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)
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.
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.
I think you can make an argument that spoofing should be legal (if for no other reason than for how hard it is to enforce). But if you are going to do that, you need to also require uniquely identifying information on the orders in the book as well. This way the market itself can accurately assign a value to the likelihood of being able to actually trade with a counterparty.
If an order comes from an entity with a reputation and history of yanking the order before anyone is able to trade with it, then the other participants in the market can accurately price based on that information.
But the current status quo of letting orders be anonymous and not punishing spoofing regularly provides a real moral hazard for traders that would otherwise prefer to actually trade the volumes they say they want to.
You're absolutely right that there's some risk involved in order-book spoofing, but the intent is the same as the examples I gave. In practice, the spoofers reduce their risk by doing things like placing a tiny order first to see whether it will get executed [1], or layering the book at prices worse than the current best bid / ask. (For the record, I don't think we should be throwing people in prison for this sort of thing.)
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).
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.
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.
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.
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.
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).
As I understand it there are lot's of ways this happen. The simplest to understand is badpsed on there being multiple semi autonomous exchanges. If a trade is to large it ends up being sent to another exchange. If it's large enough it's going to move both exchanges. Doing the liquidity calculation to predict such trades takes less time than the trade takes on the fist exchange letting someone get there order in the second exchange before the first order propagates.
If the information that enables "front-running" is available from public exchanges through standard channels, it's still public information, so the "front-running" isn't really front-running. Besides, those big orders could be sent as multiple IOC orders in order to not reveal one's hand, or executed as multiple small orders.
However, I'm not saying "spoofers" should be punished either. The SEC construing (divining?) the "intent" of a soulless automaton to me falls in the realm of not-even-wrong.
Most of this gets really technical, however the idea that you can see an order and get a ahead of it is clearly front running even if it's legal. The issue is exchanges have an incentive to sell "early" access to information so generally people do X for a while, that becomes illegal or the people being taken advantage of swap to another approach.
I just described one approach where than can happen.
All exchange access is "early" access. There is no way to stop latency advantages.
There is no need to publish pending transactions in such a way that you can get your executed on a different exchange before that one propagates.
Anyway, exchanges are an incredibly complex problem with a lot of perverse incentives. However (ed: IMO) any trading strategy based on implementation details is counter productive to a free and open market and thus it harms the U.S. economy.
> I just described one approach where than can happen.
And I'm telling you what you described can't happen. So either you don't understand what is happening or are not describing it well.
>There is no need to publish pending transactions in such a way that you can get your executed on a different exchange before that one propagates.
Luckily that does not happen.
> However any trading strategy based on implementation details is counter productive to a free and open market and thus it harms the U.S. economy.
This is demonstrably not true. If a trading strategy brings the prices between exchanges into rationality faster or cheaper than it could be done by a single exchange or by coordination between existing exchanges is very productive and useful to all market participants.
Pending transactions are never public. Everyone sees the execution on that exchange, but they don't know whether or not some additional portion is being routed to another exchange.
One situation that people often _mistake_ for this type of prior knowledge is the following: You are a market-maker, and at the current price, you want to buy X shares (you're also willing to sell at some slightly higher price, and willing to buy more at some lower price, but at the current bid, your appetite is X). Since the US equity market is very fragmented, the best way to make that happen is to place an order for X shares on all of the dozens of different venues, and hope one of them gets executed. When your order on one venue gets executed, you want to cancel your orders on all of the other venues quickly so that you don't get overfilled and accidently buy more than X. If you're a person who's trying to sell 2 * X or 3 * X shares, and the price moves down after you sell the first X, it may look like someone knew about the rest of your order and sold ahead of you, but it's actually just the market-maker trying to control their inventory.
(Bad actor 1): Gee, but if they where I could get 1 billion dollars.
(Bad actor 2): no, We could get 1 billion dollars.
(Bad actor 1): I like 1 billion dollars.
The point being it's often hard to steal 100's of Millions of dollars without someone noticing. But, front running like insider trading is one of the ways to do so.
I don't quite understand this argument. I certainly agree that front-running of the kind you describe would make someone a lot of money. This is one of the reasons that being a NYSE specialist was hugely profitable back in the pre-electronic era. I'm making the statement that this sort of thing is in fact no longer possible on on any U.S equities exchange.
I think I was talking past people. The original post I responded to said: If your insider information is exclusive and rich, you don't even need HFT
My comment was there is a range of vary short term insider information that you need HFT to benefit from. That does not mean that anyone does so, just that it's something that regulators should and probably are on the lookout for.
One of the primary strategies I used as a day trader about 10 years ago is what this article describes as front-running (it is not front-running, because front-running is also illegal). While the terminology may have changed since I was trading, the way it works is this.
When a large market order is placed with the exchange, the specialist (NYSE) would not have enough inventory to fill the entire order. What they would do is go up the book and start combining higher limit orders to fill the volume. He would also partially fill it with his own shares. This was how the specialist made a lot of their money (I imagine) because it allowed them to fill orders outside the market rate.
What we would do as day traders is as soon as we saw a large order like this occur, we'd start placing orders outside the market rate on the other side, hoping to get filled when the specialist combines the whole trade at one price. Once that happens, we can then sell that back to a market maker (at the market rate) or wait until the price moves back.
A few years after I stopped, the NYSE moved away from a specialist system (NASDAQ was never on one). I haven't followed the state of affairs since. I imagine the same thing still happens now, but only you have to be much much faster to play the game with the hybrid/computer market makers.
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?
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.
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.
30 comments
[ 2.8 ms ] story [ 77.8 ms ] threadYes, 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.
If an order comes from an entity with a reputation and history of yanking the order before anyone is able to trade with it, then the other participants in the market can accurately price based on that information.
But the current status quo of letting orders be anonymous and not punishing spoofing regularly provides a real moral hazard for traders that would otherwise prefer to actually trade the volumes they say they want to.
[1] http://www.bloombergview.com/articles/2014-10-02/prosecutors...
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).
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...
However, I'm not saying "spoofers" should be punished either. The SEC construing (divining?) the "intent" of a soulless automaton to me falls in the realm of not-even-wrong.
No one gets to see an order and get ahead of it.
> The issue is exchanges have an incentive to sell "early" access to information
All exchange access is "early" access. There is no way to stop latency advantages.
I just described one approach where than can happen.
All exchange access is "early" access. There is no way to stop latency advantages.
There is no need to publish pending transactions in such a way that you can get your executed on a different exchange before that one propagates.
Anyway, exchanges are an incredibly complex problem with a lot of perverse incentives. However (ed: IMO) any trading strategy based on implementation details is counter productive to a free and open market and thus it harms the U.S. economy.
And I'm telling you what you described can't happen. So either you don't understand what is happening or are not describing it well.
>There is no need to publish pending transactions in such a way that you can get your executed on a different exchange before that one propagates.
Luckily that does not happen.
> However any trading strategy based on implementation details is counter productive to a free and open market and thus it harms the U.S. economy.
This is demonstrably not true. If a trading strategy brings the prices between exchanges into rationality faster or cheaper than it could be done by a single exchange or by coordination between existing exchanges is very productive and useful to all market participants.
One situation that people often _mistake_ for this type of prior knowledge is the following: You are a market-maker, and at the current price, you want to buy X shares (you're also willing to sell at some slightly higher price, and willing to buy more at some lower price, but at the current bid, your appetite is X). Since the US equity market is very fragmented, the best way to make that happen is to place an order for X shares on all of the dozens of different venues, and hope one of them gets executed. When your order on one venue gets executed, you want to cancel your orders on all of the other venues quickly so that you don't get overfilled and accidently buy more than X. If you're a person who's trying to sell 2 * X or 3 * X shares, and the price moves down after you sell the first X, it may look like someone knew about the rest of your order and sold ahead of you, but it's actually just the market-maker trying to control their inventory.
Pending transactions are should never be public.
(Bad actor 1): Gee, but if they where I could get 1 billion dollars. (Bad actor 2): no, We could get 1 billion dollars. (Bad actor 1): I like 1 billion dollars.
The point being it's often hard to steal 100's of Millions of dollars without someone noticing. But, front running like insider trading is one of the ways to do so.
My comment was there is a range of vary short term insider information that you need HFT to benefit from. That does not mean that anyone does so, just that it's something that regulators should and probably are on the lookout for.
When a large market order is placed with the exchange, the specialist (NYSE) would not have enough inventory to fill the entire order. What they would do is go up the book and start combining higher limit orders to fill the volume. He would also partially fill it with his own shares. This was how the specialist made a lot of their money (I imagine) because it allowed them to fill orders outside the market rate.
What we would do as day traders is as soon as we saw a large order like this occur, we'd start placing orders outside the market rate on the other side, hoping to get filled when the specialist combines the whole trade at one price. Once that happens, we can then sell that back to a market maker (at the market rate) or wait until the price moves back.
A few years after I stopped, the NYSE moved away from a specialist system (NASDAQ was never on one). I haven't followed the state of affairs since. I imagine the same thing still happens now, but only you have to be much much faster to play the game with the hybrid/computer market makers.
source: had my series 7 about 10 years ago
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?
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.
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.
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.