

High Frequency Trading "Quote Stuffing" Visualized - uptown
http://www.zerohedge.com/article/its-not-market-its-hft-crop-circle-crime-scene-further-evidence-quote-stuffing-manipulation-

======
ig1
Pretty much everyone doing "real" trades will look at things like VWAP (volume
weighted average price) rather than just the pure bid/ask quotes because
everyone knows bid/ask might not reflect the true market value. Indeed in many
circumstances you may well be required to benchmark your trades against
something like the VWAP to prove you're acting in the best interests of your
client (getting good deals rather than pushing deals to your favourite brokers
who give you the largest kickbacks).

Some exchanges do in-fact prohibit such actions by having fill ratio
requirements (a certain percentage of your quotes have to convert into done
deals) or minimum quote times (your quote has to be dealable for at least x
milliseconds before you cancel it) and just kick off anyone who breaches them.

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qwzybug
Interesting article, and some really nifty graphs, but stay away from the
comments section.

More seriously, could someone with a bit of experience in this sort of thing
speak to the actual import of these patterns? It's not entirely obvious
whether or not there are shenanigans at work.

~~~
yummyfajitas
In my opinion, this is almost certainly not shenanigans, but simply algorithms
behaving in ways their creators did not expect. I believe this for several
reasons:

1) If you wanted to deliberately manipulate the markets, you'd come up with
something less obvious than this. You might even come up with a pattern that
is non-periodic or even put a few calls to rand() into your code just to spice
things up.

2) If you were doing anything in the markets on purpose, you'd try to be
unpredictable. And by "unpredictable", I mean "hard for a human to look at a
graph and guess at". Once you trade predictably, the other guy can exploit
you.

3) I've come up with trading strategies myself that generate "crop circles" in
simulation. It's never on purpose, and I'd certainly never be permitted to put
such things into production.

Sometimes algorithms behave in ways you didn't expect. For instance, you might
compute a quantity f(t), place a buy order when f(t) > 0.5 and cancel it when
f(t) < 0.5. If f(t) oscillates wildly from 0.4995 to 0.5001, you will wind up
doing "quote stuffing" yourself. Of course, most of the time f(t) winds up
oscillating from 0.631 to 0.632 or something like that, and things work
normally.

If your system is designed well, some monitoring system further down the line
will prevent this. Not all systems are well designed.

~~~
Confusion

      but simply algorithms behaving in ways their creators did not expect
    

That's possible, but if the owner of the algorithm doesn't monitor it or shut
it down, someone should and the owner should be punished for the behavior of
the algorithm. Currently, that doesn't seem to be happening, which means this
becomes a pretty good excuse for letting your algorithm behave like this on
purpose.

~~~
yummyfajitas
The owner should be punished? What for? Who is harmed by a visible "crop
circle" in the trade data? Also, I don't understand why you think the owners
would allow their algorithms to behave like this; a "crop circle" doesn't make
money and it does expose you to risk.

Incidentally, if your algorithm spams the exchanges too much (i.e., your fill
rate goes way below 1%), your broker will shut you down. So while there may be
crop circles out there, no one person is responsible for more than a few of
them.

~~~
Confusion
Because of the first paragraph of the article:

    
    
      [..] quote stuffing by HFT algorithms in tens of stocks, in which thousands of
      cancelled quotes would reappear each second with a definitive periodicity
      and regularity, [..]. Aside from the fact that it is illegal to indicate a 
      quote without a trade intent, this form of quote stuffing is in fact 
      manipulative when conducted by HFT repeaters in specific "shapes" as it
      actually moves the NBBO actively higher or lower, in cases pushing the
      bid/offer range up to 10% higher without even one trade ever having
      occurred, [..] 
    

_Incidentally, if your algorithm spams the exchanges too much (i.e., your fill
rate goes way below 1%), your broker will shut you down_

Except that that doesn't happen if you essentially _are_ the broker, as is the
case with large enough institutions. JP Morgan's broker isn't going to shut
them down.

~~~
yummyfajitas
All quotes on an exchange have trade intent, since if the exchange fills you,
a trade occurs. You don't have the ability to back out after your quote is
accepted.

If the NBBO moves around on a thinly traded stock and no trade occurs, so
what?The bid ask spread on some thinly traded stock fluctuated for a few
minutes, and no one bought or sold stocks? Oh noes, the horror! If we don't
put a stop to this, someone might offer to sell a coke bottle on ebay for
$10000 and no one will buy it!

Also, if you are a broker, the exchange imposes similar requirements on fill
rates. The matching engine gains nothing if you place lots of unfilled orders,
and if they allow too much of it, customers who do make trades (i.e., the
people who actually pay them) are likely to switch to other matching engines
or dark pools.

~~~
Confusion

      You don't have the ability to back out after your quote is accepted.
    

But you have the ability to back out on a majority of your quotes, if you
submit so many that they couldn't possibly be fulfilled in the time before you
cancel them. Despite the fact that they are cancelled, they still have their
effect. [http://www.zerohedge.com/article/how-hft-quote-stuffing-
caus...](http://www.zerohedge.com/article/how-hft-quote-stuffing-caused-
market-crash-may-6-and-threatens-destroy-entire-market-any-mom)

    
    
      Also, if you are a broker, the exchange imposes similar requirements on fill
      rates
    

Then why aren't these algorithms being banned?

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nivertech
It also might be a self-organized system composed of multiple algos from
different shops: i.e. like a "Life" game.

For example: one algo put a bid of X, a nanosecond later another algo steps
and put a bid X+1. The first algo cancel X and put X+2, etc. Until it reaches
a threshold of X+T, then all bots cancel and start again from X.

You can see this behavior with human traders in after-hours sessions or in
other illiquid markets. But of course in case of humans we are not talking
about nanoseconds ;)

