The changes, which researchers describe as 'fractures', could be key to understanding what causes stock market volatility and crashes.
They could also offer an 'early warning system' for when the markets are becoming unstable. The "fractures" occur so quickly they would be invisible to any human trader, existing in a world of computerised trading algorithms which make trades in milliseconds.
HFT techniques have long been suspected of causing sudden meltdowns such as the one day flash crash on 6 May 2010; the volatile period after the loss of the US AAA credit rating in August 2011; and the recent "melt-up" in the markets after October 2011, which seems to defy the reality of domestic economic fundamentals.
Now, a study analysing price logs from 60 markets provided by Eric Hunsader, CEO of Nanex, a firm who are by far the best forensic analysts of everything that is busted with the US stock market, have completed a masterpiece analysis showing the churning (packet traffic) "fractures" across the spectrum of US market venues, from the NYSE, Nasdaq to BATS and so forth, on a daily basis beginning in January 2007 and continuing through today. It uncovers the explosive impact of HFT in daily trading volumes, exposing the weird patterns high frequency traders make when they trade.
What is stunning is the first animated confirmation (hat tip: ZeroHedge) of the market terminally breaking on August 5, 2011, the day the US was downgraded. It just shows how bad things are in graphic format. (click on graphic to enlarge)
Which begs the question: what really happened in the stock market on August 5, 2011 when the US was downgraded to AA+, when everything literally broke, who is intervening constantly in the stock market, and why are they doing so via various HFT intermediary mechanisms?
These changes could build up in the financial system in much the same way as an accumulation of cracks in an aircraft's wing.
Something is starting to break open...a war of the algorithms is underway...high-speed trading is outpacing high-speed regulations...an investment Judgement Day is on the horizon as Skynet and the machines have taken over.
Eric Hunsader, the guy who has a big prediction about the next, there will be a next, he says, flash crash. He told Forbes it'll be caused by someone on purpose. However, developing his analysis techniques into methods or tools for reliably predicting crashes is a very appealing prospect. This work could turn out to be a major step in that direction.
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