Spoofers Keep Markets Honest

http://www.bloombergview.com/articles/2015-01-23/high-frequency-trading-spoofers-and-front-running

by anonu • 11 years ago

52 29 11 years ago

Selfcommit• 11 years ago

I imagine the idea of spoofers could expand to other markets... Would it be crazy to say that things like piracy and knockoff goods keep other competitors honest? (In offering their best, most competitive, product)

woodman• 11 years ago

Would it be crazy to say ...

Yes, it would be crazy - because "spoofing" on an exchange is absolutely nothing like piracy or retail knockoffs. The only overlap is the reuse of the word.

cortesoft2• 11 years ago

Wait... how is piracy or a knockoff anything like the spoofing this article talks about?

evanpw4• 11 years ago

The real-world equivalent would be setting up a website that advertises some item for sale at a low price, and then getting some other seller to beat that non-existent price so you can buy it cheaply. Or, you're a realtor negotiating with someone who wants to buy a house, and you pretend that you have a dozen other people who also want to buy it, and who keep outbidding their offers.

synsynack• 11 years ago

But the order does exists, it is in the orderbook and is available for anyone to the market to trade against.

cortesoft2• 11 years ago

If this article is correct, I am guessing it is the front-runners who are leading the charge against the spoofers.

kasey_junk6• 11 years ago

A) This is not an article it is an editorial. An editorial written by someone who is highly vested in the buy side and who therefore has a clear bias against electronic market makers (which is obvious from the ridiculously incorrect usage of the term front running in the piece).

B) The piece is also factually incorrect on the way spoofers are making money on the trade. They aren't making money by tricking an HFT into jumping in front of the wrong order (which is not possible on any exchange that I know of). They are making money by hiding the true supply and demand of a product and then taking advantage of the other market participants who misprice based on the incorrect market information.

That said, electronic market makers are leading the charge against spoofers, as the spoofing trades are explicitly targeting them (and are currently illegal).

stygiansonic• 11 years ago

Tangentially related: The SEC case against Aleksandr Milrud [0], who recruited overseas traders who used keyboards with hot-key macros (or specially designed gaming keyboards with extra keys with a similar effect, the complaint isn't clear about this) to effectively implement a spoofing/layering strategy.

Matt Levine thoughtfully compares[1] this to the practice of gold farmers in China vs. using bots.

0. http://www.sec.gov/litigation/complaints/2015/comp-pr2015-4....

1. http://www.bloombergview.com/articles/2015-01-13/spoofers-tr...

fapjacks• 11 years ago

As mentioned elsewhere in the comments, this person has a keen interest in making people believe that spoofing should be legal. Trusting what this person is saying should be extremely hard through the taste of all that salt.

ArchD2• 11 years ago

Normal definitions of 'front-running' entails trading with non-public data. Anyone who describes HFT as front-running is not telling the truth and not to be taken seriously, because HFT generally has no more reason than slow trading to involve insider information. If your insider information is exclusive and rich, you don't even need HFT.

Retric6• 11 years ago

Depends on the time window. It's not that hard to gain a few fractions of a second in front of large trades, but it's much harder to have enough time for a human to react, thus the need for HFT to exploit such trades.

yummyfajitas• 11 years ago

Could you explain the mechanics in detail? From my days trading, I dont remember any matching engines broadcasting but delaying a quote based on volume (or anything else).

Normati• 11 years ago

It's hard to understand why spoofing would be illegal. If it fools traders who are relying on buy orders to judge the price, then why don't those traders just accept spoofing exists and not rely so heavily on the unfilled buy orders?

If it's illegal to cancel a buy order immediately after placing it, then perhaps exchanges shouldn't provide that facility? Perhaps there's some legal reason you would immediately cancel an order, and this action somehow doesn't destabilize the market or screw over other traders?

kasey_junk6• 11 years ago

Spoofing is illegal mostly because we said it should be. The reason we as a community decided it should be, is that we like that the markets are very good at finding accurate prices and spoofing is specifically built to prevent that.

To your points:

- Spoofers impact all orders, buy and sell equally.

- All market participants rely on the market to judge price, that's how the markets work.

- Market makers, who spoofers are targeting, have already stopped relying on unfilled orders (or more specifically they've gotten more sophisticated about predicting spoofing). This is very expensive and that cost is being passed on to everyone else in the market place. The problem is, what else should they rely on to determine the fair price of a security other than supply and demand?

Finally, spoofing is not about when you cancel an order. There is nothing illegal or even objectionable about canceling an order immediately after placing it. Spoofers put in orders over a wide period of time and then pull them all at once. Even that isn't in itself illegal or even objectionable, it's their intent when they put the orders in the book that is illegal.

erpellan• 11 years ago

It's interesting to think about what would happen if all restrictions from markets were removed. There would be plenty of order-stuffing and price shenanigans. One could argue that is happening already, just in a sophisticated way that avoids detection.

At least in an unrestricted market all the participants would know that that was going on. People who simply want to buy and hold, or sell a stock at the market price don't generally care about the noise. They can see the macro trend and trade accordingly.

Speculators (ahem 'liquidity providers')play their games with each other and price discovery happens. The issue with regulation is that it's a game of whack-a-mole with the regulators perennially trying to catch up with the players. Outlawing each new gaming strategy as it appears ends up with a raft of complex rules that can distort the market as much as the behaviour they're trying to prevent.

kasey_junk6• 11 years ago

It's interesting to think about what would happen if all restrictions from markets were removed.

We've lived in that world and know what it would look like. Read about the US equities markets prior to the 1910s. It wasn't great.

sell a stock at the market price don't generally care about the noise.

People who want to sell a stock at the market price care keenly about the noise, as the noise is what determines the market price.

Spoofers Keep Markets Honest

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