
Why Is Spoofing Bad? - dsri
http://www.bloombergview.com/articles/2015-04-22/why-is-spoofing-bad-
======
kweinber
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.

~~~
kweinber
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.

~~~
mmodahl
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
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?

~~~
kasey_junk
Again, you are confusing the different uses of spoofing. People that are
spoofing put orders in and then leave them for a long time. The way they use
those orders is that they pull them all at once.

There are lots of legitimate reasons for behavior that looks just like this.
The problem is not one of technology, it is purely the intention that causes
the problem.

~~~
kweinber
No confusion at all kasey_junk, I think those cancels should cost something in
all those spoofing cases you mentioned (except for registered market makers
who are usually exempted from messaging rules like this in exchange for real
rules).

Those canceled orders had to be listed, the bid-ask system had to transmit
them, matching engines had to consider them, cancel machinery had to back them
out, and price discovery is affected. Why shouldn't one pay for the costs
incurred?

~~~
kasey_junk
Cancels either are explicitly built into the fees or are captured currently as
fill ratios. Spoofers (and everyone else) are happy to pay this. It won't
prevent spoofing which was your original position.

~~~
kweinber
I've had to do the math to calc this stuff... what you are saying is simply
false. If I execute a single order with a full fill, and you execute the same
fully filled order with 99 canceled order behind behind it, show me how the
execution costs are "built in" to reflect the difference.

~~~
kasey_junk
They are built into the same way extra buttons you get with dress shirts are
built in. Not everybody needs them, theoretically the people who don't use
them are subsidizing the people that do, but no one cares. It is cheaper to
deal with missing buttons as the norm than to build custom supply chains to
optimize for correct distribution. If I called up the shirt manufacture and
demanded 10K buttons on the other hand, they'd probably make me pay.

Finally, none of this has anything to do with spoofing, because spoofing
doesn't need high cancel rates. If anything, making cancels more expensive
will encourage the behavior, because it will make traditional market making
more expensive (either explicitly or implicitly by requiring membership in a
cartel to be a market maker). Meanwhile, the spoofers trade is much higher
margin and can absorb the new extra cost more readily.

------
solve
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
Except that fully hft strategies have/are also being pursued for spoofing as
well.

~~~
solve
You say it as if lawyers pursuing investment firms for every reason imaginable
is a new thing.

~~~
kasey_junk
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
I did not say that anyone could be immunized from being pursued. Every party
making a ton of money in trading gets pursued.

------
lordnacho
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
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.

------
fixxer
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.

------
xedarius
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.

------
Lorento
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
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
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
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
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
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
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.

~~~
kasey_junk
Again, I think that you are misunderstanding the way the exchanges work. Party
B is not doing anything but watching 1) The trades that are public information
available to anyone (ie his peers) and 2) his specific interactions with the
market and in some rare cases 3) the orders going into the exchange that are
public to everyone.

Party B is then inferring things about supply/demand patterns. He is not
tracking a specific entity. Party A meanwhile is doing everything in his power
to hide his large intentions (trading across multiple venues, with different
executors, at different times, at different sizes, etc). This natural
adversarial relationship is what causes the price to go from 9 to 9.20 and it
does not instantly jump, it is smooth. This is the mechanic for how that
smoothness occurs and happens in real life and needn't add any impossible
principles to the mix for it to occur.

In either case, Party A is unhappy about it jumping. They want it at 9 for as
long as they can charge it, and Party B wants to maximize the average price
they can sell it at (that is it is better for them to continue selling at 9.18
than to scare everyone off at 9.20).

~~~
Dylan16807
Let me put it in more fundamental terms. Note this quote from the article:

 _They break their orders into smaller pieces, and build (or rent from their
brokers) algorithms to make their big orders harder to spot and less likely to
move markets. John Arnold "spent millions of dollars developing a proprietary
order-entry system to disguise and conceal strategies from external
algorithms."_

The "ideal" is that this would not be necessary. That this would provide no
advantage, because markets would never try to spot "large intentions". Party B
would not temporarily set a price that is less profitable for selling small
numbers and more profitable for selling large numbers.

Markets don't need immediate higher-order feedback to be efficient.

And again, don't ask me how you would _stop_ anyone.

~~~
tptacek
It sounds like you think orders are executed atomically; that if you put in a
sell order for 10,000 shares, 10,000 shares are sold all at once. That's of
course not how it works. Even if you don't split your order up into smaller
ones deliberately, it is still going to be filled piecemeal by lots of small
buy orders. And that's not going to happen all at once either.

If you have 10,000 shares that you want to sell, and you want to sell them all
at a specific price, there is a simple mechanism to do that: enter a limit
sell order.

~~~
Dylan16807
I'm aware it's not atomic. There wouldn't be time to react if it was atomic.

------
runj__
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.

~~~
nhaehnle
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.

------
ghshephard
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
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
Also, exchanges stand on the side of anti-spoofing because they don't make
money with canceled orders (apart from co-lo/access fees).

