Sunday, July 22, 2012

Some Quant Screwed Up

Last Thursday, a very non-typical hourly saw-tooth pattern emerged in several stocks. By the time we saw this mid-day, we were intrigued, with some message boards noting it. I don't know the provenance of this pattern, but suspect it was a poorly designed algorithm that was trying to buy some fixed amount at the hour until completion, and did this repetitively over the day in some newfangled VWAP attempt. It looks like it shot out stupid buy orders for the first 30 minutes of each hour.

Clearly someone screwed up, because after the second time this happens you should stop your stupid program and tweak it.

Here's IBM, Coca-Cola, and McDonald's price movements over that day. This isn't random.





  1. Anonymous5:23 PM

    Why didn't people front-run it? Fear that the buy program would be shut down? Even then the risk:reward seems highly skewed.

  2. You seemingly forgot AAPL.

    To the commenter above: possibly HFT didn't have the ability to detect such an anomalous pattern on such a sort notice. The capacity of this strategy would have been extremely small anyway.

  3. this is almost too funny.... perhaps the gods are playing a joke....

  4. Anonymous6:51 AM

    I don't think HFTs are equipped to deal with this sort of thing, but these are major stocks. Surely there are tons of discretionary traders looking at them...

  5. Mercury9:13 AM

    Clearly this is what price discovery looks like. In no way should something like this be construed as an attempt at market manipulation.

    I’ve seen up/down patterns like this before (usually with an increasing range) but over a much shorter time frame. That looks like someone is trying to mine sweep limit orders out of the way for some reason….clearing the field for a second, follow-on algo - who knows?

    But yeah, this one could be a VWAP buy program – ineffective in that he probably paid more than he needed to but effective in that he probably satisfied his compliance/cost analysis metrics (he may have even beat VWAP he helped inflate!) which is probably the only incentive that matters to him.

    It is surprising that such predictable price action lasted all day like that. Even the dimmest of the retail crowd can figure out how to ride those waves by noon.

  6. Anonymous4:44 PM

    Where is Taleb? He's gonna tell you you're being "Fooled By Randomness" lol

  7. Besides AAPL these stocks aren't heavily "day traded" as they are normally boring, non-volatile stocks. The pattern really took most of the day to play out and reaction of the crowd was more awe then seeking a profit opportunity.

  8. A better title for this post would be: A Bad Quant Got Lucky

    Only for McDonald's is there strong evidence of front-running...