
Spoofers Tricked High-Speed Traders by Hitting Keys Fast - yummyfajitas
http://www.bloombergview.com/articles/2015-01-13/spoofers-tricked-highspeed-traders-by-hitting-keys-fast
======
wodenokoto
I'm not even sure if I would consider this fraud (personally).

I mean, if the initial outstanding orders were at risc of actually being
bought and he had to deliver, then I think it is just fine that the market is
naive enough to judge the worth of a company on some anonymous seller, rather
than company performance and market-place condition of said company.

What's next, you start moving stock prices through twitter bots?

I think stock traders should be punished by the market place for acting on
poor signals and acting like sheeps.

If he could in fact not deliver the initial sales, then not only is it fraud,
but it is a broken system that allows you to put up stuff for sale that you
don't own.

~~~
joosters
It's an odd situation, for sure. After all, these share orders were being
entered by humans and could have been sitting in the market order books for
several seconds. In that time, anyone could have taken their orders. So they
really were genuine offers to sell and buy shares.

Compare that to high frequency traders where it is alleged that 'flash' market
orders are submitted and cancelled so fast that no-one could actually take
them. How can that be considered OK and yet these human traders are labelled
fraudulent?

~~~
gd1
>So they really were genuine offers to sell and buy shares.

They weren't genuine, that's the point. They were offers made with the express
intention and hope that they never get filled.

The orders from high frequency traders in contrast are honest orders, when
they are sent they honestly express that the trader wants to trade at that
price. The fact that they may then be withdrawn 800 microseconds later when
the HFT recalculates its price in response to some stimuli and changes its
mind about the price, doesn't change the fact they were honest. They're just
fast as well. That's what control systems do, they update their outputs when
their inputs change.

~~~
ars
Why does his state of mind matter? I mean it matters for criminal matters, but
why for civil?

Either he actually was willing to make good on his offer or he wasn't. His
reasons are irrelevant.

"hope that they never get filled" is not a reason to make this a crime. If he
actually refused to fill them, then sure. But hoping?

~~~
gd1
I don't write the rules, I'm just telling you what they are. I guess it boils
down to the idea that bluffing is banned in financial markets. What
differentiates making a bluff from a regular raise in poker? You have to 'make
good' on the bet either way, yes? The difference is that you're 'hoping' that
you don't get called, 'hoping' that your opponent folds. Not allowed in
markets. Probably a good thing too, or they'd be even more chaotic as they
degenerate into bluff and double-bluff. Having said that spoofing is still
widespread, likely because it is hard to prove and some regulators aren't as
tough on it as they should be.

~~~
FireBeyond
Saying that bluffing is not allowed is disingenuous. Why, then, are sellers
allowed to break up big blocks of stocks into smaller orders to avoid
triggering algorithms in the market? How is that not bluffing. "I have 1M
shares to sell, but if I do that, I'm going to take a bath. But if I trickle
them in, break them up, etc..." \- what makes one strategy, and the other a
bluff?

~~~
gd1
What you describe is called 'slow playing' in poker, not bluffing. Put it this
way, if spoofing (bluffing) were legalized in markets, how do you think it
would work out for the little guy? Who has the advantage in no-limit Texas
hold em? The guy with the biggest chip stack bullies the pot.

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Synesthesis
Remember when S. Hawking, E. Musk, and others warned to be cautious about the
future of AI? I think the contrast defined here between the AI: HFT (High
frequency trading algorithms) and 'Monkeys' (the alleged fraudsters, bashing
buttons in a quick and manipulative fashion) shows already that we don't like
to judge AI the same as we do with humans; while the manipulative effect of
both techniques is hard to judge and compare, the argument made is mainly of
another order: intent.

On the highest level both AI/HFT and Monkey do this for their own earnings.
Society decides that profits out of investment are well earned because they
serve some important mechanisms that allow companies to operate. HFT used this
as an important argument: they add volatility to the market thus allowing more
realistic prices. But the same argument can also be made by the Monkeys.

On a lower level we now start to distinguish: the Monkey techniques are
manipulative and were used out of malicious intent. Some AI/HFT techniques may
be manipulative but intent disguised: if the technique or decision to
"manipulate" was devised by AI, who is to blame?

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harry8
Be clear that this behaviour is illegal. Totally. This is the heinous crime of
not being Goldman Sachs or RBS or $BIG_FOFF_BANK with political connections.
Make offers that others slavishly follow because they haven't got a clue what
the real value is, you're getting prosecute - even if you will trade at the
prices you quote. Manipulate libor, bullshit credit risk, rip off your
customers with buy recommendations while selling? Help the greek govt get a
loan that immediately doubles? No worries. Only small guys who cut the big
guys lunch have anything to worry about from regulation enforcement. This is
called "regulatory capture" and it's just appalling how common it is and how
little is done about it. Hell if you're even seen as a big player you can
literally rape children and get a deal for a ridiculously light sentence and
they agree to stop investigating and prosecuting other offences and then be
met by a member of the royal family when you get out. Literally rape children.
[http://www.theguardian.com/uk-news/2015/jan/03/lawyers-
seek-...](http://www.theguardian.com/uk-news/2015/jan/03/lawyers-seek-
evidence-prince-andrew-lobbying-jeffrey-epstein) Is there nothing all these
lawyers can't corrupt? Yeah the things they fucked up through sheer
incompetence. Anyway kids the lesson here will be HFT is bad for you because
the spreads in the market you can trade are now tighter, so you have lower
transaction costs putting more money in your pocket but Goldman's lucrative
market-making is lost to them. Bad for goldman's is bad for you. Oh and bubble
markets are caused by short-selling. Investment fund reporting season, rash of
stories about HFT and short selling and how evil they are - just please ignore
those huge fees mutual funds charge for their underperformance. 1-2% of your
wealth per year. 6 figures of your money, please look at short selling and HFT
and not that because that's not scary at all.

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chatmasta
We are going to see more cases like this, as market-making robots increase
their trade volumes. Big players are pouring more and more money into
automated trading, and that trading relies on algorithms. Often the algorithms
involve some sort of machine learning, and therefore depend on the input data,
which is vulnerable to manipulation.

For example, imagine a bot programmed by some 5-10 person team at a hedge
fund. They find that running sentiment analysis on twitter and news comments
can accurately predict whether a given security will rise or fall in response
to a fed press release. The profits are good, so the team manager moves a
couple million into the algorithm. One night after work, a team member tells
his programmer friend about the algorithm, and mentions some of the most
profitable stocks. This friend goes home and programs _another_ bot to corrupt
the sentiment analysis dataset, by posting fake comments with properly tuned
sentiment. The hedge fund bot reacts as expected, and now the friend has the
power to manipulate the bot. He has outsmarted the bot and can take advantage
of the high volume trading.

That might be a bit of a contrived example, but corruption in machine learning
data is a very real problem. People are just starting to study it. [0]

[0]
[https://www.usenix.org/system/files/conference/usenixsecurit...](https://www.usenix.org/system/files/conference/usenixsecurity14/sec14-paper-
wang-gang.pdf)

[1]
[http://dl.acm.org/citation.cfm?id=1128824](http://dl.acm.org/citation.cfm?id=1128824)

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billpg
HFT systems were tricked into making bad decisions?

Boo hoo hoo! Won't anyone please think of the HFT systems?

~~~
kasey_junk
I don't think anyone is suggesting that it is wrong to "trick" HFT systems
(for instance HFT systems make most of their money "tricking" other HFT
systems).

What is wrong is doing something expressly illegal to do it. Oh and then
putting it into an email chain with an FBI informant.

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smtucker
The stock market doesn't seem to be a very well designed game if such simple
moves have to be made illegal.

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mhomde
The only reason why this is "illegal" and HFT is legal is that the HFT firms
are paying customers of the exchange. It's really quite scary how complicit
and front-runned the whole stocktrading business has become. I really
recommend Flash Boys which is an interesting read on the topic

[http://www.amazon.com/Flash-Boys-Wall-Street-Revolt-
ebook/dp...](http://www.amazon.com/Flash-Boys-Wall-Street-Revolt-
ebook/dp/B00HVJB4VM)

~~~
kasey_junk
Layering was illegal before there was HFT.

Also, everyone who has any expertise in the way markets and especially
electronic markets work, thinks that "Flash Boys" is a terrible book on the
topic. You literally are worse off in understanding for reading it.

Try "Dark Pools". Still sensational and occasionally wrong, but at least it
gets close.

~~~
mhomde
I can agree that Lewis was perhaps more focused on weaving a compelling story
than focusing on the finer details of HFT. Nevertheless its a good primer on
the subject and an interesting read. Thanks for the tip about Dark pools

~~~
throwaway283719
The problem is that it is absolutely _not_ a good primer on the subject, and
the only way you could know this is if you have experience in electronic
trading already.

If you are trying to learn about electronic / high frequency trading by
reading "Flash Boys" you are actively working against yourself. You will
literally be more incorrect after you have read this book.

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kokey
I quite liked the style of writing in this article. It's days like this that I
wish news outlets like Bloomberg and IFR has RSS feeds for particular
journalists.

~~~
wombatpm
The do: [http://www.bloombergview.com/rss/contributors/megan-
mcardle....](http://www.bloombergview.com/rss/contributors/megan-mcardle.rss)

[http://www.bloombergview.com/rss/contributors/matt-
levine.rs...](http://www.bloombergview.com/rss/contributors/matt-levine.rss)

~~~
kokey
Thank you!

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reacweb
These people have just found a way to abuse the stupidity of HFT. IMHO, they
have played along the rules and the SEC should ban HFT.

~~~
kasey_junk
>IMHO, they have played along the rules

Your humble opinion is factually incorrect. At the heart of this story it
doesn't have anything to do with tricking HFT (how ever much that may appeal
to you). They broke a basic law, one that everyone who trades knows, and then
they put it in an email chain to an FBI informant.

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solve
The article has to be completely misrepresenting which part, exactly, was
illegal here. Nearly every high frequency trader in every electronic market
aims to do something very similar to 90% of what he describes here.

Is it all because of the motive? And bots can legally do the exact same thing
because it's harder to prove any motive behind a bot's actions?

~~~
dagw
_which part, exactly, was illegal here._

The part where he did this with the expressed intention to deceive the market.
This is one of those cases where your intentions are far more important that
your actions.

~~~
solve
Internet lawyers... why did I bother.

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drewinglis
Can someone explain to me why this is illegal?

~~~
CmonDev
He tried to manipulate the market to take an advantage of the shift:
[http://en.wikipedia.org/wiki/Market_manipulation](http://en.wikipedia.org/wiki/Market_manipulation)

You are not allowed to do this if you are a simple guy from the street.

~~~
throwaway183839
You are not allowed to do it, full stop.

~~~
CmonDev
I don't think High-Frequency and Investment Banks are following the rules.
Until caught.

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im3w1l
Let's say you trained a bot with reinforcement learning, rewarding profitable
trades. And it, by itself, learned this strategy.

Would it be illegal? Sure, the reason the strategy works maybe price
manipulation, but it is hard to ascribe _intent_ to it all the same.

~~~
kasey_junk
That is precisely why this case is so good for the SEC, there is an email
chain.

If you had an email chain stating that you were going to train your bot to
layer, that would show intent, which would make it illegal. Otherwise it
isn't.

Intentionality is at the heart of the law.

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tmaly
I build surveillance programs to look for activity such as spoofing and
layering. It is not always as clear cut as these cases make it out to me.

