8 ms·

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

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.)
  - tptacek 11y ago
    Question: Matt Levine keeps pointing out that this is some rando in a track suit working from his basement in London, and MF Global is providing him with execution services for ostensibly zillions of dollars worth of orders. There's no way he could have taken fills, right? The trading intent was fiction, but so was the trading capability, right?
    - kasey_junk 11y ago
      This is where the "intent" of spoofing becomes very very murky. There is a trading strategy called laddering (or sometimes confusingly layering) where a market maker will put orders at many levels of the order book at once (and sometimes at extreme depths, like 100s of levels). If they were to get swept in one direction there is absolutely no way they could trade all of those levels (their risk controls would kick in long before that). But, if the fills come in the correct order (ie 1 buy/1 sell) then the market makers would happily trade all of them. Its even worse in pro-rata matched markets because participants will often put orders in at much higher quantities than they actually want to trade, so that they can get any of the fills. That is, they'd love to get filled for 100 contracts, but are putting in orders for 10000 contracts in order to get any of the matching. Again, if that filled in the proper order they'd happily trade it, but if not they don't want to. So in both cases, spoofing and not spoofing, the actual ability to honor the orders is in question. So that in and of itself is not evidence of spoofing. The difference (I believe) is that the market makers in the laddering cases would LOVE to trade every single one of those orders if it came in the right order and are not intending to change the markets behavior with the placing of those orders.
dm3 11y ago
There's an argument for spoofing from earlier this year [1] which I would tend to agree with if the proportion of spoofers and HFT front-runners actually balanced out. Not sure how it really is in reality though. [1] http://www.bloombergview.com/articles/2015-01-23/high-frequency-trading-spoofers-and-front-running http://www.bloombergview.com/articles/2015-01-23/high-freque...
- kasey_junk 11y ago
  From what I can tell, the argument for spoofing devolves pretty rapidly into an argument for private order books (that is prices are not published at all). This is available currently in the form of dark pools. They don't tend to work out as liquidity is much lower on them and bid/ask spreads are wider. That may not be true if ALL venues were required to be private, but that would be a pretty dramatic change (and exactly the opposite of what we have now, which is a requirement to publish and meet other published prices).
  - msandford 11y ago
    > They don't tend to work out as liquidity is much lower on them and bid/ask spreads are wider. If you're a big institutional investor though, and you know that buying a bunch of shares will move the market for sure, well, it might be worth suffering a wider spread. As long as that spread looks small relative to how much you think you'll move the market, it's not a bad deal. And if you already have a subscription to the pool you might as well try it before you get the algorithms involved to buy on the open market.
    - kasey_junk 11y ago
      Absolutely if you are a large block trader your dream scenario is a very liquid market with very inefficient price discovery. Dark Pools were meant to provide that, but it turns out that in practice it didn't work (because no one wants to provide liquidity in that environment) and Dark Pools ended up resorting to either letting liquidity providers in, going out of business, or extremely scammy things to keep up the ruse.
bko 11y ago
Intentions are hard to prove and are very subjective. Big financial players who believe they are being exploited by smaller players who game their algos can lobby the regulatory bodies to punish those smaller players. This contributes to an ever increasing concentration of power in the financial sector to the large, too big to fail banks. It's the reason that, even after tens of billions of dollars in fines, there have been no criminal cases brought against those in the big banks, while this guy faces a maximum sentence of 380 years if found guilty on all charges [0] Spoofing is best handled by the particular exchanges but should be weighed against the harm it would do to honest market makers who have to place and cancel orders regularly > In looking at Mr. Holder’s legacy in white-collar crime cases, the pursuit of corporations, especially banks, stands out. The highest settlements for violations have come in the last year. These include the $13 billion from JPMorgan Chase and the $16.65 billion from Bank of America for their roles in issuing mortgage-backed securities tied to faulty subprime loans. BNP Paribas also paid a $9 billion fine for violating economic sanctions laws. BNP was also required to enter a guilty plea to a criminal charge, a rarity in the world of corporate criminal prosecutions. But prosecutors did not file charges against any individuals for the wrongdoing that led to the large settlements. [1] [0] http://www.telegraph.co.uk/finance/financial-crime/11554471/British-Flash-Crash-trader-faces-20-years-in-US-jail-if-found-guilty.html http://www.telegraph.co.uk/finance/financial-crime/11554471/... [1] http://dealbook.nytimes.com/2014/09/29/eric-holders-mixed-legacy-on-white-collar-crime/?_r=0 http://dealbook.nytimes.com/2014/09/29/eric-holders-mixed-le...
kweinber 11y ago
HN should require a signed comment when you downvote. My comment is getting hammered with downvotes now.... And I don't know why... I'd hate to assume that people just want to bury a simple, fair solution to the problem without any justification.
- maxerickson 11y ago
  Please don't complain about downvotes...
  - deleted 11y ago
    [deleted]
    - maxerickson 11y ago
      I was doing as you asked. See how fruitful it was?
- mmodahl 11y ago
  Because it is not a simple or fair solution to the problem; it is a sophomoric attempt at solving a human problem that simultaneously guts the actual mechanics of exchanges. You want to make market-making unprofitable and to turn the stock market into your town's real estate market. How easy is it to sell a house? What is an accurate price for your house? At this moment? To the dollar?
  - kweinber 11y ago
    Protecting market making is excuse-making since registered market makers are already exempt from "over-messaging" rules like this. Plus It would be possible to enter time-expiring orders to accommodate market making without allowing unbounded spoofing. The expiries are extra info you could use to disregard price flashers who have no intention of actually transacting. (filtering out ms expiries for example). Time-unbounded orders should cost something to cancel. (heck... Give institutions 3x the cancels as actual orders for free... It would still help). Real Estate isnt comparable. There are no market makers in real estate because the product isnt standardized and you can't make an equivalence market in one-off products... Houses aren't securities and the illusions propagated by securitizing the loans around them clearly has wild historical market risk attached. "it is a sophomoric attempt at solving a human problem that simultaneously guts the actual mechanics of exchanges." Markets are human constructs...the pure mechanics of exhanges aren't more important than the humans they serve. Fixing the human problems should be the priority, right?
solve 11y ago
The intention of a trader on these kinds of markets is to make money. End. Telling him that you'll arrest him, or that he should feel bad, if he doesn't have the intentions and morality you want him to have - does absolutely nothing to change his intentions. Markets work, despite this incredibly misaligned incentive, because markets can eventually reward people who are eventually more correctly predicting the future value of the assets. FYI - your usage of the phrase "true price" makes me strongly confident that you totally misunderstand markets.
yummyfajitas 11y ago
Nasdaq has an excessive messaging policy and charges the exact fees you suggest. http://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing http://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing
- kweinber 11y ago
  Fees only kick in if you cancel 100x the orders than you actually execute. And then you only pay half a cent per order over that limit. I was suggesting something much more like a txn fee per order closed above a much tighter threshold (like 3x) And none of those limits currently apply to registered market makers... And I agree with their exemption from the harsher rule too, but they should bear increased scrutiny and guaranteed liquidity rules for the privilege.
  - yummyfajitas 11y ago
    Market makers are obligated to keep lots of orders way outside the NBBO in order to maintain an "orderly market". If a trade occurs at $10.00 and then the next trade is $12.00, that's considered "not orderly". So a market maker must keep orders at $10.00, $10.20, $10.40, ..., $11.80, $12.00. This way if someone comes in and buys everything then the sequence of trades will be $10.00, $10.20, $10.40, etc.

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.)
- tptacek 11y ago
  Question: Matt Levine keeps pointing out that this is some rando in a track suit working from his basement in London, and MF Global is providing him with execution services for ostensibly zillions of dollars worth of orders. There's no way he could have taken fills, right? The trading intent was fiction, but so was the trading capability, right?
  - kasey_junk 11y ago
    This is where the "intent" of spoofing becomes very very murky. There is a trading strategy called laddering (or sometimes confusingly layering) where a market maker will put orders at many levels of the order book at once (and sometimes at extreme depths, like 100s of levels). If they were to get swept in one direction there is absolutely no way they could trade all of those levels (their risk controls would kick in long before that). But, if the fills come in the correct order (ie 1 buy/1 sell) then the market makers would happily trade all of them. Its even worse in pro-rata matched markets because participants will often put orders in at much higher quantities than they actually want to trade, so that they can get any of the fills. That is, they'd love to get filled for 100 contracts, but are putting in orders for 10000 contracts in order to get any of the matching. Again, if that filled in the proper order they'd happily trade it, but if not they don't want to. So in both cases, spoofing and not spoofing, the actual ability to honor the orders is in question. So that in and of itself is not evidence of spoofing. The difference (I believe) is that the market makers in the laddering cases would LOVE to trade every single one of those orders if it came in the right order and are not intending to change the markets behavior with the placing of those orders.

dm3 11y ago

There's an argument for spoofing from earlier this year [1] which I would tend to agree with if the proportion of spoofers and HFT front-runners actually balanced out. Not sure how it really is in reality though. [1] http://www.bloombergview.com/articles/2015-01-23/high-frequency-trading-spoofers-and-front-running http://www.bloombergview.com/articles/2015-01-23/high-freque...

kasey_junk 11y ago
From what I can tell, the argument for spoofing devolves pretty rapidly into an argument for private order books (that is prices are not published at all). This is available currently in the form of dark pools. They don't tend to work out as liquidity is much lower on them and bid/ask spreads are wider. That may not be true if ALL venues were required to be private, but that would be a pretty dramatic change (and exactly the opposite of what we have now, which is a requirement to publish and meet other published prices).
- msandford 11y ago
  > They don't tend to work out as liquidity is much lower on them and bid/ask spreads are wider. If you're a big institutional investor though, and you know that buying a bunch of shares will move the market for sure, well, it might be worth suffering a wider spread. As long as that spread looks small relative to how much you think you'll move the market, it's not a bad deal. And if you already have a subscription to the pool you might as well try it before you get the algorithms involved to buy on the open market.
  - kasey_junk 11y ago
    Absolutely if you are a large block trader your dream scenario is a very liquid market with very inefficient price discovery. Dark Pools were meant to provide that, but it turns out that in practice it didn't work (because no one wants to provide liquidity in that environment) and Dark Pools ended up resorting to either letting liquidity providers in, going out of business, or extremely scammy things to keep up the ruse.

bko 11y ago

Intentions are hard to prove and are very subjective. Big financial players who believe they are being exploited by smaller players who game their algos can lobby the regulatory bodies to punish those smaller players. This contributes to an ever increasing concentration of power in the financial sector to the large, too big to fail banks. It's the reason that, even after tens of billions of dollars in fines, there have been no criminal cases brought against those in the big banks, while this guy faces a maximum sentence of 380 years if found guilty on all charges [0] Spoofing is best handled by the particular exchanges but should be weighed against the harm it would do to honest market makers who have to place and cancel orders regularly > In looking at Mr. Holder’s legacy in white-collar crime cases, the pursuit of corporations, especially banks, stands out. The highest settlements for violations have come in the last year. These include the $13 billion from JPMorgan Chase and the $16.65 billion from Bank of America for their roles in issuing mortgage-backed securities tied to faulty subprime loans. BNP Paribas also paid a $9 billion fine for violating economic sanctions laws. BNP was also required to enter a guilty plea to a criminal charge, a rarity in the world of corporate criminal prosecutions. But prosecutors did not file charges against any individuals for the wrongdoing that led to the large settlements. [1] [0] http://www.telegraph.co.uk/finance/financial-crime/11554471/British-Flash-Crash-trader-faces-20-years-in-US-jail-if-found-guilty.html http://www.telegraph.co.uk/finance/financial-crime/11554471/... [1] http://dealbook.nytimes.com/2014/09/29/eric-holders-mixed-legacy-on-white-collar-crime/?_r=0 http://dealbook.nytimes.com/2014/09/29/eric-holders-mixed-le...

kweinber 11y ago

HN should require a signed comment when you downvote. My comment is getting hammered with downvotes now.... And I don't know why... I'd hate to assume that people just want to bury a simple, fair solution to the problem without any justification.

maxerickson 11y ago
Please don't complain about downvotes...
- deleted 11y ago
  [deleted]
  - maxerickson 11y ago
    I was doing as you asked. See how fruitful it was?
mmodahl 11y ago
Because it is not a simple or fair solution to the problem; it is a sophomoric attempt at solving a human problem that simultaneously guts the actual mechanics of exchanges. You want to make market-making unprofitable and to turn the stock market into your town's real estate market. How easy is it to sell a house? What is an accurate price for your house? At this moment? To the dollar?
- kweinber 11y ago
  Protecting market making is excuse-making since registered market makers are already exempt from "over-messaging" rules like this. Plus It would be possible to enter time-expiring orders to accommodate market making without allowing unbounded spoofing. The expiries are extra info you could use to disregard price flashers who have no intention of actually transacting. (filtering out ms expiries for example). Time-unbounded orders should cost something to cancel. (heck... Give institutions 3x the cancels as actual orders for free... It would still help). Real Estate isnt comparable. There are no market makers in real estate because the product isnt standardized and you can't make an equivalence market in one-off products... Houses aren't securities and the illusions propagated by securitizing the loans around them clearly has wild historical market risk attached. "it is a sophomoric attempt at solving a human problem that simultaneously guts the actual mechanics of exchanges." Markets are human constructs...the pure mechanics of exhanges aren't more important than the humans they serve. Fixing the human problems should be the priority, right?

solve 11y ago

The intention of a trader on these kinds of markets is to make money. End. Telling him that you'll arrest him, or that he should feel bad, if he doesn't have the intentions and morality you want him to have - does absolutely nothing to change his intentions. Markets work, despite this incredibly misaligned incentive, because markets can eventually reward people who are eventually more correctly predicting the future value of the assets. FYI - your usage of the phrase "true price" makes me strongly confident that you totally misunderstand markets.

yummyfajitas 11y ago

Nasdaq has an excessive messaging policy and charges the exact fees you suggest. http://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing http://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing

kweinber 11y ago
Fees only kick in if you cancel 100x the orders than you actually execute. And then you only pay half a cent per order over that limit. I was suggesting something much more like a txn fee per order closed above a much tighter threshold (like 3x) And none of those limits currently apply to registered market makers... And I agree with their exemption from the harsher rule too, but they should bear increased scrutiny and guaranteed liquidity rules for the privilege.
- yummyfajitas 11y ago
  Market makers are obligated to keep lots of orders way outside the NBBO in order to maintain an "orderly market". If a trade occurs at $10.00 and then the next trade is $12.00, that's considered "not orderly". So a market maker must keep orders at $10.00, $10.20, $10.40, ..., $11.80, $12.00. This way if someone comes in and buys everything then the sequence of trades will be $10.00, $10.20, $10.40, etc.