April 21, 2014

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Did a denial-of-service attack cause the flash crash? Probably not.

Last June I wrote about an analysis from Nanex.com claiming that a kind of spam called “quote stuffing” on the NYSE network may have caused the “flash crash” of shares on the New York Stock Exchange, May 6, 2010. I wrote that this claim was “interesting if true, and interesting anyway”.

It turns out that “A Single Sale Worth $4.1 Billion Led to the ‘Flash Crash’“, according to a report by the SEC and the CFTC.

The SEC’s report says that no, quote-stuffing did not cause the crash. The report says,

It has been hypothesized that these delays are due to a manipulative practice called “quote-stuffing” in which high volumes of quotes are purposely sent to exchanges in order to create data delays that would afford the firm sending these quotes a trading advantage.

Our investigation to date reveals that the largest and most erratic price moves observed on May 6 were caused by withdrawals of liquidity and the subsequent execution of trades at stub quotes. We have interviewed many of the participants who withdrew their liquidity, including those who were party to significant numbers of buys and sells that occurred at stub quote prices. …[E]ach market participant had many and varied reasons for its specific actions and decisions on May 6. … [T]he evidence does not support the hypothesis that delays in the CTS and CQS feeds triggered or otherwise caused the extreme volatility in security prices observed that day.

Nevertheless … the SEC staff will be working with the market centers in exploring their members’ trading practices to identify any unintentional or potentially abusive or manipulative conduct that may cause such system delays that inhibit the ability of market participants to engage in a fair and orderly process of price discovery.

Given this evidence, I guess we can simplify “interesting if true, and interesting anyway” to just “interesting anyway”.