Oh the weird and wonderful charts of Nanex.
Here’s the latest one from the market data analytics firm (click to enlarge):
In Nanex’s opinion this is one of their most amazing and clear images yet.
Although, as usual, it probably needs a bit of an explainer.
What you are looking at is what Nanex calls the ‘NBBO flutter’. The NBBO represents the National Best Bid and Offer in the US stock market at any particular time.
If a stock is highly liquid the bid-offer spread usually has a tendency to stay relatively stable. The NBBO spread on the SPY, for example, generally keeps within one cent even during active trading, says Nanex’s Eric Scott Hunsader. Predator HFT algorithms, however, have a tendency to disturb that stability.
As he notes:
However, if certain destabilizing HFT algorithms run in a stock, the NBBO will begin to flutter, and within a single second, the spread may go from 1 cent to 2 cents, or 10 cents, or 20 cents or more.
There are multiple causes of NBBO fluttering such as: poorly written algorithms, gaming or confusing smart order routers, quote stuffing other algorithms or humans, exposing other algorithms, exposing buyer/seller interest, overwhelming the audit trail, stuffing exchange networks to slow updates for other symbols, and other explanations.
What’s worrying, of course, is that the chart — the result of Nanex processing some 650 billion quotes over 1,516 trading days for US equities from January 1, 2006 to January 30, 2012 — shows how the NBBO is becoming increasingly unstable over time. Especially at the open.
The graphic represents the first 19 seconds of every trading day in the period, highlighting the number of stocks featuring a stable NBBO spread in those seconds. The “cooler” the colour the older the data.
The concentration of red at the very bottom of the left hand-side is perhaps the most worrying trend. Market quotes at the open are essentially hugely unstable on a historic basis.
As Nanex notes:
The colors of the lines creates a near perfect rainbow as the percentage of stocks with a stable NBBO gradually falls from 90% to 35%.
Of course, if you don’t find that information interesting, you can always cut out and use the Nanex chart as wall art. We hear Kashya Hildebrand is calling for a USD/CHF analysis herself*.
*Not really. Though Eric Scott Hunsader informs us he has had calls from other artists and exhibitors in all honesty.
Related links:
The 15:00, 15:50 and 15:59 effect – FT Alphaville
Beware the market spam - FT Alphaville