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Spoofers Tricked High-Speed Traders by Hitting Keys Fast

63 points by yummyfajitas 12y ago

wodenokoto 12y ago
I'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 bots? I think stock traders should be punished by the market place for acting on poor signals and acting like sheeps. If he could in fact not deliver the initial sales, then not only is it fraud, but it is a broken system that allows you to put up stuff for sale that you don't own.
- joosters 12y ago
  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 actually take them. How can that be considered OK and yet these human traders are labelled fraudulent?
  - BogdanCalin 12y ago
    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.
    - joosters 12y ago
      I think the only evidence for fraud here are the recordings of the people discussing their aims of manipulating the markets. If those didn't exist then it does sound like the trades alone could never be considered market manipulation. If that is the case, am I breaking the law if I just buy some shares and, during the phone call with my dealer, make a comment that I hope my share purchase drives the price up?
      - kasey_junk 12y ago
        No. Hoping that your trade moves the market one way or the other is completely different than placing orders you hope never trade. Why is it different? Because the law says it is.
      - FireBeyond 12y ago
        "If that is the case, am I breaking the law if I just buy some shares and, during the phone call with my dealer, make a comment that I hope my share purchase drives the price up?" And if it's not, why isn't it? Basically it's a double standard, because (most of) the markets are too cosy with HFT firms.
        kasey_junk 12y ago
        No. Spoofing harms HFT. They would prefer if it didn't happen (well most would prefer it). If this were the case of regulatory capture by HFT firms (which are not big enough or powerful enough to capture much) they would make spoofing harder to do.
    - throwaway183839 12y ago
      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).
      - BogdanCalin 12y ago
        95 percent of high-frequency trader orders are cancelled (so fast that nobody can take them). Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days. I don't buy the "providing liquidity" defense of HFT. http://blogs.wsj.com/moneybeat/2014/04/03/schwab-on-hft-growing-cancer-that-must-be-addressed/ http://blogs.wsj.com/moneybeat/2014/04/03/schwab-on-hft-grow...
        gd1 12y ago
        >95 percent of high-frequency trader orders are cancelled So what. 99.9999999% of the pixels blatted onto your screen aren't looked at. Why do you care? Let's say I'm making a market in a derivative product (A), one where the price is 'derived' from the price of another product (B). By a simple equation. Let's say A = 2 * B. No one likes product A. No one trades it. Lots of people trade B. All day long B moves around. B ticks up, I have to cancel my bid and offer on A and move them up 2 ticks (I do it quickly, cos I'm an evil HFT). B ticks down, I have to cancel my bid and offer on B and move it down 2 ticks. All day long I move my quotes. No one fucking trades. 100% of my orders are cancelled and replaced on a different price. Why do you care? A limit order is a limit order. It isn't doing anyone any harm by being there. >Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days. McDonalds are profitable on 100% of their trading days. Casinos are likely profitable on 99% of their trading days. If they weren't profitable they wouldn't be doing it. Market-makers like Virtu are more service providers than they are 'traders'. They are the middle men who allow others to trade and take risk, and extract a small fee for doing so. Here's a good analysis to read: http://blogs.wsj.com/moneybeat/2014/11/13/virtus-losing-day-was-1-in-1238-odds-says-it-shouldnt-have-happened-at-all/ http://blogs.wsj.com/moneybeat/2014/11/13/virtus-losing-day-...
  - rtpg 12y ago
    I don't get it, why is it that market orders don't have a lifetime? I know we used to have a granularity on price that was pretty thick, what would be the issue with having an order have to be on the market for at least a second? I have my doubts about sub-second trading increasing liquidity and making the markets more effecient
    - gd1 12y ago
      The issue would be that market makers would need to inject their orders (quotes) at a greater distance from the mid-price, in order to protect themselves against market movement during the minimum lifetime you propose. If my bid and offer is obligated to sit in the market for x seconds, then it is potentially a sitting duck for any adverse event during that time period, and I would have to quote wider to cover that possibility.
  - gd1 12y ago
    >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 recalculates its price in response to some stimuli and changes its mind about the price, doesn't change the fact they were honest. They're just fast as well. That's what control systems do, they update their outputs when their inputs change.
    - ars 12y ago
      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?
      - gd1 12y ago
        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.
        FireBeyond 12y ago
        Saying that bluffing is not allowed is disingenuous. Why, then, are sellers allowed to break up big blocks of stocks into smaller orders to avoid triggering algorithms in the market? How is that not bluffing. "I have 1M shares to sell, but if I do that, I'm going to take a bath. But if I trickle them in, break them up, etc..." - what makes one strategy, and the other a bluff?
  - yummyfajitas 12y ago
    You can take an order, at least probabilistically. Suppose an HFT has an order on the market from 0.30 to 0.40. If you submit an order at 0.00, your order will arrive at some time uniformly distributed between 0.00 and 1.00. With probability 0.1 you'll get a fill.
- deleted 12y ago
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- gd1 12y ago
  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 intention of the market participant.
  - mapt 12y ago
    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?
    - Mvandenbergh 12y ago
      You can't cancel them after they're matched, these cancellations happen while they're sitting around waiting for someone to take them.
    - gd1 12y ago
      These are limit orders under discussion, you seem to be confusing them with market orders.
    - throwaway183839 12y ago
      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).
- lmm 12y ago
  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 incentives; we'd lose the public good of the displayed, honest order book. > If he could in fact not deliver the initial sales, then not only is it fraud, but it is a broken system that allows you to put up stuff for sale that you don't own. Real world commerce works on trust and sometimes retroactive enforcement. If I order ten tons of timber, the world doesn't force the person selling it to prove they have it in stock, I just get to sue them if they don't deliver. Somehow it all manages to work out.
  - throwaway183839 12y ago
    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.
    - yummyfajitas 12y ago
      This is already done. There is an per-order fee and a per-trade fee. All your proposal would do is shift the balance slightly between these fees.
      - throwaway283719 12y ago
        What markets is this done on? On most markets that I'm aware of, there is a fee for passive trades and a fee for aggressive trades. Sometimes the fee for a passive trade is negative (a rebate) which encourages liquidity provision, but I don't know of any market that actually charges per order, and then rebates that proportionally to the liquidity providers. One proviso is that I've never worked on US equity markets, so if this rule is in place there then I wouldn't know about it.
- justincormack 12y ago
  People are already trying to move stock/fx prices via twitter bots...
drewinglis 12y ago
Can someone explain to me why this is illegal?
- CmonDev 12y ago
  He tried to manipulate the market to take an advantage of the shift: http://en.wikipedia.org/wiki/Market_manipulation http://en.wikipedia.org/wiki/Market_manipulation You are not allowed to do this if you are a simple guy from the street.
  - deleted 12y ago
    [deleted]
  - throwaway183839 12y ago
    You are not allowed to do it, full stop.
    - CmonDev 12y ago
      I don't think High-Frequency and Investment Banks are following the rules. Until caught.
- JetSpiegel 12y ago
  China and Russia, man! Terrorism, or something.
- dagw 12y ago
  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.
  - fenollp 12y ago
    Then why does the API allow it?
    - 12y ago
smtucker 12y ago
The stock market doesn't seem to be a very well designed game if such simple moves have to be made illegal.
Synesthesis 12y ago
Remember when S. Hawking, E. Musk, and others warned to be cautious about the future of AI? I think the contrast defined here between the AI: HFT (High frequency trading algorithms) and 'Monkeys' (the alleged fraudsters, bashing buttons in a quick and manipulative fashion) shows already that we don't like to judge AI the same as we do with humans; while the manipulative effect of both techniques is hard to judge and compare, the argument made is mainly of another order: intent. On the highest level both AI/HFT and Monkey do this for their own earnings. Society decides that profits out of investment are well earned because they serve some important mechanisms that allow companies to operate. HFT used this as an important argument: they add volatility to the market thus allowing more realistic prices. But the same argument can also be made by the Monkeys. On a lower level we now start to distinguish: the Monkey techniques are manipulative and were used out of malicious intent. Some AI/HFT techniques may be manipulative but intent disguised: if the technique or decision to "manipulate" was devised by AI, who is to blame?
kokey 12y ago
I quite liked the style of writing in this article. It's days like this that I wish news outlets like Bloomberg and IFR has RSS feeds for particular journalists.
- wombatpm 12y ago
  The do: http://www.bloombergview.com/rss/contributors/megan-mcardle.rss http://www.bloombergview.com/rss/contributors/megan-mcardle.... http://www.bloombergview.com/rss/contributors/matt-levine.rss http://www.bloombergview.com/rss/contributors/matt-levine.rs...
  - kokey 12y ago
    Thank you!
billpg 12y ago
HFT systems were tricked into making bad decisions? Boo hoo hoo! Won't anyone please think of the HFT systems?
- kasey_junk 12y ago
  I don't think anyone is suggesting that it is wrong to "trick" HFT systems (for instance HFT systems make most of their money "tricking" other HFT systems). What is wrong is doing something expressly illegal to do it. Oh and then putting it into an email chain with an FBI informant.
solve 12y ago
The article has to be completely misrepresenting which part, exactly, was illegal here. Nearly every high frequency trader in every electronic market aims to do something very similar to 90% of what he describes here. Is it all because of the motive? And bots can legally do the exact same thing because it's harder to prove any motive behind a bot's actions?
- dagw 12y ago
  which part, exactly, was illegal here. The part where he did this with the expressed intention to deceive the market. This is one of those cases where your intentions are far more important that your actions.
  - solve 12y ago
    Internet lawyers... why did I bother.
reacweb 12y ago
These people have just found a way to abuse the stupidity of HFT. IMHO, they have played along the rules and the SEC should ban HFT.
- kasey_junk 12y ago
  >IMHO, they have played along the rules Your humble opinion is factually incorrect. At the heart of this story it doesn't have anything to do with tricking HFT (how ever much that may appeal to you). They broke a basic law, one that everyone who trades knows, and then they put it in an email chain to an FBI informant.
mhomde 12y ago
The only reason why this is "illegal" and HFT is legal is that the HFT firms are paying customers of the exchange. It's really quite scary how complicit and front-runned the whole stocktrading business has become. I really recommend Flash Boys which is an interesting read on the topic http://www.amazon.com/Flash-Boys-Wall-Street-Revolt-ebook/dp/B00HVJB4VM http://www.amazon.com/Flash-Boys-Wall-Street-Revolt-ebook/dp...
- kasey_junk 12y ago
  Layering was illegal before there was HFT. Also, everyone who has any expertise in the way markets and especially electronic markets work, thinks that "Flash Boys" is a terrible book on the topic. You literally are worse off in understanding for reading it. Try "Dark Pools". Still sensational and occasionally wrong, but at least it gets close.
  - mhomde 12y ago
    I can agree that Lewis was perhaps more focused on weaving a compelling story than focusing on the finer details of HFT. Nevertheless its a good primer on the subject and an interesting read. Thanks for the tip about Dark pools
    - throwaway283719 12y ago
      The problem is that it is absolutely not a good primer on the subject, and the only way you could know this is if you have experience in electronic trading already. If you are trying to learn about electronic / high frequency trading by reading "Flash Boys" you are actively working against yourself. You will literally be more incorrect after you have read this book.
  - BogdanCalin 12y ago
    I've read both "Flash boys" and "Dark Pools". Do you have any other book recommendations on this subject?
    - 12y ago
harry8 12y ago
Be clear that this behaviour is illegal. Totally. This is the heinous crime of not being Goldman Sachs or RBS or $BIG_FOFF_BANK with political connections. Make offers that others slavishly follow because they haven't got a clue what the real value is, you're getting prosecute - even if you will trade at the prices you quote. Manipulate libor, bullshit credit risk, rip off your customers with buy recommendations while selling? Help the greek govt get a loan that immediately doubles? No worries. Only small guys who cut the big guys lunch have anything to worry about from regulation enforcement. This is called "regulatory capture" and it's just appalling how common it is and how little is done about it. Hell if you're even seen as a big player you can literally rape children and get a deal for a ridiculously light sentence and they agree to stop investigating and prosecuting other offences and then be met by a member of the royal family when you get out. Literally rape children. http://www.theguardian.com/uk-news/2015/jan/03/lawyers-seek-evidence-prince-andrew-lobbying-jeffrey-epstein http://www.theguardian.com/uk-news/2015/jan/03/lawyers-seek-... Is there nothing all these lawyers can't corrupt? Yeah the things they fucked up through sheer incompetence. Anyway kids the lesson here will be HFT is bad for you because the spreads in the market you can trade are now tighter, so you have lower transaction costs putting more money in your pocket but Goldman's lucrative market-making is lost to them. Bad for goldman's is bad for you. Oh and bubble markets are caused by short-selling. Investment fund reporting season, rash of stories about HFT and short selling and how evil they are - just please ignore those huge fees mutual funds charge for their underperformance. 1-2% of your wealth per year. 6 figures of your money, please look at short selling and HFT and not that because that's not scary at all.
im3w1l 12y ago
Let's say you trained a bot with reinforcement learning, rewarding profitable trades. And it, by itself, learned this strategy. Would it be illegal? Sure, the reason the strategy works maybe price manipulation, but it is hard to ascribe intent to it all the same.
- kasey_junk 12y ago
  That is precisely why this case is so good for the SEC, there is an email chain. If you had an email chain stating that you were going to train your bot to layer, that would show intent, which would make it illegal. Otherwise it isn't. Intentionality is at the heart of the law.
chatmasta 12y ago
We are going to see more cases like this, as market-making robots increase their trade volumes. Big players are pouring more and more money into automated trading, and that trading relies on algorithms. Often the algorithms involve some sort of machine learning, and therefore depend on the input data, which is vulnerable to manipulation. For example, imagine a bot programmed by some 5-10 person team at a hedge fund. They find that running sentiment analysis on twitter and news comments can accurately predict whether a given security will rise or fall in response to a fed press release. The profits are good, so the team manager moves a couple million into the algorithm. One night after work, a team member tells his programmer friend about the algorithm, and mentions some of the most profitable stocks. This friend goes home and programs another bot to corrupt the sentiment analysis dataset, by posting fake comments with properly tuned sentiment. The hedge fund bot reacts as expected, and now the friend has the power to manipulate the bot. He has outsmarted the bot and can take advantage of the high volume trading. That might be a bit of a contrived example, but corruption in machine learning data is a very real problem. People are just starting to study it. [0] [0] https://www.usenix.org/system/files/conference/usenixsecurity14/sec14-paper-wang-gang.pdf https://www.usenix.org/system/files/conference/usenixsecurit... [1] http://dl.acm.org/citation.cfm?id=1128824 http://dl.acm.org/citation.cfm?id=1128824
tmaly 12y ago
I build surveillance programs to look for activity such as spoofing and layering. It is not always as clear cut as these cases make it out to me.

63 points by yummyfajitas 12y ago

I'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 bots? I think stock traders should be punished by the market place for acting on poor signals and acting like sheeps. If he could in fact not deliver the initial sales, then not only is it fraud, but it is a broken system that allows you to put up stuff for sale that you don't own.

joosters 12y ago
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 actually take them. How can that be considered OK and yet these human traders are labelled fraudulent?
- BogdanCalin 12y ago
  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.
  - joosters 12y ago
    I think the only evidence for fraud here are the recordings of the people discussing their aims of manipulating the markets. If those didn't exist then it does sound like the trades alone could never be considered market manipulation. If that is the case, am I breaking the law if I just buy some shares and, during the phone call with my dealer, make a comment that I hope my share purchase drives the price up?
    - kasey_junk 12y ago
      No. Hoping that your trade moves the market one way or the other is completely different than placing orders you hope never trade. Why is it different? Because the law says it is.
    - FireBeyond 12y ago
      "If that is the case, am I breaking the law if I just buy some shares and, during the phone call with my dealer, make a comment that I hope my share purchase drives the price up?" And if it's not, why isn't it? Basically it's a double standard, because (most of) the markets are too cosy with HFT firms.
      - kasey_junk 12y ago
        No. Spoofing harms HFT. They would prefer if it didn't happen (well most would prefer it). If this were the case of regulatory capture by HFT firms (which are not big enough or powerful enough to capture much) they would make spoofing harder to do.
  - throwaway183839 12y ago
    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).
    - BogdanCalin 12y ago
      95 percent of high-frequency trader orders are cancelled (so fast that nobody can take them). Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days. I don't buy the "providing liquidity" defense of HFT. http://blogs.wsj.com/moneybeat/2014/04/03/schwab-on-hft-growing-cancer-that-must-be-addressed/ http://blogs.wsj.com/moneybeat/2014/04/03/schwab-on-hft-grow...
      - gd1 12y ago
        >95 percent of high-frequency trader orders are cancelled So what. 99.9999999% of the pixels blatted onto your screen aren't looked at. Why do you care? Let's say I'm making a market in a derivative product (A), one where the price is 'derived' from the price of another product (B). By a simple equation. Let's say A = 2 * B. No one likes product A. No one trades it. Lots of people trade B. All day long B moves around. B ticks up, I have to cancel my bid and offer on A and move them up 2 ticks (I do it quickly, cos I'm an evil HFT). B ticks down, I have to cancel my bid and offer on B and move it down 2 ticks. All day long I move my quotes. No one fucking trades. 100% of my orders are cancelled and replaced on a different price. Why do you care? A limit order is a limit order. It isn't doing anyone any harm by being there. >Some high-frequency traders have claimed to be profitable on over 99 percent of their trading days. McDonalds are profitable on 100% of their trading days. Casinos are likely profitable on 99% of their trading days. If they weren't profitable they wouldn't be doing it. Market-makers like Virtu are more service providers than they are 'traders'. They are the middle men who allow others to trade and take risk, and extract a small fee for doing so. Here's a good analysis to read: http://blogs.wsj.com/moneybeat/2014/11/13/virtus-losing-day-was-1-in-1238-odds-says-it-shouldnt-have-happened-at-all/ http://blogs.wsj.com/moneybeat/2014/11/13/virtus-losing-day-...
- rtpg 12y ago
  I don't get it, why is it that market orders don't have a lifetime? I know we used to have a granularity on price that was pretty thick, what would be the issue with having an order have to be on the market for at least a second? I have my doubts about sub-second trading increasing liquidity and making the markets more effecient
  - gd1 12y ago
    The issue would be that market makers would need to inject their orders (quotes) at a greater distance from the mid-price, in order to protect themselves against market movement during the minimum lifetime you propose. If my bid and offer is obligated to sit in the market for x seconds, then it is potentially a sitting duck for any adverse event during that time period, and I would have to quote wider to cover that possibility.
- gd1 12y ago
  >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 recalculates its price in response to some stimuli and changes its mind about the price, doesn't change the fact they were honest. They're just fast as well. That's what control systems do, they update their outputs when their inputs change.
  - ars 12y ago
    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?
    - gd1 12y ago
      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.
      - FireBeyond 12y ago
        Saying that bluffing is not allowed is disingenuous. Why, then, are sellers allowed to break up big blocks of stocks into smaller orders to avoid triggering algorithms in the market? How is that not bluffing. "I have 1M shares to sell, but if I do that, I'm going to take a bath. But if I trickle them in, break them up, etc..." - what makes one strategy, and the other a bluff?
- yummyfajitas 12y ago
  You can take an order, at least probabilistically. Suppose an HFT has an order on the market from 0.30 to 0.40. If you submit an order at 0.00, your order will arrive at some time uniformly distributed between 0.00 and 1.00. With probability 0.1 you'll get a fill.
deleted 12y ago
[deleted]
gd1 12y ago
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 intention of the market participant.
- mapt 12y ago
  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?
  - Mvandenbergh 12y ago
    You can't cancel them after they're matched, these cancellations happen while they're sitting around waiting for someone to take them.
  - gd1 12y ago
    These are limit orders under discussion, you seem to be confusing them with market orders.
  - throwaway183839 12y ago
    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).
lmm 12y ago
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 incentives; we'd lose the public good of the displayed, honest order book. > If he could in fact not deliver the initial sales, then not only is it fraud, but it is a broken system that allows you to put up stuff for sale that you don't own. Real world commerce works on trust and sometimes retroactive enforcement. If I order ten tons of timber, the world doesn't force the person selling it to prove they have it in stock, I just get to sue them if they don't deliver. Somehow it all manages to work out.
- throwaway183839 12y ago
  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.
  - yummyfajitas 12y ago
    This is already done. There is an per-order fee and a per-trade fee. All your proposal would do is shift the balance slightly between these fees.
    - throwaway283719 12y ago
      What markets is this done on? On most markets that I'm aware of, there is a fee for passive trades and a fee for aggressive trades. Sometimes the fee for a passive trade is negative (a rebate) which encourages liquidity provision, but I don't know of any market that actually charges per order, and then rebates that proportionally to the liquidity providers. One proviso is that I've never worked on US equity markets, so if this rule is in place there then I wouldn't know about it.
justincormack 12y ago
People are already trying to move stock/fx prices via twitter bots...

drewinglis 12y ago

Can someone explain to me why this is illegal?

CmonDev 12y ago
He tried to manipulate the market to take an advantage of the shift: http://en.wikipedia.org/wiki/Market_manipulation http://en.wikipedia.org/wiki/Market_manipulation You are not allowed to do this if you are a simple guy from the street.
- deleted 12y ago
  [deleted]
- throwaway183839 12y ago
  You are not allowed to do it, full stop.
  - CmonDev 12y ago
    I don't think High-Frequency and Investment Banks are following the rules. Until caught.
JetSpiegel 12y ago
China and Russia, man! Terrorism, or something.
dagw 12y ago
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.
- fenollp 12y ago
  Then why does the API allow it?
  - 12y ago

smtucker 12y ago

The stock market doesn't seem to be a very well designed game if such simple moves have to be made illegal.

Synesthesis 12y ago

Remember when S. Hawking, E. Musk, and others warned to be cautious about the future of AI? I think the contrast defined here between the AI: HFT (High frequency trading algorithms) and 'Monkeys' (the alleged fraudsters, bashing buttons in a quick and manipulative fashion) shows already that we don't like to judge AI the same as we do with humans; while the manipulative effect of both techniques is hard to judge and compare, the argument made is mainly of another order: intent. On the highest level both AI/HFT and Monkey do this for their own earnings. Society decides that profits out of investment are well earned because they serve some important mechanisms that allow companies to operate. HFT used this as an important argument: they add volatility to the market thus allowing more realistic prices. But the same argument can also be made by the Monkeys. On a lower level we now start to distinguish: the Monkey techniques are manipulative and were used out of malicious intent. Some AI/HFT techniques may be manipulative but intent disguised: if the technique or decision to "manipulate" was devised by AI, who is to blame?

kokey 12y ago

I quite liked the style of writing in this article. It's days like this that I wish news outlets like Bloomberg and IFR has RSS feeds for particular journalists.

wombatpm 12y ago
The do: http://www.bloombergview.com/rss/contributors/megan-mcardle.rss http://www.bloombergview.com/rss/contributors/megan-mcardle.... http://www.bloombergview.com/rss/contributors/matt-levine.rss http://www.bloombergview.com/rss/contributors/matt-levine.rs...
- kokey 12y ago
  Thank you!

billpg 12y ago

HFT systems were tricked into making bad decisions? Boo hoo hoo! Won't anyone please think of the HFT systems?

kasey_junk 12y ago
I don't think anyone is suggesting that it is wrong to "trick" HFT systems (for instance HFT systems make most of their money "tricking" other HFT systems). What is wrong is doing something expressly illegal to do it. Oh and then putting it into an email chain with an FBI informant.

solve 12y ago

The article has to be completely misrepresenting which part, exactly, was illegal here. Nearly every high frequency trader in every electronic market aims to do something very similar to 90% of what he describes here. Is it all because of the motive? And bots can legally do the exact same thing because it's harder to prove any motive behind a bot's actions?

dagw 12y ago
which part, exactly, was illegal here. The part where he did this with the expressed intention to deceive the market. This is one of those cases where your intentions are far more important that your actions.
- solve 12y ago
  Internet lawyers... why did I bother.

reacweb 12y ago

These people have just found a way to abuse the stupidity of HFT. IMHO, they have played along the rules and the SEC should ban HFT.

kasey_junk 12y ago
>IMHO, they have played along the rules Your humble opinion is factually incorrect. At the heart of this story it doesn't have anything to do with tricking HFT (how ever much that may appeal to you). They broke a basic law, one that everyone who trades knows, and then they put it in an email chain to an FBI informant.

mhomde 12y ago

The only reason why this is "illegal" and HFT is legal is that the HFT firms are paying customers of the exchange. It's really quite scary how complicit and front-runned the whole stocktrading business has become. I really recommend Flash Boys which is an interesting read on the topic http://www.amazon.com/Flash-Boys-Wall-Street-Revolt-ebook/dp/B00HVJB4VM http://www.amazon.com/Flash-Boys-Wall-Street-Revolt-ebook/dp...

kasey_junk 12y ago
Layering was illegal before there was HFT. Also, everyone who has any expertise in the way markets and especially electronic markets work, thinks that "Flash Boys" is a terrible book on the topic. You literally are worse off in understanding for reading it. Try "Dark Pools". Still sensational and occasionally wrong, but at least it gets close.
- mhomde 12y ago
  I can agree that Lewis was perhaps more focused on weaving a compelling story than focusing on the finer details of HFT. Nevertheless its a good primer on the subject and an interesting read. Thanks for the tip about Dark pools
  - throwaway283719 12y ago
    The problem is that it is absolutely not a good primer on the subject, and the only way you could know this is if you have experience in electronic trading already. If you are trying to learn about electronic / high frequency trading by reading "Flash Boys" you are actively working against yourself. You will literally be more incorrect after you have read this book.
- BogdanCalin 12y ago
  I've read both "Flash boys" and "Dark Pools". Do you have any other book recommendations on this subject?
  - 12y ago

harry8 12y ago

Be clear that this behaviour is illegal. Totally. This is the heinous crime of not being Goldman Sachs or RBS or $BIG_FOFF_BANK with political connections. Make offers that others slavishly follow because they haven't got a clue what the real value is, you're getting prosecute - even if you will trade at the prices you quote. Manipulate libor, bullshit credit risk, rip off your customers with buy recommendations while selling? Help the greek govt get a loan that immediately doubles? No worries. Only small guys who cut the big guys lunch have anything to worry about from regulation enforcement. This is called "regulatory capture" and it's just appalling how common it is and how little is done about it. Hell if you're even seen as a big player you can literally rape children and get a deal for a ridiculously light sentence and they agree to stop investigating and prosecuting other offences and then be met by a member of the royal family when you get out. Literally rape children. http://www.theguardian.com/uk-news/2015/jan/03/lawyers-seek-evidence-prince-andrew-lobbying-jeffrey-epstein http://www.theguardian.com/uk-news/2015/jan/03/lawyers-seek-... Is there nothing all these lawyers can't corrupt? Yeah the things they fucked up through sheer incompetence. Anyway kids the lesson here will be HFT is bad for you because the spreads in the market you can trade are now tighter, so you have lower transaction costs putting more money in your pocket but Goldman's lucrative market-making is lost to them. Bad for goldman's is bad for you. Oh and bubble markets are caused by short-selling. Investment fund reporting season, rash of stories about HFT and short selling and how evil they are - just please ignore those huge fees mutual funds charge for their underperformance. 1-2% of your wealth per year. 6 figures of your money, please look at short selling and HFT and not that because that's not scary at all.

im3w1l 12y ago

Let's say you trained a bot with reinforcement learning, rewarding profitable trades. And it, by itself, learned this strategy. Would it be illegal? Sure, the reason the strategy works maybe price manipulation, but it is hard to ascribe intent to it all the same.

kasey_junk 12y ago
That is precisely why this case is so good for the SEC, there is an email chain. If you had an email chain stating that you were going to train your bot to layer, that would show intent, which would make it illegal. Otherwise it isn't. Intentionality is at the heart of the law.

chatmasta 12y ago

We are going to see more cases like this, as market-making robots increase their trade volumes. Big players are pouring more and more money into automated trading, and that trading relies on algorithms. Often the algorithms involve some sort of machine learning, and therefore depend on the input data, which is vulnerable to manipulation. For example, imagine a bot programmed by some 5-10 person team at a hedge fund. They find that running sentiment analysis on twitter and news comments can accurately predict whether a given security will rise or fall in response to a fed press release. The profits are good, so the team manager moves a couple million into the algorithm. One night after work, a team member tells his programmer friend about the algorithm, and mentions some of the most profitable stocks. This friend goes home and programs another bot to corrupt the sentiment analysis dataset, by posting fake comments with properly tuned sentiment. The hedge fund bot reacts as expected, and now the friend has the power to manipulate the bot. He has outsmarted the bot and can take advantage of the high volume trading. That might be a bit of a contrived example, but corruption in machine learning data is a very real problem. People are just starting to study it. [0] [0] https://www.usenix.org/system/files/conference/usenixsecurity14/sec14-paper-wang-gang.pdf https://www.usenix.org/system/files/conference/usenixsecurit... [1] http://dl.acm.org/citation.cfm?id=1128824 http://dl.acm.org/citation.cfm?id=1128824

tmaly 12y ago

I build surveillance programs to look for activity such as spoofing and layering. It is not always as clear cut as these cases make it out to me.