HFT Firm Faces Charges For Causing “Oil Trading Mayhem”
by ilene - August 25th, 2010 12:59 pm
HFT Firm Faces Charges For Causing "Oil Trading Mayhem"
Courtesy of Zero Hedge
Could the tide finally be turning on the high frequency churners-cum-manipulators? In an exclusive report, Reuters informs that "a big high-frequency trading firm faces possible civil charges by regulators after its computer ran amok and sparked a frenzied $1 surge in oil prices in February, according to documents obtained by Reuters and sources familiar with the continuing investigation."
The firm in question is Infinium Capital Management, which confirmed that it is the company at the center of a six-month probe by CME Group Inc into why its brand new trading program malfunctioned and racked up a million-dollar loss in about a second, just before markets closed on February 3. And yes, once all is said and done, it will be precisely this kind of algos gone wild that are found to have caused the much more devastating move on May 6, as we have been claiming all alone, and which the HFT lobby has been fighting tooth and nail to bury under the rug.
The glitch explains for the first time the lightning-quick oil-trading surge of that day — and it may have been a catalyst for the abrupt and largely unexplained $5 slide amid record volumes the following two days.
The firm’s buying frenzy also reveals how faulty computer codes, known as algorithms, can spark sharp volatility and send electronic markets spinning all in the blink of an eye.
Futures exchange operator CME Group is looking into the incident, which occurred at the New York Mercantile Exchange and highlights some of the same electronic-trading concerns raised by May’s "flash crash" in the U.S. stock market.
The specifics on the actual trade:
Infinium, a household name in Chicago’s burgeoning trading community, relies on computer horsepower and quantitative models to earn razor-thin profits from short-term trading. It uses its own money to make markets and capitalize on tiny imbalances, a common high-frequency strategy.
The documents, dated March, reveal that Infinium used an algorithm that was less than a day old to execute a "lead/lag" strategy between an exchange-traded fund called United States Oil Fund, 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 February 3, less than four minutes before NYMEX closed floor trading and settled oil prices. It