
Spoofers Keep Markets Honest - anonu
http://www.bloombergview.com/articles/2015-01-23/high-frequency-trading-spoofers-and-front-running
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ArchD
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
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
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
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
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.

~~~
Retric
Most of this gets really technical, however the idea that you can see an order
and get a ahead of it is clearly front running even if it's legal. The issue
is exchanges have an incentive to sell "early" access to information so
generally people do X for a while, that becomes illegal or the people being
taken advantage of swap to another approach.

~~~
kasey_junk
>however the idea that you can see an order and get a ahead of it is clearly
front running even if it's legal

No one gets to see an order and get ahead of it.

> The issue is exchanges have an incentive to sell "early" access to
> information

All exchange access is "early" access. There is no way to stop latency
advantages.

~~~
Retric
_No one gets to see an order and get ahead of it._

I just described one approach where than can happen.

 _All exchange access is "early" access. There is no way to stop latency
advantages._

There is no need to publish pending transactions in such a way that you can
get your executed on a different exchange before that one propagates.

Anyway, exchanges are an incredibly complex problem with a lot of perverse
incentives. However (ed: IMO) any trading strategy based on implementation
details is counter productive to a free and open market and thus it harms the
U.S. economy.

~~~
evanpw
Pending transactions are never public. Everyone sees the execution on that
exchange, but they don't know whether or not some additional portion is being
routed to another exchange.

One situation that people often _mistake_ for this type of prior knowledge is
the following: You are a market-maker, and at the current price, you want to
buy X shares (you're also willing to sell at some slightly higher price, and
willing to buy more at some lower price, but at the current bid, your appetite
is X). Since the US equity market is very fragmented, the best way to make
that happen is to place an order for X shares on all of the dozens of
different venues, and hope one of them gets executed. When your order on one
venue gets executed, you want to cancel your orders on all of the other venues
quickly so that you don't get overfilled and accidently buy more than X. If
you're a person who's trying to sell 2 * X or 3 * X shares, and the price
moves down after you sell the first X, it may look like someone knew about the
rest of your order and sold ahead of you, but it's actually just the market-
maker trying to control their inventory.

~~~
Retric
"Pending transactions are never public."

Pending transactions are _should_ never _be_ public.

(Bad actor 1): Gee, but if they where I could get 1 billion dollars. (Bad
actor 2): no, _We_ could get 1 billion dollars. (Bad actor 1): I like 1
billion dollars.

The point being it's often hard to steal 100's of Millions of dollars without
someone noticing. But, front running like insider trading is one of the ways
to do so.

~~~
evanpw
I don't quite understand this argument. I certainly agree that front-running
of the kind you describe would make someone a lot of money. This is one of the
reasons that being a NYSE specialist was hugely profitable back in the pre-
electronic era. I'm making the statement that this sort of thing is in fact no
longer possible on on any U.S equities exchange.

~~~
Retric
I think I was talking past people. The original post I responded to said: _If
your insider information is exclusive and rich, you don 't even need HFT_

My comment was there is a range of vary short term insider information that
you need HFT to benefit from. That does not mean that anyone does so, just
that it's something that regulators should and probably are on the lookout
for.

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fapjacks
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.

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

~~~
kasey_junk
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).

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erpellan
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
>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.

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stygiansonic
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....](http://www.sec.gov/litigation/complaints/2015/comp-pr2015-4.pdf)

1\. [http://www.bloombergview.com/articles/2015-01-13/spoofers-
tr...](http://www.bloombergview.com/articles/2015-01-13/spoofers-tricked-
highspeed-traders-by-hitting-keys-fast)

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Normati
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
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.

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Selfcommit
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)

~~~
evanpw
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
But the order does exists, it is in the orderbook and is available for anyone
to the market to trade against.

~~~
kasey_junk
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.

