Can someone explain to me why this is illegal?
You're not allowed to place an order you have no intention of honoring. Basically it comes down to a question of his intent rather than his actions.
Then why does the API allow it?
Spoofers Tricked High-Speed Traders by Hitting Keys Fast
21–30 of 89 posts
Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast
#22Earlier quoted context omitted.
>So they really were genuine offers to sell and buy shares. They weren't genuine, that's the point. They were offers made with the express intention and hope that they never get filled. The orders from high frequency traders in contrast are honest orders, when they are sent they honestly express that the trader wants to trade at that price. The fact that they may then be withdrawn 800 microseconds later when the HFT…
Why does his state of mind matter? I mean it matters for criminal matters, but why for civil? Either he actually was willing to make good on his offer or he wasn't. His reasons are irrelevant. "hope that they never get filled" is not a reason to make this a crime. If he actually refused to fill them, then sure. But hoping?
I don't write the rules, I'm just telling you what they are. I guess it boils down to the idea that bluffing is banned in financial markets. What differentiates making a bluff from a regular raise in poker? You have to 'make good' on the bet either way, yes? The difference is that you're 'hoping' that you don't get called, 'hoping' that your opponent folds. Not allowed in markets. Probably a good thing too, or they'd be even more chaotic as they degenerate into bluff and double-bluff. Having said that spoofing is still widespread, likely because it is hard to prove and some regulators aren't as tough on it as they should be.
Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast
#23Earlier quoted context omitted.
No, it is definitely fraud. The rule is that you may not enter an order (quote) that you have no intention of filling. You're perfectly entitled to change your mind afterwards (for whatever reason) and then cancel the order, but if you send an order with the initial objective of never having it execute, it is a fraudulent order and and a case of market manipulation. Always hard to prove though, since it goes to the i…
Pardon my ignorance, but why is it possible to change your mind afterward and cancel the order? Why does the market not clear orders irrevocably (executing automatically) as soon as they are matched? Why this "sending" disengaged from actual market actions?
You can't cancel them after they're matched, these cancellations happen while they're sitting around waiting for someone to take them.
Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast
#24Earlier quoted context omitted.
No, it is definitely fraud. The rule is that you may not enter an order (quote) that you have no intention of filling. You're perfectly entitled to change your mind afterwards (for whatever reason) and then cancel the order, but if you send an order with the initial objective of never having it execute, it is a fraudulent order and and a case of market manipulation. Always hard to prove though, since it goes to the i…
Pardon my ignorance, but why is it possible to change your mind afterward and cancel the order? Why does the market not clear orders irrevocably (executing automatically) as soon as they are matched? Why this "sending" disengaged from actual market actions?
These are limit orders under discussion, you seem to be confusing them with market orders.
Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast
#25Earlier quoted context omitted.
You're not allowed to place an order you have no intention of honoring. Basically it comes down to a question of his intent rather than his actions.
Then why does the API allow it?
Are you suggesting that the API should read your mind to discover whether you really intend to trade on an order that you enter?
Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast
#26Earlier quoted context omitted.
No, it is definitely fraud. The rule is that you may not enter an order (quote) that you have no intention of filling. You're perfectly entitled to change your mind afterwards (for whatever reason) and then cancel the order, but if you send an order with the initial objective of never having it execute, it is a fraudulent order and and a case of market manipulation. Always hard to prove though, since it goes to the i…
Pardon my ignorance, but why is it possible to change your mind afterward and cancel the order? Why does the market not clear orders irrevocably (executing automatically) as soon as they are matched? Why this "sending" disengaged from actual market actions?
The market clears any matching orders in effectively zero time (that is, it runs its matching algorithm to clear the book before it allows any new quotes to enter).
After an order is matched, you can't cancel it except in exceptional circumstances (for example, you mistakenly entered an order very far from the bbo - in that case, with the cooperation of your broker and the counterparty to your trade, you may be able to unwind it).
However before the order is matched you are free to cancel it if you decide you no longer want to trade at that price (for example, you see some change in the fundamentals of the stock that causes you to no longer want to buy, or simply that the price moves in such a way that a buy/sell at your original price no longer looks like good value).
Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast
#27I'm not even sure if I would consider this fraud (personally). I mean, if the initial outstanding orders were at risc of actually being bought and he had to deliver, then I think it is just fine that the market is naive enough to judge the worth of a company on some anonymous seller, rather than company performance and market-place condition of said company. What's next, you start moving stock prices through twitter…
The order book would quickly become a tragedy of the commons - everyone's free to add quotes to it, and doing so costs everyone else. In a perfect frictionless free market maybe exchanges could charge appropriately to put in an order, and rebate the proceeds to people who use the order book. But that's probably impractical (if nothing else, people would send their orders to other exchanges), and would create bad ince…
Here's an interesting proposal - you charge a small amount (e.g. 0.001 of a cent) for every single order placement and rebate the proceeds to all market participants in proportion to how much volume they actually traded.
People who enter many quotes that they never trade on would be punished by this system (human traders and "flickering" high frequency traders alike) whereas people providing genuine liquidity, in the form of long-lasting quotes at a good price that they intend to trade, will benefit.
Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast
#28Earlier quoted context omitted.
It's an odd situation, for sure. After all, these share orders were being entered by humans and could have been sitting in the market order books for several seconds. In that time, anyone could have taken their orders. So they really were genuine offers to sell and buy shares. Compare that to high frequency traders where it is alleged that 'flash' market orders are submitted and cancelled so fast that no-one could ac…
That's exactly what I was thinking. When high frequency traders are doing it it's OK but when this guy tricks them into actually taking some risks it's fraud.
When most high frequency traders trade, they are not actively trying to manipulate the market for their own gain (in the cases where they are manipulating the market, they should of course be punished).
Most high frequency traders are trying to make money by providing liquidity, i.e. offering to buy and sell at a better price than the rest of the market. This benefits both the HFT (because they make money) and other market participants (because they can trade at lower spreads).
What these guys were doing was entering orders that they actively didn't want to trade, so that they could push around the price of the stock and repeatedly scalp a small profit. They had no intention of improving the quality of the market (either by narrowing spreads or improving price discovery). In fact they were actively making the market work less well, by impeding the process of price discovery with their "bluff" orders.
The whole point of a market is to be an efficient mechanism for matching buyers and sellers at a fair price. If someone is deliberately trying to distort the fair price, they are undermining the value of the market (and other market participants, not only HFTs, will suffer because their trades will no longer take place at the 'fair' price, but instead at the 'fair' price plus whatever direction the scalpers happen to be pushing it in at the moment).
Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast
#29Re: Spoofers Tricked High-Speed Traders by Hitting Keys Fast
#30Earlier quoted context omitted.
Pardon my ignorance, but why is it possible to change your mind afterward and cancel the order? Why does the market not clear orders irrevocably (executing automatically) as soon as they are matched? Why this "sending" disengaged from actual market actions?
The market clears any matching orders in effectively zero time (that is, it runs its matching algorithm to clear the book before it allows any new quotes to enter). After an order is matched, you can't cancel it except in exceptional circumstances (for example, you mistakenly entered an order very far from the bbo - in that case, with the cooperation of your broker and the counterparty to your trade, you may be able…
So if I offer a trade, and then withdraw the trade because I decide I don't like the idea anymore (or 'any other reason')... that's legal. And routine to do on microsecond timescales.
But offering a trade, and then withdrawing the trade manually a few seconds later because I never intended to execute the trade... that's not legal?
What was the original rational for creating this class of thoughtcrime? Why does it criminalize intent, while the action is perfectly routine, and the outcomes are the same either way? There is, after all, the risk of someone actually calling your bluff and buying your sell order, or selling into your buy order, which is cleared instantly... so where's the fraud?.
Doesn't HTF presuppose that we are hard-coding this behavior, this tactic, into the trading algorithms of automated traders?