6 ms·

Spoofers Keep Markets Honest

52 points by anonu 12y ago

Selfcommit 12y ago
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)
- woodman 12y ago
  > Would it be crazy to say ... 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.
- cortesoft 12y ago
  Wait... how is piracy or a knockoff anything like the spoofing this article talks about?
- evanpw 12y ago
  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.
  - synsynack 12y ago
    But the order does exists, it is in the orderbook and is available for anyone to the market to trade against.
    - kasey_junk 12y ago
      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.
    - evanpw 12y ago
      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.) [1] http://www.bloombergview.com/articles/2014-10-02/prosecutors-catch-a-spoofing-panther http://www.bloombergview.com/articles/2014-10-02/prosecutors...
cortesoft 12y ago
If this article is correct, I am guessing it is the front-runners who are leading the charge against the spoofers.
- kasey_junk 12y ago
  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).
stygiansonic 12y ago
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. 0. http://www.sec.gov/litigation/complaints/2015/comp-pr2015-4.pdf http://www.sec.gov/litigation/complaints/2015/comp-pr2015-4.... 1. http://www.bloombergview.com/articles/2015-01-13/spoofers-tricked-highspeed-traders-by-hitting-keys-fast http://www.bloombergview.com/articles/2015-01-13/spoofers-tr...
fapjacks 12y ago
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.
ArchD 12y ago
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.
- Retric 12y ago
  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.
  - yummyfajitas 12y ago
    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).
    - Retric 12y ago
      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.
      - ArchD 12y ago
        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.
Normati 12y ago
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?
- kasey_junk 12y ago
  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.
erpellan 12y ago
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.
- kasey_junk 12y ago
  >It's interesting to think about what would happen if all restrictions from markets were removed. 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.

52 points by anonu 12y ago

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)

woodman 12y ago
> Would it be crazy to say ... 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.
cortesoft 12y ago
Wait... how is piracy or a knockoff anything like the spoofing this article talks about?
evanpw 12y ago
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.
- synsynack 12y ago
  But the order does exists, it is in the orderbook and is available for anyone to the market to trade against.
  - kasey_junk 12y ago
    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.
  - evanpw 12y ago
    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.) [1] http://www.bloombergview.com/articles/2014-10-02/prosecutors-catch-a-spoofing-panther http://www.bloombergview.com/articles/2014-10-02/prosecutors...

cortesoft 12y ago

If this article is correct, I am guessing it is the front-runners who are leading the charge against the spoofers.

kasey_junk 12y ago
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).

stygiansonic 12y ago

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. 0. http://www.sec.gov/litigation/complaints/2015/comp-pr2015-4.pdf http://www.sec.gov/litigation/complaints/2015/comp-pr2015-4.... 1. http://www.bloombergview.com/articles/2015-01-13/spoofers-tricked-highspeed-traders-by-hitting-keys-fast http://www.bloombergview.com/articles/2015-01-13/spoofers-tr...

fapjacks 12y ago

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.

ArchD 12y ago

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.

Retric 12y ago
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.
- yummyfajitas 12y ago
  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).
  - Retric 12y ago
    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.
    - ArchD 12y ago
      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.

Normati 12y ago

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?

kasey_junk 12y ago
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.

erpellan 12y ago

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.

kasey_junk 12y ago
>It's interesting to think about what would happen if all restrictions from markets were removed. 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.