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He doesn't get it wrong. It's a classic fraud on the market: it creates the illusion of volume when that volume is really artificial. If you were to massively b

He doesn't get it wrong. It's a classic fraud on the market: it creates the illusion of volume when that volume is really artificial. If you were to massively buy and then immediately sell securities to make it seem as if there was a great demand, you would be indicted for violating the securities laws. "Rule 10b-5: Employment of Manipulative and Deceptive Practices": It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, HFT creates the illusion of volume. As such, it is a clear violation of 10(b)(5). Volume, as an important indicator of efficiency, has been repeatedly recognized by U.S. courts in both civil and criminal cases. Because of HFT, volume figures are no longer reliable. They no longer reflect a true, arms-length purchase and sale. This is a classic fraud on the market.

theorique 13y ago
HFT practitioners can't create volume unless they actually trade. If they actually trade, then they are taking risk, participating in the market, and providing (or removing) liquidity. Volume in the market refers to shares traded, not quotes. The fact that I'm willing to buy 100 shares AAPL at 12:01:00.000 (enter an order) and not willing to do so at 12:01:00.001 (cancel an order) has no influence on market volumes - because a trade never took place. Now, if you're talking about the limit order books changing extremely rapidly, according to different participants understanding of their positions and intentions, then that's true. That's because the order book represents the intersection of supply and demand at a given instant.
kasey_junk 13y ago
There is a class of algorithmic traders that create artificial volume via fraudulent orders. This is quote stuffing and it is already illegal (at least in the U.S.). There is a problem with enforcement, as the regulatory agencies are so far behind the traders. The FBI has recently announced that they will be investigating this practice as a criminal matter instead of a leaving it as a civil one, so hopefully that will discourage the practice. That said, it is a really small percentage of HFT firms that engage in this behaviour (in fact most firms would prefer more enforcement of these rules) and it has nothing to do with the practices that Lewis documents in his book or with all the publicity stops he's been on.
- theorique 13y ago
  The thing with quote stuffing is this: - If a firm is posting quotes that they have no intention of honoring, then they are backing away and that's already a violation of regulations. - If they are rapidly posting quotes and canceling them in response to quickly changing market conditions, that's normal behavior. As long as a firm fills an order appropriately, when someone actually hits their quote, then they are doing it right. Of course, some exchanges and other venues view excessive quoting with minimal actual trading as a nuisance, because it taxes their infrastructure without the actual trading that makes money for everyone involved. As such, many venues are charging fees to participants who have very high quote-to-trade ratios. This is also fine - it's the prerogative of the venues to charge fees for use of the infrastructure.

theorique 13y ago

HFT practitioners can't create volume unless they actually trade. If they actually trade, then they are taking risk, participating in the market, and providing (or removing) liquidity. Volume in the market refers to shares traded, not quotes. The fact that I'm willing to buy 100 shares AAPL at 12:01:00.000 (enter an order) and not willing to do so at 12:01:00.001 (cancel an order) has no influence on market volumes - because a trade never took place. Now, if you're talking about the limit order books changing extremely rapidly, according to different participants understanding of their positions and intentions, then that's true. That's because the order book represents the intersection of supply and demand at a given instant.

kasey_junk 13y ago

There is a class of algorithmic traders that create artificial volume via fraudulent orders. This is quote stuffing and it is already illegal (at least in the U.S.). There is a problem with enforcement, as the regulatory agencies are so far behind the traders. The FBI has recently announced that they will be investigating this practice as a criminal matter instead of a leaving it as a civil one, so hopefully that will discourage the practice. That said, it is a really small percentage of HFT firms that engage in this behaviour (in fact most firms would prefer more enforcement of these rules) and it has nothing to do with the practices that Lewis documents in his book or with all the publicity stops he's been on.

theorique 13y ago
The thing with quote stuffing is this: - If a firm is posting quotes that they have no intention of honoring, then they are backing away and that's already a violation of regulations. - If they are rapidly posting quotes and canceling them in response to quickly changing market conditions, that's normal behavior. As long as a firm fills an order appropriately, when someone actually hits their quote, then they are doing it right. Of course, some exchanges and other venues view excessive quoting with minimal actual trading as a nuisance, because it taxes their infrastructure without the actual trading that makes money for everyone involved. As such, many venues are charging fees to participants who have very high quote-to-trade ratios. This is also fine - it's the prerogative of the venues to charge fees for use of the infrastructure.