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Highlights of how Infinium algo quant high frequency trading HFT ‘manipulated’ oil which went out of control within 5 seconds

(Last Updated On: November 13, 2010)

Highlights of how Infinium algo quant high frequency trading HFT ‘manipulated’ oil which went out of control within 5 seconds

Here are some details from this article when oli plunged 4 per cent one day:

Five seconds after the firm turned it on, they had to turn it off. The algo “choked,” after it had already flooded the oil market with orders that made up 4 percent of average daily trading volume in the contract, and caused a brief 1.3 percent jump in oil prices, from $76.60 to $77.60.

The firm turned on the algo on February 3rd 2010 just before close. The following day, perhaps because the orders were unexplained, there was a 5 percent plunge in oil prices. And the day after that, crude fell further, to $71 a barrel, and volume touched a then-record high.

This case is fascinating because the faulty algo’s strategy is explained in detail. Firms are very secretive about what strategies their algos are designed to execute. So we’re lucky to witness an open investigation like this in which an algo is dissected.
From Reuters:

[Infinium Capital Management used a brand new algo] to execute a “lead/lag” strategy between an exchange-traded fund called United States Oil Fund (USO.P), which tracks oil prices, and the U.S. crude benchmark future, West Texas Intermediate.

The algorithm was turned on at 2:26:28 p.m. (Eastern) on Feb. 3, less than four minutes before NYMEX closed floor trading and settled oil prices. It immediately started uncontrollably buying oil futures, according to the documents, which include letters from Infinium’s lawyer to the regulation unit of CME Group, and cite notes from a company developer.

Infinium placed 2,000 to 3,000 orders per second before its flooded order router “choked” and was “dead in the water” a few seconds later, the developer’s notes said. The algorithm was shut down five seconds after it was turned on.

By then, the documents show, the firm had sent 4,612 “buy limit” orders into the market. It quickly offset the position, mostly with large “block” trades in the next few minutes, leaving it with a $1.03-million loss. Infinium’s burst of buying and selling represented about 4 percent of average daily trading volume in the contract, and caused a brief 1.3 percent jump in oil prices, from $76.60 to $77.60, before settling at $76.98, Reuters data show.

Trading volume spiked nearly eight-fold in less than a minute — and the reverberations turned some heads.

The next day, Feb. 4, commodities traders struggled to explain a 5 percent plunge in oil prices, the biggest one-day drop in half a year. On Feb. 5, crude fell further, to $71 a barrel, and volume touched a then-record high.

Infinium’s mistake might be compared to just a fat finger, but they’re currently being investigated for market manipulation (although they probably won’t be found guilty of it). The person or people who designed the algo are no longer at Infinium.

Read more: http://www.financialpost.com/news/business-insider/Details+algo+gone+wild+that+caused+trading+mayhem/3442414/story.html?goback=.gde_2107793_member_29378681#ixzz159y59tSz

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