Pretty smart actually. Impressed he requested this feature via his Excel platform (this screams IB as his broker). Not quite sure how this is illegal. While I have a limited understanding of HFT, I do know that a core strategy is to put in a test order for a nominal amount of shares at a certain price below market (like 20 shares?) and then once that triggers they put in a much larger order in.

He was doing something similar. From my cursory read, he was basically just filling one side of the order book and using that to his advantage. Also those order sizes for E-Minis aren't really that big...

My understanding is that market manipulation is illegal. Putting in bids without the intent to trade can be interpreted as market manipulation.

How is that any different than a person/fund/algo putting in buy and/or sell orders for a specific (illiquid) stock on expiration day to bring it closer to the strike of their much larger option position?

Pin risk exists for reason....

Now you (and perhaps others) would argue that if they actually but in bids AND THEN execute them then that it is not manipulation? I don't see the execution or lack thereof being a determinant of a strategy's legality.

Check out rule 575 http://www.cftc.gov/filings/orgrules/rule082814cmedcm001.pdf

Don't really have the energy for this currently, but reading Appendix A (red lined version) it reads:

All orders must be entered for the purpose of executing bona fide transactions. Additionally,
all non-actionable messages must be entered in good faith for legitimate purposes.
A. No person shall enter or cause to be entered an order with the intent, at the time of order
entry, to cancel the order before execution or to modify the order to avoid execution;

So in my example concerning pin risk, which has been observed in the markets for years, the act of executing manipulative orders is OK?

Equities tend to stick to the strike prices of options on expiration day due to the mismatch between option traders who are delta hedging and option traders who are not. This results in a net synthetic short options being replicated through delta hedging. When replicating a short option close to the strike, you have to sell above the strike, and buy back below, resulting in an stickiness to the strike.

http://en.wikipedia.org/wiki/Pin_risk_%28options%29

Those are all bona fide orders resulting from genuine buy/sell pressure. It's not manipulation by any stretch of the imagination.

If you are referring to people who are actually buying up shares in the underlying to move it up past a strike, that is manipulation I suppose, but it's not illegal in the same way that spoofing is.

That was my point exactly. Order book stuffing is still an HFT practice (or was..)

For reference on the expiration day pinning effect (this is just a model): https://www.math.nyu.edu/faculty/avellane/qf3601.pdf Order book spoofing has been around for years, long before HFT, and for futures (and probably stocks) it's simply illegal. Buying up shares of a stock to move it past your options strike happens to be legal, as far as I know. There are some good arguments for why order book spoofing shouldn't be illegal, there was a defense of it floating around a couple of months ago.

I wonder what the statistics look like for the market on order cancellations? How often does it occur? And the time between an orders showing up, and when they get cancelled?

As a mitigation, couldn't the market impose a "stickiness" to orders, so that they could be placed quickly, but there would be an automatic delay in cancellation (perhaps with a programmed in slippage, so that if a large order were placed, it would take an exponentially long time to cancel all of it). Or just eliminate the option to cancel altogether--you place an order and you are stuck with it. It just seems that this kind of thing should have been expected, and the folks who run the markets are kinda getting what they asked for, right? There are rules on paper, but why aren't they incorporated into the code that manages the trades?

There are tons of cancels, many more than there are executions. However, for the most part, those are HFT, and they can reasonably argue that at the time they placed the order, they bona fide wanted to trade, but circumstances changed a moment later (probably when they discovered they weren't at the front of the queue), and so they cancelled.

This is how I feel about #HFT and trading woesandhoes.blogspot.com

Is the rule against spoofing (and even probing?) universal? Or just for certain markets? For example, if someone pulled this kind of thing using Quantopian/IB on a NASDAQ listed stock, would it be illegal? I'm imagining for a thinly traded security, given that orders are transmitted immediately from Q to IB, that one could put in an order, and then slightly delayed, a cancellation of that order. Then, one could see if the price/volume is affected in the next minutely bar. I gather that this type of probing activity would be illegal, since one is only allowed to submit an order that is intended to be filled? Or would it only be illegal if there were a profit taking strategy based on the order/cancel perturbation?

Does anyone find this story a bit ludicrous , that a "kid" caused the "flash crash", trading a few 1000 e - mini contracts in his basement? come on. He was "spoofing" the market , so what . I can tell for a fact , ALMOST all prop firm use this a daily basis.

Lionel, prop firms spoof on a daily basis? You mean #HFT shops lol. Can't pull bid 100k off by hand without getting hit for some lololol.

Grant, you make a great point, but the only debate is on how fast they do it. But THE REALITY IS:

If we wanted to stop #HFT all market participants who don't want it would only trade through exchanges that don't allow it lol.

It's a simple fix, only because this all a game we made up anyway.....we can play how we like under current regulation.

But ya Lionel, spoofing happens everyday....i feel bad this is the fall guy.

How would the market look like without HFT? would it really be inneficient? huge spreads? high volatility?
While at university I worked with simulation of social agent for a short period and it would be really interesting to model it using agent based simulation. http://www.icr.ethz.ch/research/growlab

My feeling is that HFT might be good for small investors but the there are so much we just don't know that hft could be actually eating from everyone not only big investors

Who was the guy who mentioned Swift Trading? I can't find your post.....But ya your right there are some shops that have Layered , I actually didn't even take those into account because so few (Chinese Layering Groups)

But Prop Desks, T3, Trillium , 1st NY etc. Dont lol.

Lucas good point about what would it look like. I've given this question lots of thought and the fact is, it does not benefit small investors.

HFT makes it impossible for your Broker to clear size so it ends up costing you. Period.

Graham, do you follow @NanexLLC?

Eric always has the latest and greatest Spoofing Data.

I'm writing my dissertation on the subject of HFT.

The evidence is overwhelming; HFT improve market quality. HFTs participate primarily as market makers and arbitrageurs. HFT market making activity results in reduced spreads, improved liquidity and reduced transaction costs for small and large investors. HFT arbitrageurs lead price discovery and reduce volatility. HFTs also engage in directional strategies. These will be most familiar to those of us here on Quantopian. An example would be an algorithm that reads news stories and trades accordingly. These types of strategies lead price discovery and actually reduce adverse selection costs. HFTs also engage in structural strategies, and this is where all the controversy comes from. Spoofing, pinging, quote stuffing etc.. are all forms of structural strategies. This is where you see HFTs doing stuff like placing and canceling orders in an effort to induce market instability. One thing that should be noted is that none of these strategies are new. Pit traders in Chicago invented spoofing; they would try and sniff out liquidity.

Something a lot of people do not realize is that HFT market makers need to be able to detect liquidity. Market makers losses come primarily from trading against informed traders. For this reason they go through a lot of effort to identifying informed trading. This is where people like Michael Lewis think HFT are front-running. HFTs do not front run as they are not trading against private information. Using public information they identify informed traders and respond accordingly. This often means the cancellation of orders, the use of liquidity detection strategies, etc..

At this point I consider myself to be an expert on this subject, so I wish I'd joined this conversation sooner. Definitely want to get this discussion going again.

I think there are a good side and a bad side to HFT, I think the good side as market making has never been questioned but the problem is the bad side.
Strategies that the main purpose is to create opportunities either if they are flooding the market with fake data or flooding other hft algorithms.
There are so many order types out there most are tailor fit for hft and I am sure there are many predatory strategies one could implement if he had things like order flow. HFT are probably even trying to find out what other HFT are doing and competing with each other.

Also there should be a distinction of HFT that takes risks and the ones that don't.

I would be interesting in reading the dissertation, I find it difficult to find non-biased information about it.

Hello Taylor,

Given the expertise of some Quantopian players such as yourself, I have nothing to add, other than to "stir the pot" a bit more. Again, I'll make it clear that I don't support illegal activity (although I must admit, staying under the speed limit can be a personal challenge). It seems that fundamentally, regulators support a wide-open system, where someone like Sarao (the accused above) can use what sounds like a clever but rudimentary technique to gain a huge advantage. Regulators won't take the necessary steps to preclude such manipulation by requiring changes to the system. My uninformed view is that electronic trading at whatever speed is just a bunch of servers talking to one another over high-speed networks, so if regulators were serious, they would require specific, controlled code to run the system and get involved in the system architecture (as IEX has with their fiber spool delay). For example, if it is so bad that someone like Sarao could put in large manipulative orders, followed by cancellations, then automatically block this activity (e.g. by automatically delaying cancellations). My hunch is that there is some regulatory capture at play here. What does the government want? It wants to keep its paying customers happy.

Here's a relevant commentary discussing what might happen if spoofing were eliminated altogether:

http://davidstockmanscontracorner.com/navinders-excellent-adventures-in-the-casino-how-nav-sarao-milking-markets-ltd-spoofed-the-hfts/

Making spoofing illegal thus increases the profits of front running computers – meaning more front running computers.

Another article:

http://www.bloombergview.com/articles/2014-10-02/prosecutors-catch-a-spoofing-panther

As the author points out:

The direct victims of his spoofing were high-frequency trading algorithms that made their trading decisions by looking at what other algorithms were doing.

We are not talking about some jerk stealing purses from little old ladies on their way to church; HFT algorithms that didn't have sufficient smarts got ripped off, because their developers didn't invest into making them sophisticated enough to avoid getting ripped off.

If you haven't already seen it, there's a bunch of info. on http://www.nanex.net/NxResearch/ related to HFT, market manipulation, flash crashes, etc.

Hi Grant,

I am familiar with Nanex. You don't see Hunsader's research cited much in academic HFT literature because it isn't very academic. His visuals are great for... visualizing HFT, but that's about it. The academic literature, on the other hand, is actually well-developed and continuing to grow. I can't say that there is a consensus, but the general view is that HFTs are mostly good, particularly when they're functioning as market makers or arbitrageurs.

The criticism is focused mostly on two aspects:

1) that HFT market makers may withdraw liquidity in volatile markets. For a long time, fault for the Flash Crash has been wrongly attributed to HFTs. HFTs did not cause the Flash Crash. They may, however, have exacerbated the problem by withdrawing liquidity at a time when markets are already fragile.

2) HFTs are also criticized for certain strategies like spoofing, quote stuffing, pinging, etc.. These strategies are typically treated as if they are their own type of trading strategy, but it should be noted that they are all designed with one specific purpose. They are designed around the detection of and response to informed trading. HFTs function primarily as market makers. Market making losses stem primarily from trading against informed traders. For this reason, HFT market makers go through great lengths to predict and detect informed trading.

This is where you get Michael Lewis claiming that HFT "front run". HFTs do not front run. For front running to occur, there must be access to private / proprietary information. HFTs trade on public information. Using this information they are very efficient at predicting informed trading. When Brad Katsuyama went to trade and discovered that liquidity had dried up on him, it was because HFTs discovered him as an informed trader. They responded accordingly. They weren't front running, they just weren't willing to lose money from trading with him. Brad was upset because he was no longer able to go to the market and take advantage of the unsuspecting market maker. Simply put, the HFTs were outsmarting him. He had to actually pay for his liquidity.

HFTs ability to detect liquidity means that informed traders like Brad had to become smarter about hiding their liquidity. Meanwhile, HFT market makers offer more competitive spreads to the rest of us. VWAP algorithms, which I am sure you're at least familiar with, are designed with this purpose. Thor was designed to hide liquidity. Iceberg order types, for example, are designed for hiding liquidity. All of this is a continuation of the never ending battle between informed traders and liquidity providers. Technological innovations mean that HFTs are better at detecting liquidity, and institutional traders are better at hiding liquidity.

With that said, the research I'm conducting focuses on exchange microstructure; the rules that govern securities exchanges. You're right to point out that IEX's fiber spool might be one way to thwart manipulative HFTs. My major criticism of the SEC and CFTC is that they won't allow other types of microstructure changes that might mitigate HFT. This is a huge mistake. Exchanges face incentives to provide the best market quality for everyone. They do this through the rules they set, like maker taker pricing, order cancellation fees, liquidity provision tiers, designated market maker status, etc.. A number of microstructures have been proposed that could potentially make a lot of sense, but the SEC doesn't allow them to be tried. For example. HFT could be granted a temporal advantage over other market participants in exchange for the privilege of serving as a consistent and competitive market maker. Additionally, they could be limited to market making strategies. This microstructure could be ideal, but we will never know.

I remember you asked about statistics on order cancellation metrics. Order cancellation ratios are certainly very high. Somewhere around 100 cancellation per trade. Most of this is driven by HFT market makers and arbitrageurs. Simply put, their computers change their mind a lot. They are able to focus on the entire market simultaneously, and therefore they update their quotes very frequently. Order cancellation fees exist, but are not always enforced. It turns out that in other markets where they have enforced order cancellation limits, the result has been reduced liquidity provision and wider spreads. High order cancellation ratios are a legitimate aspect of modern liquidity provision. Unfortunately, strategies like quote stuffing may also in fact be designed to manipulate markets. Exchanges are aware of this and have taken steps to mitigate.

Anyways, the cancel to trade ratios you are looking for are available through the SEC:

http://www.sec.gov/marketstructure/datavis/ma_exchange_canceltotrade.html