5 ms·

Theory: 1) Short DJIA. 2) Pick some stocks and place buy orders at $0.01. 3) Get a friend to fill those orders for you at $0.01, taking the loss. Call it a t

by andr 16y ago

Theory: 1) Short DJIA. 2) Pick some stocks and place buy orders at $0.01. 3) Get a friend to fill those orders for you at $0.01, taking the loss. Call it a trader error. 4) A lot of poorly written algorithms, which take into account the last traded price, start selling to cover their stoploss orders (sell if the price < X). 5) Havoc ensues. DJIA is down. Cover your DJIA short and take the rest of the day off.

oneplusone 16y ago
Expect your trades will get reversed at the end of the day and you will not make any money.
- andr 16y ago
  That's the best part. Only the trades that are directly related to the stocks that dropped are being reversed. Even if your trades on the stock are reversed, you have still moved the market and executed your DJIA options.
  - ewjordan 16y ago
    ...and then, if your scheme works (which, as others have pointed out, would take a miracle, and a very carefully chosen market that's not handled the way most of the big ones are), both you and your friend go to jail for market manipulation, which would be rather simple to prove - there's almost no reason you would ever want to sell something way below the best bid, so you're without the usual excuses that market manipulators use to justify manipulative trades ("uh, my analysis showed that the 26.5 day moving average crossed the 100 day low, so I bought, but then I noticed that the pork bellies volatility was higher than usual, so I sold a few seconds later, because that's the way my strategy works...").
yummyfajitas 16y ago
Practice. Assume the stocks you are manipulating are bid at 99.99, ask at 100. 3 - Your friend's first few sell orders at $0.01 or better are filled at about $99.99. Your buy orders go unfilled. 4 - If your friend sold enough shares, the algorithms notice someone aggressively selling. They may undercut and sell at 99.99 or even 99.98. The algorithms also place a few buy orders at 99.96-99.97. 5 - Your friend's trades (assuming he is placing multiple orders, and is selling a lot) execute and drive the price down to 99.96-99.97 or so. 6 - The algorithm's buy orders at 99.96-99.97, are filled by your friend's sell orders. 7 - Price back up to 99.99. 8 - Algorithms eventually sell the shares they bought at 99.96 at 99.99. Sum total: the algorithms made a few pennies off your friend. Your DJIA short does pretty much whatever it would already have done.
- cschneid 16y ago
  Hell, you don't need algorithms to do that. This is just what market makers do. Humans are a bit slower than computers, so the price may fluctuate by a few more cents, but the exact same order will end up happening.
- andr 16y ago
  If you have direct market access you can match particular orders in the order book, even if they are out of the money. Your friend would fill your $0.01 order at $0.01 and move the last trade price.
  - yummyfajitas 16y ago
    This is not technically possible for most matching engines. There is simply no "fill order X bypassing price/time queue" message. In fact, NYSE doesn't even tell you that order X exists and simply aggregates all orders into "Z shares available at price Y". Also, except in the case of certain rare events which cause high latency (e.g., yesterday), it is also illegal to play games like this. For instance, if the bid is 99 on BATS and only 50 on ARCA, and I want to sell, I can't sell on ARCA. (I'm grossly oversimplifying, of course, but my simplifications don't exclude the case of selling at $0.01 to fool the markets.)
  - fr0sty 16y ago
    Reg NMS does not allow a trade to happen outside the national Best Bid/Offer. If the market is 99.99-100.00 you cannot trade even at 99.98
- sesqu 16y ago
  Thank you, but I think you need to be more explicit at stage 7. As I understood you, algorithms notice someone dumping stock and they pick it up. Then they hope you were selling for cheaper than market value because you were in a hurry, not because you thought said stock was overvalued, and they try to pass off the stock later on. Is this what "providing liquidity" means? It seems like a good thing, iff people generally do high-frequency trading far more than actual investment. What's providing that confidence? Experience?

by andr 16y ago

oneplusone 16y ago

Expect your trades will get reversed at the end of the day and you will not make any money.

andr 16y ago
That's the best part. Only the trades that are directly related to the stocks that dropped are being reversed. Even if your trades on the stock are reversed, you have still moved the market and executed your DJIA options.
- ewjordan 16y ago
  ...and then, if your scheme works (which, as others have pointed out, would take a miracle, and a very carefully chosen market that's not handled the way most of the big ones are), both you and your friend go to jail for market manipulation, which would be rather simple to prove - there's almost no reason you would ever want to sell something way below the best bid, so you're without the usual excuses that market manipulators use to justify manipulative trades ("uh, my analysis showed that the 26.5 day moving average crossed the 100 day low, so I bought, but then I noticed that the pork bellies volatility was higher than usual, so I sold a few seconds later, because that's the way my strategy works...").

yummyfajitas 16y ago

Practice. Assume the stocks you are manipulating are bid at 99.99, ask at 100. 3 - Your friend's first few sell orders at $0.01 or better are filled at about $99.99. Your buy orders go unfilled. 4 - If your friend sold enough shares, the algorithms notice someone aggressively selling. They may undercut and sell at 99.99 or even 99.98. The algorithms also place a few buy orders at 99.96-99.97. 5 - Your friend's trades (assuming he is placing multiple orders, and is selling a lot) execute and drive the price down to 99.96-99.97 or so. 6 - The algorithm's buy orders at 99.96-99.97, are filled by your friend's sell orders. 7 - Price back up to 99.99. 8 - Algorithms eventually sell the shares they bought at 99.96 at 99.99. Sum total: the algorithms made a few pennies off your friend. Your DJIA short does pretty much whatever it would already have done.

cschneid 16y ago
Hell, you don't need algorithms to do that. This is just what market makers do. Humans are a bit slower than computers, so the price may fluctuate by a few more cents, but the exact same order will end up happening.
andr 16y ago
If you have direct market access you can match particular orders in the order book, even if they are out of the money. Your friend would fill your $0.01 order at $0.01 and move the last trade price.
- yummyfajitas 16y ago
  This is not technically possible for most matching engines. There is simply no "fill order X bypassing price/time queue" message. In fact, NYSE doesn't even tell you that order X exists and simply aggregates all orders into "Z shares available at price Y". Also, except in the case of certain rare events which cause high latency (e.g., yesterday), it is also illegal to play games like this. For instance, if the bid is 99 on BATS and only 50 on ARCA, and I want to sell, I can't sell on ARCA. (I'm grossly oversimplifying, of course, but my simplifications don't exclude the case of selling at $0.01 to fool the markets.)
- fr0sty 16y ago
  Reg NMS does not allow a trade to happen outside the national Best Bid/Offer. If the market is 99.99-100.00 you cannot trade even at 99.98
sesqu 16y ago
Thank you, but I think you need to be more explicit at stage 7. As I understood you, algorithms notice someone dumping stock and they pick it up. Then they hope you were selling for cheaper than market value because you were in a hurry, not because you thought said stock was overvalued, and they try to pass off the stock later on. Is this what "providing liquidity" means? It seems like a good thing, iff people generally do high-frequency trading far more than actual investment. What's providing that confidence? Experience?