(This guest post originally appeared at the author’s blog)
I am growing more and more tired of seeing what appears to be a very “helpful” algorithm running in the SPY. I am using the term “helpful” very lightly. I relate this algorithm to a jumper cable, your car will run once you get the jump if your battery is running low right?
Now lets say volume in our market is equivalent to a discharged but not quiet a dead battery yet. Symptoms of the market being a “dead battery” are sluggish movement through key pivot levels on a daily 1 min chart, along with violent price spikes within the 1 min candle.
So how do we fix a market which does not have the Umph it needs to stay liquid and trade while not remaining flat all day after the initial 30 min opening volatility? A quant algo of course!
First a little background on why the SPY would be a good target for some undercover manipulation. As you may or may not know ETF’s run our retail markets. The S&P depository Trust buys and sells individual components of the S&P’s based on movement within the index. Simple right? Well if you say, “Screw it, I am purchasing the 500 S&P components via the SPY ETF. Now i can buy little pieces of the components without laying out the cash to buy them individually.” GREAT! If you are a buy and hold investor looking to leverage your hard earned dollar. Now lets think about how the normal operation of the SPY can cause manipulation…
*If there is a huge buyer day in and day out of the SPY whom has no interest in holding for a long period of time how would this affect the components? The direct affect of SPY purchasing would cause the cash market(individual stocks, not futures) to trade in a much more liquid manner in whatever direction the purchaser is leaning.
Now for the juicy stuff,…For months now i have been watching a specific algorithm push our markets around with great ease. It looks like this algo is giving the SPY a little push through support and resistance levels with massive size executed in seconds. Sometimes the push is tens of thousands of shares, the size all depends on the natural volume around the level which the SPY is trading at the time it may need a “Jump”. For instance if the market is oversold on a 1 min time frame and is trying to break higher off lows but just cant get the party going on its own, the algo will come in and take offers until day traders, scalpers, swing traders jump in and chase the market higher. Once the price gets “jumped” the algo just sits and waits till natural buyers and sellers are few and far between and it either dumps or takes in more. Usually the program will reset itself after a trade, then will wait till it senses low volume once again.
For some concrete evidence of this action I have done a quick illustration, which includes Time & Sales which only display prints on the exchange the algorithm does business on. This exchange is used because of its very nice rebate structure, and it allows the algo to exploit the SOES, meaning it cannot trade in blocks larger than 10000 shares per order. So what does it do, it takes blocks almost 10,000 shares multiple times a second, this price action causes the market to lift violently. This is not small money, remember small money follows big money.
The algo in question starts buying at 110.04 with one block of 9999 shares, followed by 60k more shares all bought in under two minutes. You can see from the chart how the SPY reacted, it violently moved higher all the way up to 110.55, where the algo dumped just about all of the shares, you can see the prints in the “dump” prints window, again only showing the print from the exchange the algo does business on. The algo did its job, the cash market snapped back, the components again caught a bid and moved higher through resistance. I.E. they look alive and well… Natural buyers came in above the 110.55 level chasing the market up another 50 cents or so before they left and the SPY fell again because the volume was not there to support the massive run up which took place over 15 minutes. As you can see the algo works in two capacities, it manipulates the market to the upside along with keeping S&P500 components trading in a liquid orderly “non flat” fashion.
The 650,000,000,000$ question now is.. What would our markets look like if this “jump starting” was not taking place every day? I think you know the answer.
Click the image below to see how it really works.