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The Setup

Assume the inside market is $15.15 \times 15.16$ and there is a very large bid order imbalance. For example, 30,000 shares bid across 100+ orders, 200 shares offered across 1 order; however, it is not always this extreme.

Approximately 10-1000$\mu$s prior to a tick up I've seen numerous occasions where a single order is "flickered" at the bid very quickly. By flicker I mean an order with the same size is quickly added and canceled, over and over again.

The flickering persists until the spread widens and the market goes to $15.15 \times 15.17$. Orders then rush to improve the bid to $15.16$ narrowing the spread back down to $0.01$. I've noticed that an order with the same size as the order being flickered at $15.15$ joins the new bid level very quickly after the tick, often achieving a queue position of 3 or better. Sometimes the new level is joined with an $Add Order$ and sometimes with a $Replace Order$, presumably to coincide with the state of the order being managed at the time of the widening of ths spread ($Add Order$ if the order was deleted immediately prior the widening, $Replace Order$ if the order was added immediately prior to the widening).

Additional observations and notes:

  1. While the flickering is happening the market is relatively quiet making it easy to "see" the effect if one is scanning data visually.

  2. The venue involved seems to always be INET (Q). At least, when I have noticed or gone looking for the flicker this is where I always see it. I've not done an exhaustive search.

  3. In line with the above, I've not searched across more than CSCO for the flicker. It may behave differently (or not be present) in other symbols.

My Question and Ideas

What purpose does flickering the order serve? Or perhaps it serves no purpose and it is simply an order execution algorithm unsure about where to place the next bid?

It would seem to be disadvantageous to do this because it resets the priority of your resting bid. Granted, the tick up is very probable given the imbalance at the inside, but it is not guaranteed. Further, resetting priority works against the trader if the midpoint reverts quickly after the tick up.

Perhaps there are latency advantages to doing the flicker, but I can't puzzle out what they might be. One could simply leave their order unmolested, wait for the tick, and proceed to do a $Replace Order$ improving the bid and joining the new level. However, perhaps there is a small latency advantage to using $Add Order$ over $Replace Order$ on INET and the flicker allows the trader to sometimes be able to do this: use $Add Order$ if the tick happens immediatley following a $Cancel Order$, and the flicker serves to allow the trader to stay at the bid while hoping for the right timing of the tick.

Finally, some might suggest quote stuffing, but the amount of traffic generated by this one order is inconsequential in the grand scheme. No ticker plant worth its salt would care about a few hundred more messages that might be caused by this flicker.

What other possibilities are there? What's the best motivation to flicker an order in this fashion? Of course there is the simplistic explanation of: it serves no purpose and happens due to negligence (bug in the trader's software) or is meant to be confusing, and without a better explanation I suppose I must accept this. However, I'm curious if there is a more positive motivation for this order execution behavior.

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Does the quote flicker after the tick up? Or does it rest on the book waiting for execution? (I knew by the third paragraph that the venue had to be NASDAQ since most other exchange operators will get quite irritated by rapid cancelations like this.) –  chrisaycock Nov 17 '12 at 16:58
    
No, the quote stops flickering after the ask gives way and the spread widens. –  Louis Marascio Nov 17 '12 at 17:10
    
Another follow-up: Does the canceled quote reappear momentarily at $15.14$, or is this an out-right cancel? (I assume this order is not being removed because of an execution.) –  chrisaycock Nov 17 '12 at 17:43
    
No, I don't believe so. I just spot checked a few instances and did not see a case where the orders alternated back one level. They stayed at the current bid level. There are no executions, it is an out-right cancel. –  Louis Marascio Nov 17 '12 at 17:53
4  
The flickered orders are postonly bid at 15.16. The exchange slides it back to 15.15 to avoid a locked market. Submitting firm sees the slideback and cancels. Then tries again. When the 15.16 offer is executed or cancelled out, the offer moves to 15.17 then the postonly bid at 15.16 goes through at the targeted price and gains good queue position. This tactic is pretty well known, not a mystery. –  Kevin Schmit Nov 18 '12 at 7:01

1 Answer 1

up vote 8 down vote accepted

The flickered orders are postonly bid at 15.16. The exchange slides it back to 15.15 to avoid a locked market. Submitting firm sees the slideback and cancels. Then tries again. When the 15.16 offer is executed or cancelled out, the offer moves to 15.17 then the postonly bid at 15.16 goes through at the targeted price and gains good queue position.

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This sounds interesting. Why the cancelations though? If I fire a cancel, and during transmission the opposing 15.16 offer is pulled, then I have to wait until my execution report before I can send my new order. This seems like it would slow me down. Why wouldn't I just submit the post-only bid at 15.16 and leave it? After all, if I happen to get executed at 15.15 when I was willing to buy at 15.16, then that's an even better scenario than any queue position could provide. (This answer is definitely worthy of an up-vote, so +1 and welcome to Quant Stack Exchange!) –  chrisaycock Nov 19 '12 at 12:35
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The post only order is treated as Price to Comply when it would lock/cross another protected quote it is booked at 15.16 but displayed at 15.15. If the order isn't re-entered at 15.16 then all displayed bids that join the new level at 15.16 will have priority. There really is no hope of execution at 15.15 given the state of the market, at least not in the immediate future since the tick is "imminent". OUCH ports can be configured to automatically re-enter Price to Comply orders that were slid for this reason to avoid the add/cancel spam. I'm not sure why this trader doesn't use that feature. –  Louis Marascio Nov 19 '12 at 14:06
    
I read the Price Sliding Factsheet. It mentions "Price to Comply orders that are automatically re-entered by their OUCH port will maintain priority among other similarly price slid orders, but are not guaranteed time priority over other incoming orders at the same price level". So is he trying to place orders instead of configuring the ports to replace, in order to gain time priority. How does this work? How can new orders gain time priority? –  shoonya Feb 22 '13 at 4:55

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