Thomson Reuters has been giving elite traders a 2 second advantage on the bi-monthly Consumer Confidence index, a key number for traders. In the past few days, that revelation has angered a lot of people on Wall Street.
A two second advantage may seem like a lot of time to a human, but to a robot, with the right (read: fastest) connection to a stock exchange, it’s plenty of time to spray out thousands of orders and (most likely) cancel them.
That impacts price. Suddenly, the market thinks that a given ETF, equity — whatever you’re trading — is really in demand.
But it’s not.
When it happens incredibly fast (like, in a second) it can be like a tsunami that rises and then disappears.
Until the correct price is found, what all of that does is simply create a mess — a sort of high speed chaos that can only be seen clearly in milliseconds but can send ripples throughout the market as the tsunami dies down.
First and foremost, paying for early data is something completely known on Wall Street, and it makes an impact. This Feb 2013 chart shows how much power people that pay to get Chicago PMI 3 minutes early have on volume. The dots are orders, coloured by exchange. Imagine if you're not paying for this service, and you're just a ship sailing on the water, so to speak.
Three minutes later, when the number officially comes out. The water is calm. That said, a human being can react in 3 minutes. What's at issue with Thomson Reuters is 2 seconds.
Forget 2 seconds, this video shows what a high speed trader can do with one second of time. Specifically, it shows trading between exchanges one second after the Chicago PMI number is released, slowed down to a minute and a half.
And here's a run down of all the trading that took place (from Nanex):
- 550,000 SPY shares
- 10,000 June 2013 eMini futures contracts
- 1,400 Nasdaq 100 futures contracts
- 800 Dow Jones futures contracts
- 350 Russell 2000 futures contracts
- 125 S&P 400 Midcap futures contracts
- 300 Crude Oil futures contracts
- 900 Dollar Index futures contracts
- 800 Gold futures contracts
- 10,000 10yr T-Note futures contracts
- 2,500 5yr T-Note futures contracts
- 3,500 T-Bond futures contracts
- 5,000 Eurodollar futures contracts
- 750 Japanese Yen futures contracts
- 600 Euro futures contracts
This is the Consumer Confidence number for March 8, 2012. Pay close attention to 9:54:48. The rainbow coloured chart shows the depth of book — basically how many orders are lying around in the market. As the colour goes from bright red to violet, it shows orders (essenitally demand) evaporating right after they were sprayed out. In this case, they're not being filled, they're simply being canceled.
That means order volume suddenly evaporates too. Incorrect demand plus the disappearance of people on one side of a trade all together is a recipe for crazy price swings. (This chart shows S&P futures before Consumer Confidence on April 13)
Want to see more volume evaporate? This chart shows the moment it disappears. The data you're seeing is what happened when it appeared that a key Natural Gas supply number was leaked 400 milliseconds early in January. Volume careens down just ahead of the official announcement of the number.
When volume is gone, it also means for a bit there's little liquidity in the market. Last month we saw what that can do when liquidity dried up in some utilities stocks and there was crazy flash crash in the whole sector. In that case, it was because exchanges had done away with regulations that allow them to replenish a stock's liquidity. It can also happen, though, when liquidity evaporates at high speed.
Now watch the price swing. It's best illustrated by this chart of the VIIX during Consumer Confidence release on April 13th. Two seconds before the number is out, this chart shows the the spread between the best bid and offer widening like CRAZY and the readjusting. It's that grey shading (can't miss the spike).
This is the Chicago PMI number for June 2011. It's known that some traders pay to get this info early (at 9:42 rather than 9:45) but half a second before that, this chart shows a spike in quote messages for U.S. equities and index options.
Now this doesn't always happen on purpose. To give you a sense of how sensitive this stuff is, here's what happens when some clocks at exchanges are set a mere 15 milliseconds early. On this chart, exchanges are colour coded by dots. As you can see, some colours are early while others lag. That grey shade is the spread between the bid and asking price. As you can see, it goes nuts.
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