6 ms·

Why Is Spoofing Bad?

38 points by dsri 11y ago

xai3luGi 11y ago
Without it, how can we survive when are those who make war, & oppression possible.
Lorento 11y ago
His argument seems to hinge on the claim that fundamental investors need to be able to trade large amounts without affecting the price. He backs it up with the claim that some traders see that as a fundamental human right. Is it really important?
- tptacek 11y ago
  There can't possibly be a right to trade large numbers of shares without moving the price, that of course being the whole point of a market.
  - Dylan16807 11y ago
    Without moving the price outside of the direct effect of applying the trade to the order book. In other words, the prices everyone else offers do not change based on your purchase. They are based on an assessment of the company, not based on exactly how much you are willing to pay for stocks minus .01 cents. (Yes there are gray areas, but as a principle it's valid.)
    - tptacek 11y ago
      Aren't you in effect arguing against the law of supply and demand? Stipulating that you can reliably predict the future cash flows of a company and holding them constant, the number of shares available to buy or on offer should determine the price. Ergo, the impact on the market of a giant block of shares should be large.
      - Dylan16807 11y ago
        I don't read it that way. I take it as an insistence that basic supply and demand decide the price. This means no millisecond-level attempts to outsmart the other guy. So for example you want to buy a million shares starting at $9.00 and this naturally moves the price up to $9.20 based on what everyone is offering. You're okay with that, but you are not okay with someone intercepting mid-purchase, buying a whole bunch of shares that were between $9.02 and $9.15, and instantly selling them back to you at $9.18. Maybe I'm being too generous in my interpretation of "not moving the price", but this is the effect you get when you disguise your purchase. Only the actual demand affects the price. So I think that's what the real meaning is.
        kasey_junk 11y ago
        Your read is skewed by a common but incorrect perception about the way the markets operate. You see it as party A wants to trade with party B and party C steps into the middle of the transaction to extract money from the transaction that they have no right to. What is in fact happening is that party A wants to trade with party B over and over again at the same price and party B wants to change their price based on these interactions. The later is what is actually happening (in greatly simplified form) and it is the mechanic by which the market goes from $9.00 to $9.20. Further, large block traders absolutely positively hate that it goes up no matter how it happens, because their whole trade is based on finding a market price inefficiency. The longer it remains, they longer they profit. If they could, they would make it a law that prices of transactions couldn't be shared.
        Dylan16807 11y ago
        In this scenario it's okay for B to change their price based on "sold some, bump the price based on supply". It's not okay for B to change their price even more based on tracking A's actions. So you treat trades as independent, and there would be no benefit from hiding the fact that you're trading. This means the price smoothly curves up from $9.00 to $9.20, it doesn't instantly jump to $9.19 or $9.27 because B figures out how much A is willing to pay. I'm not going to comment on how realistic such a principle is.
- hudibras 11y ago
  Levine is being sarcastic about the "fundamental human right" part, by the way.
kweinber 11y ago
Spoofing is bad because it allows you to lie about your intentions in a system that is supposed to give true price transparency. This would all be corrected if the exchanges charged money for cancelled orders. These traders are placing orders on a massive basis at prices they never intended to honor in order to get the exhanges to transmit these fake prices and trick others into action. (Often cancelling 100x the orders they transact). This is called "price-fraud", "spamming", and "market manipulation" in other parts of the economy. Exchanges should charge a transaction for orders when they are placed... Not solely if they are executed. It is actually a fairer system since exchanges have to bear the cost of transmitting prices, volume, book depth, etc. on order placement... It could actually drive transaction fees down for those who cancel infrequently too (people trading for true commercial purposes) since the exhanges could average down thr cost of their transactions with mass-cancelers and they can trade with better information. Oh, and unloading or buying large blocks of stock SHOULD move the market... by definition. Allowing people to mask that is a manipulation as well.
- kasey_junk 11y ago
  People use the term spoofing in an overloaded way: 1) As this article describes, spoofing is the use of orders to change the perception of the supply and demand of an instrument. It is often also called layering (a term that is also overloaded). It does not involve mass amounts of orders or cancels. In fact, good spoofers go to great lengths to make their order flow look identical to someone who has regular trading intentions. 2) Spamming lots of orders into an exchange for some nefarious purpose (I've heard this described as a DDoS on the exchange). Which is both widely over reported (to the point that I believe it is largely urban myth) and trivial to detect and prevent on the exchange side (the exchanges know exactly who is sending the orders, the specific order gateways have rate limits, etc). Finally, exchanges do penalize market participants that cancel too many orders. This is typically done via a fill ratio (the % of orders to those that trade) and enforcement can be either in the form of price levels, fees or potentially banning from the exchange.
  - yummyfajitas 11y ago
    To make it more complicated, there are people who run bargain hunter strategies - people who deliberately place orders way outside the NBBO in the hope of getting fills at really good prices. E.g., I'll buy TWC at $140 but not it's current $148. This is functionally identical to spoofing except that these people are explicitly hoping to get a fill. (Hence it's legal.)
ghshephard 11y ago
I find it hard to belief that this concept of "Spoofing", which so many knowledgeable and expert people are debating as to whether it's a good or practice, could be considered "illegal."
- kasey_junk 11y ago
  It is illegal, everyone who trades knows it is illegal, and it has been illegal for a very long time (long before HFT was an accepted concept)/
  - tcbawo 11y ago
    Also, exchanges stand on the side of anti-spoofing because they don't make money with canceled orders (apart from co-lo/access fees).
runj__ 11y ago
There's an interesting argument for insider trading being legal, the basic idea is that it helps propagate information faster than it would if people just keep the information to themselves and results in a more fair stock price at any given time. Which is sort of the argument for why HFT is legal.
- bko 11y ago
  The most convincing case I heard for making insider trading legal was in a 2003 Wall Street Journal op-ed [0]. [0] http://www.wsj.com/articles/SB104786934891514900 http://www.wsj.com/articles/SB104786934891514900 (Paywall) [1] https://www.google.com/#q=%22the+case+for+insider+trading%22 https://www.google.com/#q=%22the+case+for+insider+trading%22 (Google search results, top result)
- nhaehnle 11y ago
  The flip side of this is that publishing information is a better way to transmit information than placing orders on an exchange by many orders of magnitude. If insider trading is legalized, the incentives are stacked even further towards intransparency in corporations, because it gives management yet another reason to try to hide what is going on. That will lead to more information being hidden on purpose. Sure, some of that information leaks back out via orders and price movements, but at least to me it seems overly optimistic to hope that the overall amount of publicly available information increases.
solve 11y ago
His only big mistake was to not use the obvious loophole that traders have been using for decades - put some kind of slightly black-box automated system between you and the market. Train that system to do what you want, but now it's being done in a way that takes some of the fine-grained control and responsibility away from the human. Exact same end-results, but it eliminates the human "intent" that this law hinges on. Is this whole controversy really that dumb? Yes. Why are hackers and engineers so horrible at understanding trading, when they first get into it? If I had to name one reason - it's because they've been trained for their whole lives to assume that there is such a thing as a "real price". There is no "real price" for anything in the world. There is no one in the world that has some inside access to the mythical "real price". At the surface level, both fields have many similarities, but unlike the engineering problems you've always dealt with, there is no clear undeniable truth that will be eventually uncovered with enough work. Assume that's true, now carefully consider the implications. If you can do that, you've crossed the most difficult mental gap when transitioning from engineering to trading.
- kasey_junk 11y ago
  Except that fully hft strategies have/are also being pursued for spoofing as well.
  - solve 11y ago
    You say it as if lawyers pursuing investment firms for every reason imaginable is a new thing.
    - kasey_junk 11y ago
      I was replying to the specific idea that by using an algo to trade you are immunized from spoofing laws, which is not/has not been true.
      - solve 11y ago
        I did not say that anyone could be immunized from being pursued. Every party making a ton of money in trading gets pursued.
fixxer 11y ago
The idea that one trader caused the flash crash is absurd. Every professional trading operation uses such strategies to shift the book, the large banks and funds especially. One guy? I feel like I am living in a fucking cartoon.
lordnacho 11y ago
Good points in that article. He's spot on about the fundamental players; they want the market to be inefficient so they can make up the difference when it goes to the right value, and they don't want to leak their decisions that they've paid a lot of money to come to. To add complexity, it's not necessarily the case that someone who almost never trades is spoofing, or that they don't want to trade. Consider a simple strategy: I am willing to offer GE shares at 20.00 if the the wider index is trading at 100. In fact because there's some sort of relationship (real or imagined) I'm happy to sell as long as I get more than 1/5 of the index price for my GE shares. I'm also willing to buy on a similar ratio. Now every time someone trades some other share, the index will move. And I will have to move my price. The thing with spoofing is a spoofer doesn't want to trade. They just want to raise until everyone else folds. Just like in poker, it creates noise in the market. How exactly you prove that is hard to say. Another thing, related to manipulation: you can move the market by actually trading as well. Especially if you're a big guy. I can't count the number of times (normally around expiry) when the index has moved unnaturally only to come right back. I think guys are getting done for this now, and it's about time.
- fixxer 11y ago
  Spoofing involves a substantial amount of risk. You can get lifted/hit, in which case you're on for size in a trade you never wanted.
xedarius 11y ago
I was reading some of the enhancement requests Navinder asked his broker firm to build into his trading application. Here's a quote from the FT. "He said he would “like to be able to alternate the closeness ie one price away or three prices away etc etc”, and needed “a facility to be able to enter multiple orders at different prices using one click” and a function that would cause his “order to be pulled if there are not x amount of orders beneath it”, according to the DoJ’s criminal complaint." He also asked for a feature that would allow him to cancel on closeness, so if the market price started drift close to his buy/sell price he would cancel. Now the interesting thing about thing about these features is that if you've ever worked at an investment bank, these features are not dissimilar from the kinds of requests you would get from trading desks. For example, there are a number of algos out there that try to stay second on the order book. They may not cancel the order, but widening a spread is effectively the same thing. As for a country with limitless resources hunting down an individual for playing the game and winning is farcical. They should be thanking him for highlighting how ludicrously vulnerable their market place is.

38 points by dsri 11y ago

Without it, how can we survive when are those who make war, & oppression possible.

His argument seems to hinge on the claim that fundamental investors need to be able to trade large amounts without affecting the price. He backs it up with the claim that some traders see that as a fundamental human right. Is it really important?

tptacek 11y ago
There can't possibly be a right to trade large numbers of shares without moving the price, that of course being the whole point of a market.
- Dylan16807 11y ago
  Without moving the price outside of the direct effect of applying the trade to the order book. In other words, the prices everyone else offers do not change based on your purchase. They are based on an assessment of the company, not based on exactly how much you are willing to pay for stocks minus .01 cents. (Yes there are gray areas, but as a principle it's valid.)
  - tptacek 11y ago
    Aren't you in effect arguing against the law of supply and demand? Stipulating that you can reliably predict the future cash flows of a company and holding them constant, the number of shares available to buy or on offer should determine the price. Ergo, the impact on the market of a giant block of shares should be large.
    - Dylan16807 11y ago
      I don't read it that way. I take it as an insistence that basic supply and demand decide the price. This means no millisecond-level attempts to outsmart the other guy. So for example you want to buy a million shares starting at $9.00 and this naturally moves the price up to $9.20 based on what everyone is offering. You're okay with that, but you are not okay with someone intercepting mid-purchase, buying a whole bunch of shares that were between $9.02 and $9.15, and instantly selling them back to you at $9.18. Maybe I'm being too generous in my interpretation of "not moving the price", but this is the effect you get when you disguise your purchase. Only the actual demand affects the price. So I think that's what the real meaning is.
      - kasey_junk 11y ago
        Your read is skewed by a common but incorrect perception about the way the markets operate. You see it as party A wants to trade with party B and party C steps into the middle of the transaction to extract money from the transaction that they have no right to. What is in fact happening is that party A wants to trade with party B over and over again at the same price and party B wants to change their price based on these interactions. The later is what is actually happening (in greatly simplified form) and it is the mechanic by which the market goes from $9.00 to $9.20. Further, large block traders absolutely positively hate that it goes up no matter how it happens, because their whole trade is based on finding a market price inefficiency. The longer it remains, they longer they profit. If they could, they would make it a law that prices of transactions couldn't be shared.
        Dylan16807 11y ago
        In this scenario it's okay for B to change their price based on "sold some, bump the price based on supply". It's not okay for B to change their price even more based on tracking A's actions. So you treat trades as independent, and there would be no benefit from hiding the fact that you're trading. This means the price smoothly curves up from $9.00 to $9.20, it doesn't instantly jump to $9.19 or $9.27 because B figures out how much A is willing to pay. I'm not going to comment on how realistic such a principle is.
hudibras 11y ago
Levine is being sarcastic about the "fundamental human right" part, by the way.

kweinber 11y ago

Spoofing is bad because it allows you to lie about your intentions in a system that is supposed to give true price transparency. This would all be corrected if the exchanges charged money for cancelled orders. These traders are placing orders on a massive basis at prices they never intended to honor in order to get the exhanges to transmit these fake prices and trick others into action. (Often cancelling 100x the orders they transact). This is called "price-fraud", "spamming", and "market manipulation" in other parts of the economy. Exchanges should charge a transaction for orders when they are placed... Not solely if they are executed. It is actually a fairer system since exchanges have to bear the cost of transmitting prices, volume, book depth, etc. on order placement... It could actually drive transaction fees down for those who cancel infrequently too (people trading for true commercial purposes) since the exhanges could average down thr cost of their transactions with mass-cancelers and they can trade with better information. Oh, and unloading or buying large blocks of stock SHOULD move the market... by definition. Allowing people to mask that is a manipulation as well.

kasey_junk 11y ago
People use the term spoofing in an overloaded way: 1) As this article describes, spoofing is the use of orders to change the perception of the supply and demand of an instrument. It is often also called layering (a term that is also overloaded). It does not involve mass amounts of orders or cancels. In fact, good spoofers go to great lengths to make their order flow look identical to someone who has regular trading intentions. 2) Spamming lots of orders into an exchange for some nefarious purpose (I've heard this described as a DDoS on the exchange). Which is both widely over reported (to the point that I believe it is largely urban myth) and trivial to detect and prevent on the exchange side (the exchanges know exactly who is sending the orders, the specific order gateways have rate limits, etc). Finally, exchanges do penalize market participants that cancel too many orders. This is typically done via a fill ratio (the % of orders to those that trade) and enforcement can be either in the form of price levels, fees or potentially banning from the exchange.
- yummyfajitas 11y ago
  To make it more complicated, there are people who run bargain hunter strategies - people who deliberately place orders way outside the NBBO in the hope of getting fills at really good prices. E.g., I'll buy TWC at $140 but not it's current $148. This is functionally identical to spoofing except that these people are explicitly hoping to get a fill. (Hence it's legal.)

ghshephard 11y ago

I find it hard to belief that this concept of "Spoofing", which so many knowledgeable and expert people are debating as to whether it's a good or practice, could be considered "illegal."

kasey_junk 11y ago
It is illegal, everyone who trades knows it is illegal, and it has been illegal for a very long time (long before HFT was an accepted concept)/
- tcbawo 11y ago
  Also, exchanges stand on the side of anti-spoofing because they don't make money with canceled orders (apart from co-lo/access fees).

runj__ 11y ago

There's an interesting argument for insider trading being legal, the basic idea is that it helps propagate information faster than it would if people just keep the information to themselves and results in a more fair stock price at any given time. Which is sort of the argument for why HFT is legal.

bko 11y ago
The most convincing case I heard for making insider trading legal was in a 2003 Wall Street Journal op-ed [0]. [0] http://www.wsj.com/articles/SB104786934891514900 http://www.wsj.com/articles/SB104786934891514900 (Paywall) [1] https://www.google.com/#q=%22the+case+for+insider+trading%22 https://www.google.com/#q=%22the+case+for+insider+trading%22 (Google search results, top result)
nhaehnle 11y ago
The flip side of this is that publishing information is a better way to transmit information than placing orders on an exchange by many orders of magnitude. If insider trading is legalized, the incentives are stacked even further towards intransparency in corporations, because it gives management yet another reason to try to hide what is going on. That will lead to more information being hidden on purpose. Sure, some of that information leaks back out via orders and price movements, but at least to me it seems overly optimistic to hope that the overall amount of publicly available information increases.

solve 11y ago

His only big mistake was to not use the obvious loophole that traders have been using for decades - put some kind of slightly black-box automated system between you and the market. Train that system to do what you want, but now it's being done in a way that takes some of the fine-grained control and responsibility away from the human. Exact same end-results, but it eliminates the human "intent" that this law hinges on. Is this whole controversy really that dumb? Yes. Why are hackers and engineers so horrible at understanding trading, when they first get into it? If I had to name one reason - it's because they've been trained for their whole lives to assume that there is such a thing as a "real price". There is no "real price" for anything in the world. There is no one in the world that has some inside access to the mythical "real price". At the surface level, both fields have many similarities, but unlike the engineering problems you've always dealt with, there is no clear undeniable truth that will be eventually uncovered with enough work. Assume that's true, now carefully consider the implications. If you can do that, you've crossed the most difficult mental gap when transitioning from engineering to trading.

kasey_junk 11y ago
Except that fully hft strategies have/are also being pursued for spoofing as well.
- solve 11y ago
  You say it as if lawyers pursuing investment firms for every reason imaginable is a new thing.
  - kasey_junk 11y ago
    I was replying to the specific idea that by using an algo to trade you are immunized from spoofing laws, which is not/has not been true.
    - solve 11y ago
      I did not say that anyone could be immunized from being pursued. Every party making a ton of money in trading gets pursued.

fixxer 11y ago

The idea that one trader caused the flash crash is absurd. Every professional trading operation uses such strategies to shift the book, the large banks and funds especially. One guy? I feel like I am living in a fucking cartoon.

lordnacho 11y ago

Good points in that article. He's spot on about the fundamental players; they want the market to be inefficient so they can make up the difference when it goes to the right value, and they don't want to leak their decisions that they've paid a lot of money to come to. To add complexity, it's not necessarily the case that someone who almost never trades is spoofing, or that they don't want to trade. Consider a simple strategy: I am willing to offer GE shares at 20.00 if the the wider index is trading at 100. In fact because there's some sort of relationship (real or imagined) I'm happy to sell as long as I get more than 1/5 of the index price for my GE shares. I'm also willing to buy on a similar ratio. Now every time someone trades some other share, the index will move. And I will have to move my price. The thing with spoofing is a spoofer doesn't want to trade. They just want to raise until everyone else folds. Just like in poker, it creates noise in the market. How exactly you prove that is hard to say. Another thing, related to manipulation: you can move the market by actually trading as well. Especially if you're a big guy. I can't count the number of times (normally around expiry) when the index has moved unnaturally only to come right back. I think guys are getting done for this now, and it's about time.

fixxer 11y ago
Spoofing involves a substantial amount of risk. You can get lifted/hit, in which case you're on for size in a trade you never wanted.

xedarius 11y ago

I was reading some of the enhancement requests Navinder asked his broker firm to build into his trading application. Here's a quote from the FT. "He said he would “like to be able to alternate the closeness ie one price away or three prices away etc etc”, and needed “a facility to be able to enter multiple orders at different prices using one click” and a function that would cause his “order to be pulled if there are not x amount of orders beneath it”, according to the DoJ’s criminal complaint." He also asked for a feature that would allow him to cancel on closeness, so if the market price started drift close to his buy/sell price he would cancel. Now the interesting thing about thing about these features is that if you've ever worked at an investment bank, these features are not dissimilar from the kinds of requests you would get from trading desks. For example, there are a number of algos out there that try to stay second on the order book. They may not cancel the order, but widening a spread is effectively the same thing. As for a country with limitless resources hunting down an individual for playing the game and winning is farcical. They should be thanking him for highlighting how ludicrously vulnerable their market place is.