Financial Forensics

FINANCIAL FORENSICS

The Flash Crash of May 6, 2010 was the biggest one-day market decline in history. It saw the Dow Jones Industrial Average plunge by about 1,000 points—9 percent of its total value—only to recover these losses within minutes. A forensic investigation of this financial event conducted by the data analyst Nanex revealed that, in contrast to claims by US authorities, which put the blame on human trading, it was in fact trade orders executed automatically by algorithms that caused the crash. Nanex noticed evidence of market activity at fractions of milliseconds by analyzing the Flash Crash at a time resolution far quicker than conventional data records, which usually show one-minute trading intervals. Computer-based high-frequency trading is beyond the capacity of human experience or action. In order to support their claim, Nanex used otherwise secret trading data provided by Waddell & Reed, the mutual fund blamed for the crash. Here the traditional role of the expert witness is replaced by a collaboration between the forensic analyst and the renegade company, which joined forces to provide information in contravention of the industry’s unwritten law of secrecy.

Researcher

Gerald Nestler

 


Countering Capitulation

Countering Capitulation engages with the inquiries following the Flash Crash of May 6, 2010, an event that went down as the biggest one-day market decline in history. Focusing on a remarkable forensic analysis that not only contradicted the official findings of the regulatory authorities but also shed light on the impact of high frequency trading, Nestler argues that in the current legal framework, evidence of financial market events can only be produced by having two individuals share the role of expert witness: the forensic analyst joined by a renegade whistleblower. The video concludes with a call for renegade solidarity between the forensic analyst, the whistleblower, and the general public as the basis for an informed political debate on the effects of algorithmic trading, not just on financial markets but on society at large.

Both charts show E-mini S&P 500 index depth and cumulative Waddell & Reed contracts sold. Nanex’s findings contradict the official report issued by the SEC (the US Securities and Exchange Commission) and the CFTC (the US Commodity Futures Trading Commission) as regards the catalyst of the Flash Crash by showing that the bulk of trades by the mutual fund Waddell & Reed “occurred after the market bottomed and was rocketing higher—a point in time that the SEC report tells us the market was out of liquidity.”  Quoted from: May 6th 2010 Flash Crash Analyses: Continuing Developments: Sell Algo Trades, Nanex, October 8, 2010, http://www.nanex.net/FlashCrashFinal/FlashCrashAnalysis_WR_Update.html. Images: © Nanex, LLC.

Both charts show E-mini S&P 500 index depth and cumulative Waddell & Reed contracts sold. Nanex’s findings contradict the official report issued by the SEC (the US Securities and Exchange Commission) and the CFTC (the US Commodity Futures Trading Commission) as regards the catalyst of the Flash Crash by showing that the bulk of trades by the mutual fund Waddell & Reed “occurred after the market bottomed and was rocketing higher—a point in time that the SEC report tells us the market was out of liquidity.” Quoted from: May 6th 2010 Flash Crash Analyses: Continuing Developments: Sell Algo Trades, Nanex, October 8, 2010, http://www.nanex.net/FlashCrashFinal/FlashCrashAnalysis_WR_Update.html.
Images: © Nanex, LLC.

E-mini S&P 500 index depth and cumulative Waddell & Reed contracts sold. Images: © Nanex, LLC.

E-mini S&P 500 index depth and cumulative Waddell & Reed contracts sold. Images: © Nanex, LLC.

Nanex Flash Crash Summary Report, Nanex, September 27, 2010. This timeline graph distinguishes “the events that caused the crash from those that were effects of the crash. The main chart covers from 14:42:30 to 14:52:00 in 1 second intervals, and the inset covers from 14:42:43 to 14:42:46 in 25ms intervals.” Image © Nanex, LLC.

Nanex Flash Crash Summary Report, Nanex, September 27, 2010. This timeline graph distinguishes “the events that caused the crash from those that were effects of the crash. The main chart covers from 14:42:30 to 14:52:00 in 1 second intervals, and the inset covers from 14:42:43 to 14:42:46 in 25ms intervals.” Image © Nanex, LLC.

These charts by Nanex show the growth of high frequency quoting (left) and high frequency trading (right) 2008–2012. Nanex estimate that algorithmic trading accounts for 70% of trades and 99,9% of quotes. Hence, algorithmic trading constitutes market liquidity. The obvious conclusion: algorithmic trading machines have taken over. Images © Nanex, LLC.

This chart by Nanex shows the growth of high frequency quoting, 2008–2012. Nanex estimates that algorithmic trading accounts for 70% of trades and 99,9% of quotes. Hence, algorithmic trading constitutes market liquidity. The obvious conclusion: algorithmic trading machines have taken over.
Images © Nanex, LLC.

These charts by Nanex show the growth of high frequency quoting (left) and high frequency trading (right) 2008–2012. Nanex estimate that algorithmic trading accounts for 70% of trades and 99,9% of quotes. Hence, algorithmic trading constitutes market liquidity. The obvious conclusion: algorithmic trading machines have taken over. Images © Nanex, LLC.

This chart by Nanex shows the growth of high frequency trading, 2008–2012. Images © Nanex, LLC.

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