
What Michael Lewis Gets Wrong About High-Frequency Trading - luu
http://www.businessweek.com/articles/2014-04-01/what-michael-lewis-gets-wrong-about-high-frequency-trading?curator=MediaREDEF
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pseingatl
He doesn't get it wrong. It's a classic fraud on the market: it creates the
illusion of volume when that volume is really artificial. If you were to
massively buy and then immediately sell securities to make it seem as if there
was a great demand, you would be indicted for violating the securities laws.

"Rule 10b-5: Employment of Manipulative and Deceptive Practices": It shall be
unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce, or of the mails or of any facility of
any national securities exchange,

(c) To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any person,

HFT creates the illusion of volume. As such, it is a clear violation of
10(b)(5).

Volume, as an important indicator of efficiency, has been repeatedly
recognized by U.S. courts in both civil and criminal cases. Because of HFT,
volume figures are no longer reliable. They no longer reflect a true, arms-
length purchase and sale. This is a classic fraud on the market.

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kasey_junk
There is a class of algorithmic traders that create artificial volume via
fraudulent orders. This is quote stuffing and it is already illegal (at least
in the U.S.).

There is a problem with enforcement, as the regulatory agencies are so far
behind the traders. The FBI has recently announced that they will be
investigating this practice as a criminal matter instead of a leaving it as a
civil one, so hopefully that will discourage the practice.

That said, it is a really small percentage of HFT firms that engage in this
behaviour (in fact most firms would prefer more enforcement of these rules)
and it has nothing to do with the practices that Lewis documents in his book
or with all the publicity stops he's been on.

~~~
theorique
The thing with quote stuffing is this:

\- If a firm is posting quotes that they have no intention of honoring, then
they are backing away and that's already a violation of regulations.

\- If they are rapidly posting quotes and canceling them in response to
quickly changing market conditions, that's normal behavior.

As long as a firm fills an order appropriately, when someone actually hits
their quote, then they are doing it right.

Of course, some exchanges and other venues view excessive quoting with minimal
actual trading as a nuisance, because it taxes their infrastructure without
the actual _trading_ that makes money for everyone involved. As such, many
venues are charging fees to participants who have very high quote-to-trade
ratios. This is also fine - it's the prerogative of the venues to charge fees
for use of the infrastructure.

