Why Is Spoofing Bad?

http://www.bloombergview.com/articles/2015-04-22/why-is-spoofing-bad-

by dsri • 11 years ago

38 52 11 years ago

Lorento• 11 years ago

His argument seems to hinge on the claim that fundamental investors need to be able to trade large amounts without affecting the price. He backs it up with the claim that some traders see that as a fundamental human right. Is it really important?

tptacek4• 11 years ago

There can't possibly be a right to trade large numbers of shares without moving the price, that of course being the whole point of a market.

Dylan168075• 11 years ago

Without moving the price outside of the direct effect of applying the trade to the order book.

In other words, the prices everyone else offers do not change based on your purchase. They are based on an assessment of the company, not based on exactly how much you are willing to pay for stocks minus .01 cents.

(Yes there are gray areas, but as a principle it's valid.)

hudibras• 11 years ago

Levine is being sarcastic about the "fundamental human right" part, by the way.

kweinber6• 11 years ago

Spoofing is bad because it allows you to lie about your intentions in a system that is supposed to give true price transparency.

This would all be corrected if the exchanges charged money for cancelled orders. These traders are placing orders on a massive basis at prices they never intended to honor in order to get the exhanges to transmit these fake prices and trick others into action. (Often cancelling 100x the orders they transact). This is called "price-fraud", "spamming", and "market manipulation" in other parts of the economy.

Exchanges should charge a transaction for orders when they are placed... Not solely if they are executed. It is actually a fairer system since exchanges have to bear the cost of transmitting prices, volume, book depth, etc. on order placement... It could actually drive transaction fees down for those who cancel infrequently too (people trading for true commercial purposes) since the exhanges could average down thr cost of their transactions with mass-cancelers and they can trade with better information.

Oh, and unloading or buying large blocks of stock SHOULD move the market... by definition. Allowing people to mask that is a manipulation as well.

kasey_junk13• 11 years ago

People use the term spoofing in an overloaded way:

1) As this article describes, spoofing is the use of orders to change the perception of the supply and demand of an instrument. It is often also called layering (a term that is also overloaded). It does not involve mass amounts of orders or cancels. In fact, good spoofers go to great lengths to make their order flow look identical to someone who has regular trading intentions.

2) Spamming lots of orders into an exchange for some nefarious purpose (I've heard this described as a DDoS on the exchange). Which is both widely over reported (to the point that I believe it is largely urban myth) and trivial to detect and prevent on the exchange side (the exchanges know exactly who is sending the orders, the specific order gateways have rate limits, etc).

Finally, exchanges do penalize market participants that cancel too many orders. This is typically done via a fill ratio (the % of orders to those that trade) and enforcement can be either in the form of price levels, fees or potentially banning from the exchange.

yummyfajitas3• 11 years ago

To make it more complicated, there are people who run bargain hunter strategies - people who deliberately place orders way outside the NBBO in the hope of getting fills at really good prices. E.g., I'll buy TWC at $140 but not it's current $148.

This is functionally identical to spoofing except that these people are explicitly hoping to get a fill. (Hence it's legal.)

dm3• 11 years ago

There's an argument for spoofing from earlier this year [1] which I would tend to agree with if the proportion of spoofers and HFT front-runners actually balanced out. Not sure how it really is in reality though.

[1] http://www.bloombergview.com/articles/2015-01-23/high-freque...

kasey_junk13• 11 years ago

From what I can tell, the argument for spoofing devolves pretty rapidly into an argument for private order books (that is prices are not published at all).

This is available currently in the form of dark pools. They don't tend to work out as liquidity is much lower on them and bid/ask spreads are wider.

That may not be true if ALL venues were required to be private, but that would be a pretty dramatic change (and exactly the opposite of what we have now, which is a requirement to publish and meet other published prices).

bko2• 11 years ago

Intentions are hard to prove and are very subjective. Big financial players who believe they are being exploited by smaller players who game their algos can lobby the regulatory bodies to punish those smaller players. This contributes to an ever increasing concentration of power in the financial sector to the large, too big to fail banks.

It's the reason that, even after tens of billions of dollars in fines, there have been no criminal cases brought against those in the big banks, while this guy faces a maximum sentence of 380 years if found guilty on all charges [0]

Spoofing is best handled by the particular exchanges but should be weighed against the harm it would do to honest market makers who have to place and cancel orders regularly

In looking at Mr. Holder’s legacy in white-collar crime cases, the pursuit of corporations, especially banks, stands out. The highest settlements for violations have come in the last year. These include the $13 billion from JPMorgan Chase and the $16.65 billion from Bank of America for their roles in issuing mortgage-backed securities tied to faulty subprime loans. BNP Paribas also paid a $9 billion fine for violating economic sanctions laws. BNP was also required to enter a guilty plea to a criminal charge, a rarity in the world of corporate criminal prosecutions. But prosecutors did not file charges against any individuals for the wrongdoing that led to the large settlements. [1]

[0] http://www.telegraph.co.uk/finance/financial-crime/11554471/... [1] http://dealbook.nytimes.com/2014/09/29/eric-holders-mixed-le...

kweinber6• 11 years ago

HN should require a signed comment when you downvote.

My comment is getting hammered with downvotes now.... And I don't know why... I'd hate to assume that people just want to bury a simple, fair solution to the problem without any justification.

maxerickson• 11 years ago

Please don't complain about downvotes...

mmodahl• 11 years ago

Because it is not a simple or fair solution to the problem; it is a sophomoric attempt at solving a human problem that simultaneously guts the actual mechanics of exchanges.

You want to make market-making unprofitable and to turn the stock market into your town's real estate market. How easy is it to sell a house? What is an accurate price for your house? At this moment? To the dollar?

solve4• 11 years ago

The intention of a trader on these kinds of markets is to make money. End. Telling him that you'll arrest him, or that he should feel bad, if he doesn't have the intentions and morality you want him to have - does absolutely nothing to change his intentions.

Markets work, despite this incredibly misaligned incentive, because markets can eventually reward people who are eventually more correctly predicting the future value of the assets.

FYI - your usage of the phrase "true price" makes me strongly confident that you totally misunderstand markets.

yummyfajitas3• 11 years ago

Nasdaq has an excessive messaging policy and charges the exact fees you suggest.

http://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing

kweinber6• 11 years ago

Fees only kick in if you cancel 100x the orders than you actually execute. And then you only pay half a cent per order over that limit.

I was suggesting something much more like a txn fee per order closed above a much tighter threshold (like 3x)

And none of those limits currently apply to registered market makers... And I agree with their exemption from the harsher rule too, but they should bear increased scrutiny and guaranteed liquidity rules for the privilege.

ghshephard• 11 years ago

I find it hard to belief that this concept of "Spoofing", which so many knowledgeable and expert people are debating as to whether it's a good or practice, could be considered "illegal."

kasey_junk13• 11 years ago

It is illegal, everyone who trades knows it is illegal, and it has been illegal for a very long time (long before HFT was an accepted concept)/

tcbawo• 11 years ago

Also, exchanges stand on the side of anti-spoofing because they don't make money with canceled orders (apart from co-lo/access fees).

runj__• 11 years ago

There's an interesting argument for insider trading being legal, the basic idea is that it helps propagate information faster than it would if people just keep the information to themselves and results in a more fair stock price at any given time. Which is sort of the argument for why HFT is legal.

bko2• 11 years ago

The most convincing case I heard for making insider trading legal was in a 2003 Wall Street Journal op-ed [0].

[0] http://www.wsj.com/articles/SB104786934891514900 (Paywall) [1] https://www.google.com/#q=%22the+case+for+insider+trading%22 (Google search results, top result)

nhaehnle• 11 years ago

The flip side of this is that publishing information is a better way to transmit information than placing orders on an exchange by many orders of magnitude.

If insider trading is legalized, the incentives are stacked even further towards intransparency in corporations, because it gives management yet another reason to try to hide what is going on. That will lead to more information being hidden on purpose. Sure, some of that information leaks back out via orders and price movements, but at least to me it seems overly optimistic to hope that the overall amount of publicly available information increases.

solve4• 11 years ago

His only big mistake was to not use the obvious loophole that traders have been using for decades - put some kind of slightly black-box automated system between you and the market. Train that system to do what you want, but now it's being done in a way that takes some of the fine-grained control and responsibility away from the human.

Exact same end-results, but it eliminates the human "intent" that this law hinges on.

Is this whole controversy really that dumb? Yes.

Why are hackers and engineers so horrible at understanding trading, when they first get into it? If I had to name one reason - it's because they've been trained for their whole lives to assume that there is such a thing as a "real price". There is no "real price" for anything in the world. There is no one in the world that has some inside access to the mythical "real price".

At the surface level, both fields have many similarities, but unlike the engineering problems you've always dealt with, there is no clear undeniable truth that will be eventually uncovered with enough work. Assume that's true, now carefully consider the implications. If you can do that, you've crossed the most difficult mental gap when transitioning from engineering to trading.

kasey_junk13• 11 years ago

Except that fully hft strategies have/are also being pursued for spoofing as well.

solve4• 11 years ago

You say it as if lawyers pursuing investment firms for every reason imaginable is a new thing.

fixxer2• 11 years ago

The idea that one trader caused the flash crash is absurd.

Every professional trading operation uses such strategies to shift the book, the large banks and funds especially.

One guy? I feel like I am living in a fucking cartoon.

lordnacho• 11 years ago

Good points in that article. He's spot on about the fundamental players; they want the market to be inefficient so they can make up the difference when it goes to the right value, and they don't want to leak their decisions that they've paid a lot of money to come to.

To add complexity, it's not necessarily the case that someone who almost never trades is spoofing, or that they don't want to trade. Consider a simple strategy: I am willing to offer GE shares at 20.00 if the the wider index is trading at 100. In fact because there's some sort of relationship (real or imagined) I'm happy to sell as long as I get more than 1/5 of the index price for my GE shares. I'm also willing to buy on a similar ratio.

Now every time someone trades some other share, the index will move. And I will have to move my price.

The thing with spoofing is a spoofer doesn't want to trade. They just want to raise until everyone else folds. Just like in poker, it creates noise in the market. How exactly you prove that is hard to say.

Another thing, related to manipulation: you can move the market by actually trading as well. Especially if you're a big guy. I can't count the number of times (normally around expiry) when the index has moved unnaturally only to come right back. I think guys are getting done for this now, and it's about time.

fixxer2• 11 years ago

Spoofing involves a substantial amount of risk. You can get lifted/hit, in which case you're on for size in a trade you never wanted.

xedarius• 11 years ago

I was reading some of the enhancement requests Navinder asked his broker firm to build into his trading application. Here's a quote from the FT.

"He said he would “like to be able to alternate the closeness ie one price away or three prices away etc etc”, and needed “a facility to be able to enter multiple orders at different prices using one click” and a function that would cause his “order to be pulled if there are not x amount of orders beneath it”, according to the DoJ’s criminal complaint."

He also asked for a feature that would allow him to cancel on closeness, so if the market price started drift close to his buy/sell price he would cancel.

Now the interesting thing about thing about these features is that if you've ever worked at an investment bank, these features are not dissimilar from the kinds of requests you would get from trading desks.

For example, there are a number of algos out there that try to stay second on the order book. They may not cancel the order, but widening a spread is effectively the same thing.

As for a country with limitless resources hunting down an individual for playing the game and winning is farcical. They should be thanking him for highlighting how ludicrously vulnerable their market place is.

Why Is Spoofing Bad?

Related Stories