IPO Incident Demonstrated, what, except for passive "shutdown", HFT algorithms can also "turn on" and act at the right time and in the right place in this way, that any security can be destroyed in seconds! In other words, technological monsters have escaped from Pandora's box and turned into deadly weapons, perfect for the upcoming cyberwar!

Why am I suddenly talking about cyberwar? You never know how many IPOs are held in America every year by unknown companies? One more, one less… In fact of the matter, that BATS is not an ordinary business in itself, a - what is there to be shy about! - the third largest exchange in the United States!

Удивлены? ABOUT NYSE everyone knows, NASDAQ on everyone's lips, but BATS? What kind of BATS? Where did she come from? Think, when readers get to know the dossier of this company, they will be able to appreciate the exchange sabotage at its true worth, against the company 23 Martha.

so, BATS Global Markets was established in 2005 by David Cummings in Kansas City, Missouri. BATS stands for Better Alternative Trading System ("Improved Alternative Trading System") - title, self-explanatory. BATS is a so-called electronic communication network (ECN) second generation, that is, a platform for conducting exchange trading, alternative to systemic NYSE and NASDAQ.

BATS was created by high-frequency trading players to meet their own needs, in particular for a qualitative reduction in commissions, which, when interacting with system exchanges and taking into account the colossal volume of transactions carried out, are poured into almost unbearable amounts.

High frequency traders not only create liquidity in the market, but also represent the beloved "cash" cow of stock exchanges, since they regularly provide them with high yields in the form of commissions.

By creating BATS in 2005 year, traders set themselves an obvious task: get out of the control of system exchanges and transfer operations to our own platform, more convenient for high-frequency trading. Lehman Brothers were the main investors in BATS, Getco, Wedbush, Lime и Deutsche Bank.

The names are all sonorous - what are only the late Lehman brothers worth! - however also united by sad stigma: Losers! Of course, in the context of the financial elite of the planet, it is generally difficult to talk about failure, but the absence of genuine favorites - companies is striking, really determining the world financial policy.

Citibank joined the main underwriters when listing BATS shares on the stock exchange, Swiss credit, Morgan Stanley и JPMorgan, but even in the extended version, the list is missing at least one name, which in itself completely outweighs the rest: Goldman Sachs.

This detail is a trifle, only information for thought, That, Nevertheless, will help the reader to more objectively evaluate subsequent events.

The high-frequency traders' stake on "independence" was fully justified: 27 January 2006 of the year BATS has opened for the implementation of "high-speed, high volume, anonymous algorithmic trading "and thanks to dumping commissions in just a few months pulled 10% of the entire stock exchange volume of America (more 50 million transactions daily)! Trading on BATS was postponed more than 270 broker-dealer offices, and not only from the USA, but also Europe with Asia.

Two years after the opening of BATS Global Markets, which by that time already managed three sites (two for shares and one for options), went to net profit.

The company's management model has also crystallized.: Founding Father David Cummings humbly stepped down as CEO and Chairman of the Board of Directors, handing over the reins to his former CEO Joe Rutterman. And he himself headed the private investment firm Tradebot Systems, which developed shopping malls and algorithms, and then licensed BATS.

The purely commercial success of the alternative high-frequency trading platform ultimately predetermined the founding fathers' decision to go public.. The highlight of the BATS IPO was, that the underwriters decided to send the company's shares on a big voyage through its own trading floor! Not through the traditional NYSE and NASDAQ, and their own BZX Exchange and BYX Exchange3.

The reasons for the decision were weighty. Firstly, BATS, in the event of a successful IPO, received full control over its own securities, at least avoiding hypothetical manipulations and tricks from their direct competitors and fierce rivals - NYSE and NASDAQ. Secondly, BATS securities were provided with the highest possible liquidity, since according to SEC statistics, trades on BZX are available to traders 99,94% всего времени, a BYX - 99,998%.

The figures given are also indicative in that respect., that BATS sites have historically demonstrated exceptional reliability. Besides, before listing your shares, the company conducted field trials and test simulations for six months. Everything went without a hitch, at the highest technological level, what you can expect from the latest generation marketplace.

In the light of the said event 23 Martha 2012 years look more unlikely than the most unscientific fiction. Meanwhile, the fact remains: placement of BATS securities began in 11 hours 14 minutes 18 seconds and ended in 11 hours 14 minutes 27 seconds. 9 seconds of trading - and a complete failure!

Nanex helped reconstruct dramatic events (the same accidental witness!) - the largest provider of ultra-accurate stock information in the USA. Nanex is tracking, fixes, and then sells to traders the entire chronography of the stock exchange life of America with an accuracy of hundredths and thousandths of a second. The company's analysts conducted their own investigation in a matter of days after the incident., которое и показало, that there was no "software glitch"!

Was, that BATS shares destroyed 567 deals, which were received during 9 seconds from the same terminal, and not connected to the BATS exchange, and with the site of its competitor - NASDAQ.

How it was? Let's start with a general chronology.

so, 23 Martha 2012 BATS years, having received all the necessary permits from the SEC in advance, decides on listing its own shares. The first tranche consisted of 6,3 million class A securities, of which almost half came from the holdings of Lehman Brothers Holdings Inc. (heiress of the deceased in Bose Lehman Brothers), and further 1,1 million - from Getco.

It was planned to start trading in the range between 16 And 18 долларами за штуку, depending on the level of demand prevailing at the time of opening.

When did the placement start, the first quote that appeared on the monitors - 15,25 dollar - turned out to be lower than originally planned for 5%. As BATS managers recalled later, the price upset them, but not much. Everyone hoped, if not for the rush demand from the right place, then at least for interest, fixed at the level of preliminary surveys, that is, in the range of $ 16-18.

On the first deal, held on the site of BATS itself, the lion's share of shares passed - 1 million 200 thousand shares. Further events developed as follows:

in the first thousandths of a second, starting from the second, the quote rises to 15,75 - there is an exchange 800 shares, which is already carried out on the NASDAQ exchange;

further in the range of a second there is a chain of successive falls: $14 — $13 — $10,23 — $8,03 — $5,79 — $4,17 — $3,01. Some unfortunate seven orders, and IPO is practically out of the game! Each of the killer deals was made on the minimum lot of 100 stocks are so-called flash orders of the IOC type (Immediate Or Cancel — «выполнить незамедлительно либо отменить»), are the "trademark" of the high-frequency trading algorithm. All trades are conducted on NASDAQ;

in the second second of its life IPO BATS continued to fall: $2,17 — $1,15 – $0,76 — $0,0002 (two hundredths of one cent!). Total was produced 444 трейда по 100 долларов каждый, and all transactions went through NASDAQ;

there is a pause for a second, затем в 11 hours 14 minutes 21 second, a fixing trade passes by 3 cents per share BATS;

in 11 hours 14 minutes 27 seconds the price rises to 4 Cents, and it is this figure that first appears as a starting deal on the monitors of most computers for ordinary traders from the street (каковых, as you guess, majority);

in 11 hours 14 minutes 33 seconds on all displays the inscription "Halted" lights up 4: stock breakers turned on, which automatically stop trading on the stock, if its quotation changes above the allowed limit. In the case of BATS, a drop from 16 Dollars

to 4 центов за 9 seconds generally falls outside the scope of the possible;

after a few minutes of pause, the IPO BAT price was returned on the quotation tape to a technically meaningless value - 15,25 dollar apiece. Senseless, since no sane trader would ever think of buying paper for that kind of money, if he knows, what a few seconds ago it was worth 4 cent!

BATS management announces withdrawal of IPO from trading.

After the overwhelming embarrassment, CEO and President Joe Rutterman delivered a public address to investors, in which he apologized for the disaster and - sic! - completely blamed the "software glitch" (software glitch): “This is a terrible shame, - Joe Rutterman sobbed virtually on the shoulder of affected investors. - We feel terrible. All responsibility lies with our company. We take responsibility. There were no external influences from the outside ".

The last phrase looks very spicy., because if an outsider Nanex could easily spot the killer warrants, received from NASDAQ terminals, BATS engineers could do it even faster, analyzing internal traffic on transactions with shares of your own company. And they certainly found. However, BATS chose not to stir up the scandal and even refused to re-IPO., having recorded, in fact, multi-million dollar losses for its shareholders and underwriters! Why is BATS so scared??

Analyzing transactions, destroyed IPO BATS, Nanex discovered mysterious "glitches", that accompanied the malignant computer killer algorithm. Moreover, these "failures" did not occur on the NASDAQ, but directly at the BATS sites, which, in technological terms, had previously enjoyed a reputation for being practically bullet-proof - "bulletproof".

So, a quarter of an hour before the 9-second massacre, another strange glitch occurred on the BATS electronic networks., which brought down Apple quotes, the most actively traded paper on the US stock exchanges, as a result, trading had to be stopped at all sites in the country. Three days earlier, Apple quotes for the same BATS also unexpectedly fell by 20 Dollars, after which there was again a halt in trading. Finally, one second before withdrawal of BATS shares from trading, after the attack, the deal on Apple shares at 54 dollar below current quotes. And again, trading in securities of the stock exchange's favorite was stopped for five minutes..

Choosing Apple as a collateral victim, in my opinion, not accidental precisely because of the cult status of America's favorite: as a result of the 9-second sabotage, not only the shares of BATS itself were discredited, but also questioned her ability to control the situation on her own site. Which of the resourceful "high-frequency workers" would now want to trade on the stock exchange?, which manages to roll Apple's own papers?!

Analysis of the malignant algorithm operation shows, that there was an almost direct connection and dependence between trading in Apple and BATS securities, however, Nanex did not dare to take responsibility for such a statement..

Why we are talking about the killer algorithm, not a software glitch? Nanex provides some evidence in its research report, the most obvious of which can be considered schedule, which i put here.

The chart displays all 567 deals with IPO BATS, which are presented in two scales. The blue line reflects the fall in the value of BATS shares in absolute terms, the red line is taken on a logarithmic scale. In absolute terms, we're seeing chaotic freefall, whereas in the logarithmic representation the price decline is not chaotic, and in strict accordance with the given algorithm, on which the car operated, placing orders. In other words, the intruder's handwriting is obvious: BATS shares did not depreciate "by mistake" or as a result of a "glitch", but systematically "killed"!

Will SEC Ever Name "Killer" IPO BATS? You can be sure, what will not name. If only because, that all the participants in the drama - and BATS in the first place - this name has long been well known! If the affected company itself chose to take the blame, refusing to wash dirty linen in public, there are clearly valid arguments for keeping the default shape.

What arguments can we talk about? In my opinion, there are two.

Argument one: the weight category of the killer IPO BATS in the financial world is, that the alternative platform simply does not see prospects for itself in any form of open confrontation. To the domestic reader, the situation should remotely resemble army hazing: exactly that case, when it is wiser for the "young" to swallow the offense and humbly go to wash the footcloths of the "grandfather" - it will be healthier.

Аргумент второй: историю 23 Martha 2012 year can be represented as an analogy with the bombing of Hiroshima and Nagasaki. Such a powerful and destructive cyber weapon was demonstrated to the financial world of the planet, that everyone preferred to negotiate the terms of the truce, and not to arrange unequal showdowns and clarifications with the "owner of the bomb".

Now the most important thing. What lesson can ordinary mortals learn from the told story - traders from the street and just the inhabitants of our sad planet? The lesson is clear: play by the rules, created in their own interests by modern dinosaurs - the financial elite, furry mammals can't. Therefore, it remains either to sit quietly in a respectful distance, in no way agreeing to play on someone else's site, which is created in this way, to knowingly beat any outsider, or - to break the rules of dinosaurs!

Finally, for philosophical readers, I have one more alternative in store: wait, while dinosaurs catch a meteorite from space on their heads!