Presenting The Quote Stuffing Trading Strategy Of The NY Fed's Favorite Hedge Fund: Citadel

As regular readers are well aware, when it comes to "more than arms length" equity market intervention in New Normal markets, the New York Fed's preferred "intermediary" of choice to, how should one say, boost investor sentiment aka "protect from a plunge", is none other than Chicago HFT powerhouse, Citadel.

Yet one question had remained unanswered: just how does Citadel manipulated stocks?

We now know the answer, and perhaps more importantly, it also links in to the true culprit behind the May 2010 Flash Crash, no not Waddell & Reed, but quote stuffing.

Most importantly, the revelation that for Citadel quote stuffing is not just some byproduct of some "innocuous" HFT strategy, is that none other than the Nasdaq has now stated on the record, that the most leveraged hedge fund (at 9x regulatory to net assets), and the third largest after Bridgewater and Millennium, used quote stuffing as a "trading strategy."

One wonders: did Citadel (with or without the Fed's urging) also have something to do with the infamous and biggest (to date) May 2010 market crash and subsequent surge - and was it merely a test for something else?

We hope to bring readers the answer soon, in the meantime here, courtesy of Nanex, is all you wanted to know about Citadel's quote stuffing strategy:

The Quote Stuffing Trading Strategy

On June 16, 2014, Nasdaq posted a Disciplinary Action against Citadel Securities, LLC (CDRG) which was similar to one posted by FINRA on June 12, 2014 (and we wrote about here). Usually, exchange disciplinary actions are identical to FINRA's except for name changes, however in this case, there was one paragraph in the Nasdaq action missing from FINRA's. And not just any paragraph, but the most stunning revelation about Quote Stuffing to date. Let's read through it:

The paragraph states that Citadel was sending excessive orders (Quote Stuffing) as a trading strategy 3 separate times.

This was not a glitch or human error, it was an intentionally programmed trading strategy!

If there was a glitch, it would be from from a human mis-configuring a parameter, allowing the Quote Stuffing trading strategy to blast orders at rates much higher than 200 per second. Is placing and cancelling 200 orders per second excessive? This depends on whether they are spread out evenly over the entire second (1 every 5 milliseconds), or if all 200 are sent in one 5 millisecond burst and then silence for the remaining 995 milliseconds. If sent in a burst, the impact on networks and trading systems is significantly higher than if spread out evenly (see Latency on Demand and Direct Feed Slowdown). Furthermore, a burst followed by quiet wouldn't be detected by exchange monitoring software looking at traffic at one second resolution or higher (most internet monitoring software looks at 5 minute averages!). This isn't theoretical, it's real and we have documented many examples, such as this one here.

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