Thursday, July 19, 2012

More weird behavior in high frequency markets

Today's Coke and IBM markets are jumping every hour on the hour.  Does anyone know what the heck is going on? One guess received: another case of algorithms gone wild. But whose, and on the hour, exactly? And are there no humans left to counter this sort of thing? Looking at the google finance plot (source here) this started exactly at the open today and seems to have petered out. (Thanks Giovanni Puma for sending me the pictures.)

Update (Friday AM). Bloomberg article on it. They have no idea either, beyond suspecting an algorithm has a bug in it. But why can one trader move a large market so much?

Update 2 (Friday 10 am) Better coverage and better graphs in the Wall Street Journal, suspecting " a computer algorithm known as a time-weighted algorithmic program, or a TWAP. These programs are designed to parse trades out over a set period of time, helping explain the clockwork-like consistency of the trading. “I think some large institutional buyer is using a new algorithm,” mused Eric Hunsader, chief executive of market data service Nanex.

Translation, I think: this is a "fundamental buyer" (known as "liquidity trader" or "mark") trying to parcel a big position out by spreading the trade out through the day, using an algorithm to do so, and not really watching the results. Still... a puzzle to me why people use such algorithms. Randomizing is the only way not to get front run. And a bigger puzzle that markets for coke and IBM are effectively so illiquid in the middle of the day that even big mistakes can move prices. Stay tuned....