First issue; HFT players dabble in spoofing from time to time. Second issue, and a big one; entering orders with no intent to execute submitted solely for the purpose of manipulating, influence trade or pegging prices is a serious offense. It is antithetical to any hope for attempts to maintain minimal market integrity. Once upon a time the objective of the rules and regulations was aimed at maintaining a fair and orderly market. How business is conducted today is a far distance from such a target. Spoofing is illegal. It is not a legitimate tool for any purpose and should not be encouraged or tolerated.

exchanges immediately can identify spoofers , layerers etc as blatantly obvious on the ladder ! They are even told by the market of a "flipper !" however choose normally to ignore or deny most complaints ! Why ? = VOLUME .

The cheaters are normally the high volume traders; even perhaps market makers . The exchanges have the tools to rectify this immediately but don't ; the regulators cannot intervene as exchanges deny its existence .

However the worse offences are some of the beneficial orders exchanges give certain clients .

Spotting such behavior can be done but the task is imposing. Enforcement actions require empirical evidence. Systems handle massive data and we are talking about massive data. The exception reports must be designed, monitored analyzed and recommendations rendered. Manpower is required. The regulators are far behind the proverbial curve simply due to the chore of tweezing the misbehavior from the flood. There is no doubt whatsoever that many exchanges hesitate or are unwilling to act since they assume a role of "co-conspirators" by benefitting from the high volumes schemes. Gaming the system is ever present. However, when schemes become so apparent something usually happens forcing the players to find another scheme. The HFT and spoofing abuse gambit has enjoyed a very long life. The only thing abating the activity at this stage is diminishing profitability. The crowd expanded and the sunlight is shining on these cockroaches. Wonder what will develop next.

Arnold certainly has a unique POV (not the 1st time)... http://aitegroup.com/blogs/david-b-weiss/spoofing-good

The feeling that the exchanges don't act against HFT and other (illegal) trade distortions is shared by the majority of my members opining on the issue.

While HFT accounts for relatively large volume it comes from trading small size frequently. Small size isn't spoofing, that is normally done by humans manually.

Secondly, it appears there is confusion between spoofing and quickly cancelling an order that no longer has the edge it had when it was first placed. Do any traders leave orders out for trades they no longer want to take? If they do, I doubt they will remain traders for very long.

If the exchanges can identify spoofers, etc. wouldn't it stand to reason that anyone could and therefore render that type of activity ineffective? It seems losing traders lose because of someone else but win due to their brilliance; must be nice. On second thought, I suspect losing is bad regardless of the reason.

Out of curiosity how did you come to discover this "fact"? Have you ever worked for a firm that has HFT trades or even an algorithmic trading firm of any type?

I do admit, circular reasoning does win every time; if you classify HFT algorithms as those that only use speed as an edge with no other logic and then complain that HFT traders only use speed... well who could argue with that logic?

Not every HFT is doing so but some are

At this point, I am really unclear how you are classifying an algorithm as HFT. Is the deciding factor latency, is it hold times, is it the number of trades per day or is it that they are fast and make you lose money or is it simply you read somewhere that HFT is bad and it sounded like an idea you could get behind?

First you say HFT traders are dishonest and thieves; now you seem to be saying some are but not all. Is that kind of like saying some people are not that bright but some are? Again, the logic escapes me (maybe I am one of those you would classify as not that bright).

Also, I didn't see any answer as to how you came to these conclusions and where you worked where you might have seen this type of behavior that would cause you to come to the conclusions you so vehemently advocated above.

Well, I am off to watch the Super Bowl.

I know very well what HFT, I don't need to define it to you and I am sure you can google it if you are confused. I didn't say all HFT's are bad. I said the ones that make most of their money by "cutting the line" using their fast connection are thieves because they have no edge other than speed.

@Muhammad, thank you for the clarification. I am always interested in how people come to conclusions regarding what HFT does and does not do when that person has never actually worked in HFT nor even for an algorithmic trading firm.

HFT represents a tax paid by every non HFT participant. The beneficiaries contribute nothing. No risk is assuming, no market making function is provided, no price efficiency is contributed and the practice does nothing to promote fair and orderly markets. I am hardly naive regarding the reality f the Street. Life is rarely fair, if ever. HFT may be legal but an abusive practice nonetheless. It is a potentially destructive factor since it possesses the capacity to exacerbate melt up and melt down conditions. Something may be technically legal but that does not mean it is constructive or desirable. The practice is receding somewhat these days due to shrinking profitability. Excesses are ultimately liquidated in this business. HFT is probably no exception. Hopefully, the collateral damage will be contained and limited to less than catastrophic proportions.

It's good to see you back in here @Scott. A little chuckle first thing in the morning sets one up nicely for the challenging day ahead!

@ Scott and Hunt You can laugh all you want, my view happens to be shared by many traders and many prominent publications including Bloomberg's view above. When you fight for a microsecond, it says a lot about your trading style! It shows your are a zero risk taker which means you have no edge! You can't take a bet one way or the other, you play it safe.

@Muhammad - interesting logic; in your view the HFT crowd take no risks and therefore have no edge yet somehow they are the cause of so many losses.

From what I understand something close to 95% of all traders lose so I am not sure how much I would trust their opinion when it comes to trading. Presumably playing it safe and winning isn't a reasonable goal. Very curious indeed.

Scott, HFT is designed as a risk less exercise. It exists based upon the transference of risk elsewhere. The losses are the result of the tax imposed on others who are merely attempting to fill orders for any number of trading or investment purposes. HFT provides no market making and presents a façade of liquidity since it moves the market and sops up available inventory rather than taking the other side of trade as the bid or offer appears. HFT cannot afford to place bets. The massive daily turnover and leverage could lead to catastrophic loss if the trade is caught without essentially prearranged coverage. The banks and exchanges are reluctant to discourage the practice despite recognizing the questionable legality of how the business is conducted. Exchanges love the order flow and the mega banks love gleaning the spread with the books balanced at the end of the day. Of course the exercise is financed by the non HFT accounts which commonly fork over a penny a share here and a few pennies there and a nickel over there. Yes, it may be the price of admission but unethical and exploitive at the very least and likely illegal. The scheme will end in a inglorious manner. As the regulators and bankers plow through the damage reports new rule proposals will emerge as all culpability is denied.

By the way, speed is everything. It is the epitome of the Vince Lombardi dictum, winning is everything. Second place is the race means no trade for you.

Hi Larry, HFT is no golden goose, it has risk just like every other strategy. Indeed the whole point of this discussion and original article is that spoofing is the manner in which HFT loses its edge and that therefore spoofing is good. In any case my feeling is that the amount HFT takes off people is really very small, maybe 0.5bips if you were working an order for an extended period of time.. the figure is just a guess of course but its really not much. People would be better off getting their broker to reduce their commission charges or else just switch to Interactive Brokers where the comm is way less than other brokers. Point is that broker comm is way more expensive than HFT. Also for me personally, as someone who trades in small size and holds for 4-5 days looking for circa 3% gains, I am glad that HFT is there padding the book and tightening the spread.

Cameron, HFT does not assume risk just like every other strategy. HFT risk is essentially confined to the incredibly slim possibility of all exchanges closing simultaneously while an HFT entity was caught long or short in the few nanoseconds of exposure. HFT should not be taking anything off of anyone. That is what I mean by a tax. Transaction expense may exceed the HFT tax but trades commonly pay the transaction fees on top of the HFT tax. Getting a good deal on commission rates does not avert the tax. At least the specialist of past days ran a book for his own account and accepted the possibility that the market could move against him. Intermediaries often knew exactly where they were going with the positions taken but not always. People are deluding themselves about HFT contributions, They do not pad any book because they are not acting as bookmakers or market makers. They do not carry a book and the entire program is dedicated to avoiding any carry. As for the spread, HFT reacts to interest shown and real order flow. They do not tighten spreads. In reality they tend to widen them by moving the market away from the bids. HFT sees your bid and beats you to the merchandise. The quoted spread may show a penny but the market usually moves a couple of cents or more in some case. I remember tussling with marker makers, floor traders, block desks, specialists and so forth in days past. They were out to profit at your expense if at all possible which it usually was. However, front running and self serving trades and executing orders for their own account instead of serving the customer account was illegal. Did it happen? of course it did. If caught and such misdeeds were regularly detected, sanctions, fines and customer account adjustments were the order of the day. Individuals caught could and were often suspended or banned from the business. The HFT skim may be small but it does not belong to them and they contribute nothing constructive in exchange for the fee taken. I never whine about their presence. They are part of the schematic formed by all the various schemes from the nefarious to the straight arrow and everything in between. I accept the reality of the presence. Nevertheless, the practice is abusive and parasitic. I recognize the fact and go forward doing my business with full knowledge of the challenges represented by HFT and countless other factors. The thing that is difficult to understand and accept is the widespread tendency to make excuses for these actors and rationalize a justification for their activity. Such support promotes tolerance for ill behaved actors whether HFT or some other scheme. HFT does not push me out of the arena but I must day that I tired of watching HFT runs while trying to get some things done. I tired long ago of entering bids at reasonable levels if not at the offer on relatively quietly traded issues only so see a few bids suddenly lined up against or with me at or above my price showing precisely the same size. If the order is changed to market prints appear at or near the outstanding offer and I am executed at a price slightly above that print. Perhaps I could cancel and pass but there are things deemed worth owning so I execute on the basis of the old rule holding that limit orders limit profits. One must have the position before anything can happen. The computers crawl the entire list of listed securities and go to work wherever activity appears. As activity ebbs so will HFT. They feed off the general liquidity situation. They do not contribute. It is happening already.

@Larry - For the last several years I have traded primarily FX and futures so I cannot authoritatively speak to equities however as related to futures, the anti HFT posts look more like opinion and conjecture than anything fact based. Again, how does one get facts on the subject when they haven't actually worked in HFT?

I have worked directly for several HFT firms and I can categorically tell you HFT trades very small size and cannot and does not move the futures markets (no doubt there are infrequent exceptions as with anything). When most people talk about HFT moving the market, they are referring to orders being pulled when there is some sort of major event.

I will ask the same question I always ask - do you leave orders out to buy if the market is crashing down? I can assume not since you appear to still be trading. I really, really would like an explanation for why anyone, in fact almost everyone not associated with HFT, thinks any firm/algo/whatever should trade against a one way market to their detriment.

I think getting the answer to that simple question is why I bother to get involved in this type of discussion.

Scott, please permit me to express my appreciation for your contributions. I am grateful that you take the time for expressing your thoughts and sharing your experience. Your postings, as well as many others, prompt me to review my thought process, dig a little deeper and consider how I am approaching the business. Sometimes spirited sparring stimulates adjusting the view to something not considered previously. The adventure and the learning never stops.

The corollary to "If it is on the Internet it must be true": "on the Internet no one knows you are a dog". It was a New Yorker cartoon eons ago. The marvelous aspect of these threads is that no one is hiding behind a screen of anonymity or at least nearly no one. We lay it out there baring the soul. Thanks again.

@Larry as the saying goes - you are a gentleman and a scholar. I enjoy spirited discussions as well.

Some act as if HFT causes no harm, and is the natural evolution for trading systems. Machines are indeed taking over with speed and diligence. There is no problem with that. It will transform the trading environment into programs designed by people to do specific tasks; and that is to exploit the order book the best they can by detecting and following momentum or provoking it. If an HFT program can buy small size on one venue, sell at another within a few microseconds with a small profit, I'm all for it. It's a fair trade. But if to do so it is necessary to cheat; then we can't say that the trade is fair.

If I place a limit order, it's in the books in a few milliseconds at the specified price. And if executed, I get the price I wanted. So why should I complain? There appears to be no reason to. After all, I got exactly what I wanted!

IMHO, it's kind of the role of any type of trader to camouflage his/her real trading intentions. An order book can be very deceptive. The what you see might not be what is really out there. Here are some statistics related to stock order books: some 90% of orders placed in the books end up being canceled, that it be due to spoofing or otherwise; some 20% of trades are stealth (iceberg types); a little more than 20% of executed shorts are of the naked type (meaning no shares were immediately borrowed). Just these 3 points make what is seen in the books unreliable to say the least. It's all a matter of deception or maybe more appropriately camouflage leading to or preceding price discovery. And it is within regulations except for spoofing.

If you could uncover that a big trader is in need to unload a million shares at the retail level, you would simply front run that big order and do it legally. There is nothing wrong with that. You estimate that an upcoming earnings report will be bad and short the stock in just a few microseconds. There is nothing wrong with that either. You are using your expertise and trade according to your know how.

So when does some of the HFTs break the rules?

One is by jumping the order queue. When you trade as an individual, your limit order is placed at the end of the queue and as orders are executed or canceled you advance in the queue til you become the best bid or offer, resulting in you being next in line. Now if some organization pays for the service, they can intercept (by speed) the order that was to execute your trade. Is this illegal? Usually no, they just have faster machines, better programs. It should however be considered illegal if somehow they jumped the queue without price improvement. Some venues offer this kind of “service” for a fee.

If an HFT program uses trading techniques, special order types and data feeds that are not available to all unless they co-locate, pay the infrastructures expenses and pre-datafeeds; then can we really talk about a leveled playing field?

To do spoofing properly, you need very fast machines with very low latencies and with even faster bulk order cancellation facilities. But why spoof in the first place if not to deceive? And then why even consider it if it is considered “illegal”? Don't these HFT firms pass their license and know what is legal and not?

If it was only HFT playing against HFT, who would mind? It's just that the retail and institutional player are also in the mix. And what ever operations done by HFT by not following the rules, don't think that no one is paying for it. We all are.

These particular trading practices are under SEC and FINRA investigation. But, IMHO, one should not expect an immediate answer. After all, it took the SEC over 20 years to uncover Madoff and more that 15 for Stanford. Once it's been said that there might be some “illegal” operations using HFT, the answer is not to ignore it, but to at least let the authorities do their job and investigate to see if there is some wrong doing or not.

That yahoo article is blindingly stupid. Why can't people accept that markets have always crashed and have always had periods of high volatility for no apparent logical reason. It's got nothing to do with technological advancement! Yes that's right people, you can't blame technology for your losses. At the end of the day modern sheeple think that if they read a yahoo article they are now informed. But information without first hand experience is not knowledge, not even remotely close.

Guy, thank you for the detailed recitation. It should be read by everyone engaged in the securities business. I am challenged to recall and more informative capsule covering the subject.

Cameron, no one should blame the technology developments as a cause for trouble. The trouble regularly emanates from assigning universal truth and acceptance to practices creating or contribution to systemic risk. Unchecked, such practice assume inordinately sizable influence and represent an excess that must and will be unwound. The manner of the unwinding takes many forms, the worst of which results in the panics and crashes recorded in all markets throughout human history. If not already done, scan through "extraordinary Popular Delusions and the Madness of Crowds" by Charles Mackay. It was written a couple of centuries ago but the contemporary relevance is uncannily enduring. I am not citing HFT and program trading as probable panic and crash catalysts. However, HFT is clearly represents an application representing a disproportionate amount of market activity and as such a prospective excess and disruptor. If nothing else, the sheer weight could easily exacerbate fallout from some other calamity producing dislocation.

within an historical context, HFT meets the standard as a problematic element. Conventional program trading is not all that far behind.

I would love to play poker with Michael Coscia some day xD !

When firms pay for order flow, they use this information to trade or front run the order. Order flow payments should be illegal.

Jenny, visit the library and check out a copy of "Flash Boys" by Michael Lewis. It is not the only study or text on the HFT subject but probably explains the evolution of it in a more entertaining manner than the alternatives. Delivering a package or mail faster than the other service is a competitive advantage that commonly leads to success. Stealing the package delivered by the Pony Express before the addressee can claim it and then adding a surcharge to deliver it too the addressee is the essence of front running. Such conduct damages commerce at the expense of legitimate players. Hence front running is illegal. The Pony Express was not a front runner. HFT depends upon front running for its very existence. Understanding HFT may not alter the way you conduct business but the practice must be recognized and understood as a matter of awareness regarding the environment. As noted previously, HFT and program trading regularly composes approximately 75% of all equity trading activity. The practice is present elsewhere as well.

Jerry Ware raises a valid point. Once upon a time soft dollar payments were highly controversial. Some permitted the practice while others repudiated it. In recent history hard dollar payment to HFT for order flow is accepted practice. Again, I believe too many players lost their moral compass altogether. The Street is a shark tank but there are limits before we call upon Sheriff Brody to take Jaws out of the water.

firm's cannot buy or sell at the same price or a better price in front of the order they are paying for. This would be violation for Best Execution and Manning.

My opinion is from the Equity side. Traders have always looked for liquidity and price discovery from the beginning, and will continue the practice. The idea of one trader having an advantage over another because of resources and technology (information) has again been an advantage since the beginning of time. The rule is that you cannot trade on inside information ( information not disseminated to the entire street). Is it against the rules, if a trader is able to gather public information (buys and sells) on the intent ( bids, offers) of other participants trading, before other traders are able to? My personal opinion is the fastest trade, is not always the best trade. My concern is the Non Registered HFT's, which have taken the place of Market Makers. Market Makers would be required to have a firm bid and offer, and not spoof. Market Makers had to honor their market by rule. If regulation will allow for Market Makers to "make money" then the markets will again be stable. Then the HFT's that are not Market Makers that cancel buys and sells would only be noise as the Market Participants (Traders) will know the real liquidity and price of the market. This mess is from how the current Market is structured by Regulation (Decimalization and Reg NMS).

Some have a misconception of what front-running is. If you offer a price improvement over the best bid or offer in the books, you are not front-running. You are simply offering a better price and this surely and emphatically is not illegal, never has. It should also be the only way for anyone to jump the queue at the offered price.

It becomes front-running when someone manages to jump the queue and place his order just in front of yours at the exact same price. As an individual, you do not have this ability. Try it as much as you want, you won't be able to do it. You will always end up at the end of the queue. It is how it should work, it is how it works: first come first serve. If I want to be in front of your price improvement, my only alternative should be to also offer a price improvement on your price improvement. That's only fair. I should not be able to say: hey, move aside, that order is mine!

If my limit order is first in line at the NBBO price, then that is the one that should be executed next. It does not matter how fast your machine can be, how better your trading program might be, or how more knowledgeable you might be. If you can get the trade at the same price before I can, then the only way it could be done is by cheating in some way. Even co-location can not go faster than what is already there.

It is imperative that authorities investigate if there is any wrongdoing in the management of exchange's live books now that the cat is out of the bag. It's not that it might be there or not, it is the case that if they do not investigate after Lewis' book, they are not doing their job. They have to come out and say: everything is fine, or say some of it is not. They can't wait for 20 years like in Madof's case, they have to act now. They have been sufficiently warned. Otherwise, it's another scandal in the making. And until the SEC gives its answer, all we can do is wait with some apprehension that the front running and spoofing might indeed be true and wide spread.

Ah, Mr. Boulette, always trying to put meanings to words that have not been said. I've been in this forum for over 3.5 years. And as you know quite well, my comments are almost entirely related to stock trading automation. Never mentioned anything concerning trading in commodities, futures or bonds. And yet you always come back with things as if trading in one market is the same for all markets. Well, it's not.

We don't agree on much, that is for sure. We don't have the same meaning or understanding on a lot of things (related to stocks), including what should be considered legal or illegal. You give the impression that if one is not caught cheating red handed, then there is no crime and everything is fine. Yet, practically on a daily basis, we find huge frauds of all kinds on the front page. Billions are paid every year in fines and penalties to the SEC, all for things that “honest” players have not done and promise not to do again.

It is why I usually try to avoid any thread in which you participate whatever the subject may be. You have shown in the past, as a forum moderator, that you could bar someone from the forum simply because they had a different point of view. So, I'll consider myself warned.

@Guy - I could put anyone in moderation status at virtually any time, yet I rarely have had to. The exception is when there is a personal attack on another person. Check the threads you have been put on moderation status; you will find that it didn't happen until you began to attack others (as far as I remember, you have never attacked me personally) and it was normally one of the other moderators that took those actions, not me.

Healthy discussion is the goal of this group and as long as it remains civil, you don't need to concern yourself. I can disagree with you and even find some of what you say to be nonsense without thinking you are not a worthwhile contributor to the group in general and this thread in particular.

In case you have the slightest doubt, I hope you continue to post as I feel it adds to the discussion.

Please see https://lnkd.in/dDwK5Eg

Pioneer has an important point for buyside electronic trading: "Well calibrated post-trade transparency rules ... might be crucial to give market participants the confidence to rely more on what they see on the screen, which will make electronic trading more efficient. There is still a lot to be done on RFQ protocol, where brokers still freely advertise prices at which they are unwilling to trade. This practise has to be discontinued and we, as buy-side, should all aim to put more pressure on to promote more reliability of prices and push for more automation."

Scott's spoofing remarks are very interesting. I am certain that the comments sincerely represent his experience and understanding of the subject. From a regulatory and compliance perspective there is virtually no difference between various markets regarding the nature of the orders. Spoofing violates the rules. Spoofing is offensive since it is rooted in market manipulation and fraud. Scott may accurately describe a practice observed regularly. Its existence in any venue does not make it acceptable or permissible.

@Neil Exactly what would a fake order look like and how would you determine that it wasn't one side of a spread? If you can do that reliably, pm me and we will make millions together.

Traders who spoof large size (which is the only way I would notice) are almost always manual traders (I say almost because obviously I do not know every algo trader in the world) and I have not worked with manual traders in years. If you think about it, if an algo trader wrote code to spoof in the futures markets, it would audited and someone, somewhere would notice.

The thought of that being done is kind of antithetical to logic - the programmer would have to be smart enough to successfully write an algorithm around that and dumb enough to do it. Are you saying you have met an actual trader who you know for a fact participated in spoofing or are you saying you have seen a lot of fake orders?

If it is the first, you must run with a different crowd than I do and if it is the later, please see my comment in the first paragraph just above.

@Scott - The real gripe is with market operators and brokers who like to high revenues all the HFT trades generate and so favour them over other players. One place you'll find HFT players being predatory is in US treasuries cash and futures. They get to freeze a trade on the interdealer market using the workup protocol and trade across other markets. It is the market operators who aren't reforming the system (and its not illegal as far as I can tell) but it is certainly busting up human traders. More here - http://www.bond-desk.com/2014/11/03/government-municipal-bonds-treasuries/

I did manage to read both Flash Boys, and Irene Aldridge. One was a textbook for serious practitioners--the other an interesting narrative designed to sell books. Like a Michael Moore treatise on Canadian Health Care. My point was that there were front runners during the Pony Express era! It was illegal then and it is illegal now. Technology doesnt break the law, practitioners do.

The Bloomberg article demonstrates no understanding that regular investment firms using automated trading also get spoofed. It's pretty weak.

Except, if the offer was 12.03 and you sent a Limit buy at 12.04 or 12.05, this is a spread-crossing order, which won't even rest on the book and get displayed: it will interact directly with the 12.03 offer. So nobody would see your order "in line to execute" since you crossed the spread and went straight to the front of the queue.

Apropos the current discussion, this just landed on my virtual doormat:

http://www.tradersmagazine.com/news/technology/book-excerpt-flash-boys-not-so-fast-113462-1.html?pg=2

"It may take a while to unpack these three conclusions that Michael Lewis links together. Let us put aside the fact that, in interviews subsequent to the publication of “Flash Boys,” Lewis and his protagonist, IEX co-founder Brad Katsuyama all but admitted that this alleged front-running couldn’t affect the orders of ordinary retail investors"

et. seq.

Any thoughts?

@Jim - thank you for the link to that article. I had to laugh as I read it because it states quite eloquently what I have been trying to say in this thread. It lines up perfectly with my direct experience working for algorithmic trading firms, especially on the HFT side.

The logic is pretty clear; who would be dumb enough to do what so many seem to be saying they "know" is done, yet have no direct experience with a firm or individual that actually does it.

It is very tough when the facts (and simple logic) run contrary to some good old "righteous" indignation.

A really interesting discussion from people with more market experience than me so I hope these comments aren't lacking too much knowledge.

It does seem from my perspective that having the technology to read an order before it gets filled and then placing your own order ahead of it to make a zero risk trade may not breach the precise detail of any regulation (because the first order is deemed public information by that point?) but it doesn't seem to add anything to the market. An amount of shares was going to be traded once at a price and they now are traded twice in about the same amount of time with a minute mark up in between, merely taking money from the final recipient. Can someone explain what value is added to the market because of it?

It seems their rationale behind making a profit is based solely on the technical ability to queue barge and trade ahead of those large orders. Using technology to combat it through placing an order to wrong foot them seems to be a war of codes and not that unreasonable if kept in isolation. The difficulty seems to be it cannot be isolated and spoof orders can/may lead to market manipulation.

Being able to trade as fast as possible because market factors or cross market correlations have met your trading strategy should be permitted. Should using that technology to trade inefficiencies (even if such inefficiencies are outside of the regulated area) be corrected if it provides no market value? How do you determine between the intentions of those two trades?

Equally, without some restrictions around placing orders with reasonable/true intent the market becomes ever more "gamed" and that has been part of market regulations for some time. When does a set of trades designed to take advantage of queue barging algos become broader market manipulation and unwarranted volatility? Again, how do you determine between the two?

If you can determine between them, then would you be able to regulate them?

What happens if a front runner puts an order in front of a spoofer and is hit by an anti-front runner algo?

I constructed a clever and carefully thought out example of what would happen but LinkedIn decided it couldn't post it because of a system upgrade. This sounds very, very suspicious and I am certain my comment was actually posted but deleted by an HFT algo of some sort.

Let's have a little fun with the "facts" being bandied about in this thread to see where logic will take us.

We have four types of market participants

1) regular, law abiding folk aka the good guys

2) spoofers aka the kind of bad guys

3) front runners aka really bad guys (criminals)

4) smart algos aka sheriff

Good guy places an order to buy at 21.04

Spoofer places really big order that he has no intention of trading at 21.05

Front runner places an order where? For fun let's say 21.06

Spoofer immediately pulls his order

Smart algo immediately hits the good guy price (21.04) with a marketable limit order of 21.04 taking out the front runner and filling the good guy all at once.

Smart algo covers at the front runners stop price making a tidy profit of a couple of cents

Good guy sees price go against him a couple of cents temporarily and doesn't care because he was just buying at a price that suited him

Let's take a quick tally

Smart algo makes some money

Good guy is in it for a longer period of time so doesn't even notice and price bounces back anyway

Spoofer is really, really glad he pulled his order

Front runner is hosed

If anyone is missing the point, please feel free to pm me to either a) explain to me how to construct a risk free trade or b) get me to explain why you can't.

Remember this is not to say a given trade can't be risk free but rather a series of such trades can't be risk free. I am sure there is an article or a calculation somewhere to prove me wrong but don't quote it if you haven't actually traded it repeatedly through many different market conditions.

Scott, on your example.

The front runner gets hit on his 06 bid by the spoofer who was going short and subsequently cancels the 05 bid, the front runner panics and sells at 04 lifting the good guy's bid and the spoofer gets flat at 03...

@Pablo - the spoofer was on the bid but the example wasn't a specific trade setup but to make the point that there are no risk free trades with the possible exception of the occasional latency arbitrage trade and even with those you risk getting filled on one side but not the other.

I was talking with a colleague of mine yesterday and we were laughing about how much the trader tasked with unwinding spreads would sweat at the end of the day when he had to get out during low liquidity situations. These were "almost" risk free spreads when they were put on but try telling that to him as he was working the orders to unwind them.

What made it truly funny was that in so many threads you hear opinions on these trades stated as facts by individuals (I purposely did not use the term traders) who have never set foot in an HFT shop, probably not in an algo shop and possibly don't even trade for a living yet somehow "know" what is going on.

WHen things go wrong for the spoofer (e.g. someone says "yay, there's finally some decent liquidity in this stock, I'll take it! " ) it can take a lot of work to get out of that mess without lossing his shirt too...

Some seem to think that there is no crime in HFT; not only that, they also believe that it is beneficial to all. Well, no. There is in fact cheating, what could be an euphemism for stealing to outright highway robbery. I've claimed this a few times before in this thread to be rebuked by some.

So, here is a smoking gun!

CFTC fines Panther Energy Trading for 2.6 millions for spoofing.

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http://www.cftc.gov/PressRoom/PressReleases/pr6749-13

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http://www.nanex.net/aqck2/4371.html

See also:

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http://www.nanex.net/aqck2/3628.html

For a more general overview, I recommend the following links with some examples:

. On spoofing:

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http://www.nanex.net/nanex_search.php?zoom_sort=0&zoom_query=spoofing&zoom_per_page=10&zoom_and=0

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https://www.sec.gov/news/press/2001-129.txt

. On layering:

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http://www.nanex.net/nanex_search.php?zoom_sort=0&zoom_query=layering&zoom_per_page=10&zoom_and=0

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http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171484972#.VN_C55jF-Uk

. On front running:

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http://www.nanex.net/nanex_search.php?zoom_sort=0&zoom_query=front+running&zoom_per_page=10&zoom_and=0

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http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171574978#.VN_Dj5jF-Uk

. Even at the sub-penny trade level there is more than deception:

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http://www.nanex.net/nanex_search.php?zoom_sort=0&zoom_query=sub-penny&zoom_per_page=10&zoom_and=0

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http://www.nanex.net/aqck2/3519.html

.

As individual or institutional traders, we most often do not have all the facts at our disposal to make such a call: is it good or bad? But at least, I find that Nanex is doing a relatively good job at monitoring what wrong doing is being done out there.

It is also a pity that regulators are so far behind the puck. You mandate them to protect the people, which in the end will be the victims, and most of what you see is lobbying efforts to push legislation towards protecting those that have a self-interest in keeping things at a status quo, even if it is of a criminal nature.

We now have one firm accused, charged and fined for spoofing. It took over 2 years of prosecution to get the verdict out. But don't worry there are more to come. Hundreds of such cases are under investigation. It's just that justice is very, very slow.

Of those supporting the devious nature of some of the “illegal” HFT trade, what would be their interest to do so if not for their own self interests. Maybe, bank robbers should also lobby congress to force banks to leave their vault deposits in carry ready cardboard boxes in their entry halls to save them time. No surprise some HFT firms also lobby, contribute to political campaigns, and promote their particular brand of “super fast” trading using pre data feeds.

The minimum that regulators have to do, now that the cat is out of the bag, is to investigate, report their findings and charge firms where warranted. There is no other way out of this. And since they do have the regulatory powers to do so, I would consider technically criminal on their part not to do so. At the very least, if they don't, I could not say for one that they are there to protect the people.

Note that not all HFT trading is illegal, but whatever part is illegal should be extirpated from those HFT programs. And I would suggest that regulators keep on watching those HFT firms like hawks afterwards. For at some time, show how, some of those firms will find new ways to screw people again.

One does not need to be part of the HFT crowd to see a crime for what it is. It's also not by shutting up, or closing our eyes, that the above cited crimes will disappear. All I can hope for is to see regulators do their jobs.

Guy F, you appear to be well read and a studious theoretician. But for years I've tried to gain something from your comments and have always struggled. I wonder, do you feel the same way when you read comments from practical people - those who trade for a living? Net net I would trust a person who actually did something rather than someone who read about it. So why are you telling us about what HFT is instead of listening to those who know? Indeed your last post, where you parrot what the media have told you, is complete hogwash. It's sad that you believe it. It's sadder still that you don't listen to those who know.

@Cameron, wow, that's almost unexpected. I'm now well read. That's a notch up coming from you, impressed, humbly, thanks. The reason I don't listen to your argumentation, as well as others, is mostly because all you bring are opinions, no hard facts or data. I prefer to listen to the result of a government investigation resulting in a sentence of wrong doing by spoofing than listen to your exhortations on HFT.

Note that I'm not saying that all is bad in HFT, only that some of it is cheating. And if you think that spoofing is not cheating in some way, then you should petition the CFTC for wrongful indictment and sentencing of Panther Energy (the first one of many to come). But please be ready to bring some kind of proof. As I don't think the CFTC will consider your opinion as sufficient justification to change their verdict no matter how much in the know you might be.

For me, I find more credence in the data in the links provided substantiating the “claims” that there is data showing wrongdoing than whatever “opinion” you might express without a shred of corroborative evidence or data of your own. So, understandably, when you say: <... So why are you telling us about what HFT is instead of listening to those who know? > it might be because trust is not there, or maybe more appropriately, that you bring no data to the table to substantiate your “know how”. But then, that's me. And I don't think I'm alone.

You add: <... for years I've tried to gain something from your comments and have always struggled.> Sorry about that. I often have a hard time translating everything, but I usually express things that I consider simple common sense. Since what I've been mostly saying over the past 3 ½ years in this forum is: accumulate shares over the long term and trade over the process; what part of a weak Buy & Hold are you struggling with?

We don't see much on HFT trading procedures but I believe that notwithstanding, HFT should at least be done under the rules and regulations. That you have a better machine than mine, that you have a better program than mine, that you have more knowledge than I have, that you have more funds than I have; it is all acceptable to me. That HFT needs to cheat on top of that, that is where I draw the line. And since I am really too small to do any of the research, I will definitely rely more on regulators (CFTC, SEC, FINRA, ...) to do their job than on your “know how”. I do consider spoofing, front running and layering illegal.

What I find not so surprising from you is that even confronted with the evidence that a trading firm has been convicted under the law of spoofing, you are still ready to defend these practices. Well, let it be said that I am not.

Thanks Guy, just to be clear. Myself and others in the thread worked in HFT for years. Opinion is not the correct word to express what we have. It is knowledge formed through years of experience. I don't have the data now, of course not. What I have is an understanding of the strategies and the ability to recognise comments in the media as uninformed or misinformed. My position is as follows: I never spoofed. None of the models I ran spoofed. The reason wasn't that it was bad or illegal. It was because it wasn't a smart thing to do anymore. The first algos may have spoofed profitably but the next generation preyed on the spoofers. The complexity increased until they wound up tearing each other apart in August 2007. Thereafter a new iteration of the game commenced and around and around it has gone ever since and always will. That's because human beings are deceptive animals and to be successful in the the capitalist system and in financial markets requires deception too. To brand spoofing illegal and "indicting the criminals" is nonsense to placate the masses. It is like indicting an advertising company for trying to get people to buy a product they wouldn't have otherwise bought or indicting a soccer player for pretending he was going to shoot left but then he shot right. In the end whatever elaborate version of spoofing people are trying now it really doesn't bother me since even if they sometimes move the market with a fake order it is a symmetric risk at worst and a welcomed addition of liquidity at best.

@Cameron, after having said: “...Indeed your last post, where you parrot what the media have told you, is complete hogwash.”, you seem ready to accept that spoofing just “might” be illegal. Not sure since, even in your last post you mention: “...The reason wasn't that it was bad or illegal. It was because it wasn't a smart thing to do anymore.” to corroborate your saying that: “...I never spoofed. None of the models I ran spoofed. ” As if, if you could have, you would have. I now have 2 who say that they have not spoofed, note that the other one was using the term “nonsense” for what I was saying. No apologies, but total, it's great news.

You say: “...Opinion is not the correct word to express what we have. It is knowledge formed through years of experience. ” This knowledge of yours didn't seem to include what was legal and what was not; a rather basic notion that one learns early on in this game. Especially if one takes on fiduciary duties.

Then you add: “...To brand spoofing illegal and "indicting the criminals" is nonsense to placate the masses.” So for the same reason: why prosecute and jail bank robbers? Both are just stealing money from other people! What's the harm? Please understand: the law says spoofing is illegal. And just as with bank robbers, spoofers should be prosecuted to the full extend of the law.

Not surprisingly, spoofing, layering can not be done with much success by small traders. They have this major limitation: the size of their trading account. Don't think that putting out a limit order for a few hundred shares of AAPL to be cancel shortly there after will impress, scare or spoof anyone. Only big trading accounts can engage in “noticeable” spoofing, layering and in HFT for that matter. Now, if HFT needs to cheat to make a buck, then their activities should be curtailed to the extreme. Fortunately, some of the HFT trade is legit.

I find it imperative that people or organizations that cheat in this trading game be weeded out as fast as possible. The reason is simple: they are cheating everyone. In the end, it's the people paying for it all. I see it as a question of justice and fairness, nothing more, nothing less.

One can always hide his/her real trading intentions, cancel existing orders, put out new ones, adapt and change orders to suit one's needs, and change from a long to a short stance on a dime; but it has to be done without cheating, within the rules, regulations and the law. Not being caught cheating is not the same as saying it's legal.

sadly agree and Scott not to know any "spoofers!" is laughable ; however I give Cameron credit in accepting abuse in HFT ; this industry = money and we will always be pushing those boundaries however HFT have to accept the punishments when captured ! Keep pleading innocence and purity until ceiling drops !

sadly agree and Scott not to know any "spoofers!" is laughable ; however I give Cameron credit in accepting abuse in HFT ; this industry = money and we will always be pushing those boundaries however HFT have to accept the punishments when captured ! Keep pleading innocence and purity until ceiling drops !

@Neil - I am glad I gave you a good laugh.

It is illegal to spoof in the markets I trade so I can only assume you run with a different crowd than I do. It doesn't really surprise me that you are so presumptuous as to have an opinion on who I do and do not know, although I wish it did.

Good luck with your trading.

A bit late to the conversation. My view is that if we want a better marketplace:

- require a minimum time-to-live for each order (some # of ms)

- allow "locked" markets (more of a US equity question, where cross-exchange crossed pricing is not allowed & opens avenues for HFT games)

The mTTL restriction will greatly reduce games such as quote stuffing and also require a certain level of commitment for order placers. Of course one can still play games with showing size further inside the book with intent to mislead on buying or selling interest.

There are a number of markets already with mTTL and some even with a maximum on the # of orders that can be sent per unit of time (the later I am not in favor of). I think it leads to a better marketplace for all with exception of the gamers.

One problem is that too many people believe the market(s) are monolithic. They are not. Within any market there are many domains based on the time that market event data remains relevant to the trading strategy.

HFT is relative to the time domain the trader chooses to participate in. The systems my company design and build operate in the sub-microsecond wire-to-wire domain. The platform that is sub-millisecond in the five second domain is every bit as much a HFT system. Ditto with a one-second machine operating in the one-minute domain.

When you realize that markets can be divided into time domains then you can also devise a solid trading strategy that will be profitable in the chosen domain. People get into difficulty when they try to apply a strategy in the wrong time domain-- then they blame others for their errors. They also get into trouble when they fail to realize that the "faster" (shorter duration domains) below theirs actually provide stability that makes their strategy possible.

Today I'm designing new (affordable) platforms for "retail" traders that have millisecond wire-to-wire times but are targeting fifteen and thirty minute time domains. Are these HFT systems? Yes, because in those domains most traders are human and a millisecond response time system is always going to respond to market events faster than they can. And that's the game-- turn market data into market knowledge as fast as possible and then apply that knowledge faster than those you have chosen to compete with.

Jonathan - Perhaps you would care to comment (even more belatedly!) over here?

https://www.linkedin.com/groupItem?view=&gid=1813979&type=member&item=5863554029946183681

Democratising High Frequency Trading!

Some people think that Arnold's Bloomberg article makes a point! Geez. When you read the article, Arnold proposes to curtail an act that is considered illegal, namely front running, by minimizing it's impact; and this by allowing another illegal act, namely spoofing, as a remedy to what amounts to cheating other market participants in both cases.

The solution to front running is not to re-introduce spoofing, it is to get rid of front running altogether resulting in absolutely no need or justification for spoofing at all.

It's not a question of opinion, mine or anybody else's, it's simply the current state of the law. For anyone having missed the now illegal status of spoofing, or have the opinion that it is somehow still legal, I would recommend a refresher course no matter their past experience or know how.

I'm no lawyer, but how can someone ever suggest that a criminal act be justified by another criminal act as a deterrent to the first?

Regulatory agencies have been given the mandate and power to set rules and regulations for everyone. And as long as those rules, regulations and laws are in place, we should all simply abide by them. One can always lobby regulatory authorities (SEC, CFTC) for a change in existing rules or try to introduce new ones, but in the meantime, respecting the existing regulations is still the law.

If some trading desk continue using the spoofing strategy, then exchanges can easily identify these traders by observing no orders are in fact executed or traded at the volume they use as spoofing on a particular day, thus the exchanges should track these traders daily filled orders. However if traders do end up buying/filling in orders with significant volume throughout the day, this does provide market liquidity and forces them to take risk. In the end we cannot have traders creating false activity without taking any risk. If risk is assumed then it is fair that they have a reasonable case to counter act HFT algorithms in order to fill their orders. The fact remains that spoofing and HFT implicates interbank and large hedge funds and specialist groups, who aim to dominate activity in a particular security including market makers to the disadvantage of individuals. However in my opinion more exchange resources should be used for excessive short selling by these groups who cause mini crashes in stocks which can take months to recover, so I would be more focused on prime lenders and short sellers.

@Arthur I think there are reasonably situations where a market maker or an algo may post and update orders at a fairly high-frequency with a low fill rate. Really depends on their role in the market and the liquidity of the venue. Rather than looking at the fill-rate, suggest a simpler alternative of a required minimum TTL for orders. If the exchange requires, say, 25ms min TTL, this will at least get rid of the quote stuffing spam and also hold traders / algos to some level of commitment on their orders.

Some exchanges have gone a step further to automatically reject orders submitted if the # of orders in a 5min period > some maximum. I am not in favor of this additional restriction unless the limit is reasonably high.

@ Jonathon, Im an equities trader primarily so the best i can do is 0.005bps brokerage per contract as a private company, I am envious how HFT traders can execute small size orders, units of 1 and 2 somtimes , which is effectively a contract of SELL or BUY, so I would also look at increasing exchange fees on small unit orders/contracts, this will make spreads slightly more expensive and squeeze the profits out forcing the trader to commit to a purchase or sale, food for thought. I also agree with your comments.

There's certainly no rest for the wicked! This has just landed on my virtual doormat this morning (UTC):

http://www.tradersmagazine.com/news/buyside/aggressive-hft-is-not-dead-113497-1.html

Personally I'm not one of Irene Aldridge's biggest fans, but your mileage may of course vary.

"Recently, some articles have declared high-frequency trading (HFT) dead. One industry observer even suggested that “poor” HFT firms should be “pitied” as their strategies have been wiped out by volatility and dog-eat-dog competition for faster, better, ever more expensive technology undermining all profits.

According to research from AbleMarkets.com, nothing could be farther from truth. Aggressive HFTs quietly, but significantly, prosper, and more so in the presently volatile market conditions."

@Jim - Thank you for posting that article. If you want more information on how that analysis is accomplished and in general what to do about it, please feel free to pm me. That is the basic premise of what I posted earlier (above) about finding HFT or HFT like algos and benefiting from them without having to deploy them yourself.

It seems so many traders like to complain about (I originally used a different term but upon reflection, thought better of it) losing out to another bigger/faster/better informed/etc entity (machine) and instead of looking for ways to benefit from the situation, only want to seek a way to play the victim.

Note to all - before you go ballistic, I am not talking about illegal behavior, unethical behavior (as defined by an informed and reasonable person who actually trades for a living) nor am I talking about anything even remotely along those lines. I am talking about the advent of any technology that disrupts older, less effective technology in the same space where the existing adherents make no effort to adapt.

Thanks Scott. Adaptation efforts are always ongoing!

For some strange reason Traders Magazine mentions in this morning's mail a 2012 Bank of England in depth investigation into HFT:

http://www.bankofengland.co.uk/research/Documents/workingpapers/2012/wp469.pdf

"We find that both higher price volatility and lower spreads cause HFT activity to increase. We suggest a number of reasons as to why this might be so. Finally, we use a tick time specification to examine the impact of HFT activity on price discovery (ie information-based volatility) and noise (ie excess volatility). We find that while HFTs have a higher information-to-noise contribution ratio than non-HFTs, there are instances where this is accompanied by a large absolute noise contribution."