yET to find an exchange guilty of anything ................"fair & orderly markets !"

Struggle to understand how regulators have been so lenient .on them as all profit enterprises .

@Neil - out of curiosity are the same Neil Crammond that was by Bloomberg the other day? In case you get quoted a lot, it was in an article about the UK guy they are accusing of causing the flash crash.

hi Scott ; yes it was ; ive traded futures in london for over 30+ years and the trader ; Nav Savoa ;was previously at Futex ; he's as guilty as most the market but a good trader . If he said he was a HFT he be not in prison . I speak alot in London on "spoofing & layering " and currently questioning the new commodity exchange act on spoofing where any cancelled order is a spoof !

Wow, that is fascinating and very cool.

I have a real question for you then. Spoofing I understand and am against. When it affects other algos (vs human traders) it can even be interesting to watch algos spoofing each other back and forth but I still think it is wrong.

On the other hand layering isn't as clear to me as the term is used in the context of undesirable (and possibly illegal activity ).

How is it different from "stacking the book" which is common, even the norm for algos of any speed? If I am making a market, I will have orders on many prices on both sides of the book (layering) that I am fully willing to execute because I have very good metrics on where bounces occur and I want trades at those prices.

However if news has entered the market that takes us out of an auction mode and into vertical development (regime change), no different from any other trader, I am not willing to catch a falling knife and will cancel away and reenter once the market stabilizes.

It doesn't seem manipulative, just smart tading not to stand in front of an oncoming train. That approach to market making even has a phrase associated with it - "avoiding adverse selection" (avoid transacting with counter parties who have information you do not).

Pit traders used to "work" large orders to avoid getting filled at bad prices; it was part of their job and if locals saw they were on the wrong side of a move, they too would get out of the way.

It all seems like the same thing and could certainly be termed layering but hardly nefarious; are those all the same thing so many people are up in arms about?

scott; under this new law "layering " & "stacking the book " are both deemed illegal as distorts the order book BUT as time priority orders we need to stack orders ! I raised this point alot recently and sadly it affects most active traders ! PIT traders we had to wear the lot BUT benefitted elsewhere and translation been lost when in these markets HFT and other traders can cherry pick their trades ; on the floor you took the rough with the cream ; ie we had to let the retail traders out !

This commodity exchange act ; spoofing act ; has and will catch alot of traders out ; ive often rang exchanges up and said orders cancelled as limits exceeded etc ;again the wrong governance at the top . Traders will always cheat if allowed ; easy solution is real time referrees making instant decisons ; aka on a sports field ; they get it mostly right and keep it fair & orderly .

@ Hmmm, not sure what to make of the new law then. If I want 100 contracts but have only a general sense of where price will turn around, I won't put out a 100 lot nor even five 20 lots at the same price; that would be suicide (talk about being a sitting duck). I will put 20 lots on successive prices either contiguously or with a slight gap among the orders. This normally leaves me with a reasonable average price relative to the area (as opposed to the exact price) where I want to trade.

Even though I put the orders out on a few different price levels, like the pit traders you mention, I would be willing to take the trades (it appears you are saying they had to take the trade once they had the order out). If market moving news comes in that is clearly putting me on the wrong side of the market (Greece just announced they were defaulting or there was a lock down at the US capital because of a bomb threat), just like any normal trader I would try to get out of the way.

Logically, I am not sure what the law would have me do; not talking about cheating (nor effectively cheating but being technically within the rules). I am talking about the very first rule of trading - don't do stupid stuff and try to pick a bottom in a sharp market move down.

I don't have an issue with most of this and as I mentioned I can spot the spoofers pretty easily by sight - I mean really, does someone change their mind 100 times in 5 seconds by showing 100, then 99, all the way down to 50 and then back up to 100 over and over? That is an algo trying to simulate activity where there is none trying to entice another trader or algo to take a bad trade.

It is strictly the oncoming train/falling knife scenario I am thinking about. I used to trade HFT so I know a lot about how those algos work and have quite effectively used that knowledge to stay out of their way and in fact, enter once they stop trying to push price. Often they will force price beyond its natural auction value and that is where you want to enter counter to that move. As long as the move is algo or large order driven trading against it almost never loses as long as you can differentiate that scenario from one where legitimate new information has entered the market place.

I am not in favor of spoofing or layering with no intent to take the trade nor can I see how anyone should have to stand on the wrong side of a clearly one way market. When you traded in the pit, what happened if you signaled you would trade at X price and then changed your mind before anyone accepted your offer? Is there a there a middle ground somewhere in your opinion?

As an aside, I must say, I appreciate you discussing this, it is important to have open, direct discussion of these issues without everyone retreating to their respective corners defending a position the other side doesn't even understand.

The exchanges will do nothing to dampen abusive practices. The revenue flow is too attractive and they can stand to the side and claim minimal if any responsibility due to "free market" trading. When the guano hits the fan and their entire livelihood is at stake they will move to defend the integrity of their markets. By integrity I mean revenue stream of course. The primary root problem is that the venues were converted into a free for all contest with automated order entry, removal and execution dominant. None of the players are charged with any accountability or responsibility. The regulators determined that all intermediaries were evil, a concept easily sold to a public persuaded that investment houses were headquartered in Hades. Now there is no referee or intervening party with a proprietary interest that steps into the breach to restore order as much as possible or call for a temporary halt to the proceedings in order to balance the order book. I was never one of those whiners regarding the specialists' role. At least some party was there at risk with the responsibility to maintain a fair and orderly market as am accountable party. The specialist's life depended upon both performance as a trader and satisfying the responsibility associated with the position. Increasingly we see moderate and large block positions broken into pieces an precipitating an HFT and flash riot. The consequences and outcomes reflect corruption of the process. The image will linger long after the next spill by any of the major markets. Trust and confidence suffered badly last time and the next round will likely be far worse. The result will leave the hardcore sitting at terminals gaming each other until a few winners walk off with the pot. Then the system implodes and we go about rebuilding it. Removing market makers and intermediaries and moving to decimals was a mistake. Control of all floors was ceded to algos with no regard for anything but skimming from the flow through any means possible. There is no accountability and virtually no threat of adverse repercussions. The fact that there is a discussion regarding whether or not spoofing is wrong attests to how serious the situation is. A close reading of the rules clearly and categorically classifies such behavior as manipulative and abusive. It is illegal and constitutes felonious conduct. Yet the practice continues as the practitioners out run the regulators and the exchanges pretend there is nothing untoward occurring. Each cycle produces such abuse and it ends the same way; broken markets which kills the practice until another gambit is developed.

@Larry, just to be clear, I am 100% against spoofing and every ethical trader I know is against it as well. The only good I can see regarding spoofing is that since my algos can detect it for what it is, I profit from not being fooled by it and in fact, knowing how to trade against it.

My confusion centers around layering. If today I could be guaranteed to be able to buy every bid and sell every ask under the same rules as a specialist, I am pretty sure I would be willing to do that. Sure I would lose a handful of days a year but would easily make that up the on the vast majority of the days I didn't lose.

Layering and averaging in to take a position at an area vs a particular price are one and the same to me. The alpha isn't in the layering, it is in knowing the area where price is likely to bounce and the conditions that might determine the efficacy of the calculations. Those together signal the right price/time to begin accumulation. I don't have to nail the price, I only have to get the general area right sort of like - I don't have to outrun the bear...

Never a doubt regarding your position on spoofing. It simply seems unfortunate that your well crafted statement is remotely necessary. Your detailed description of layering and averages draws the distinction between the tactic and spoofing. When scaling into or out of a position circumstances compel a change of plans. Some call it a fine line but there is no fine line. It is a permanent marker line. Scaling or layering is designed to minimize market and account disruption and demonstrates clear intent to bid or offer. Spoofing schemes are designed to avoid execution and order are entered with the sole intent of influencing movement without any intent of executing the orders shown and withdrawn. Thnks for submitting your remarks. Hopefully, viewers will find them enlightening.

@Larry, thank you for the kind words. I agree 100% that in the vast majority of cases, there is no ambiguity, do you intend to take the trade or not given you are in a normally functioning market.

In writing this I realized something interesting (to me at least); I could literally publish exactly where all my orders are with no detriment to me at all. If you want to trade with me at those prices at that time, I will be more than happy to take the trade. You may be right and I may be wrong or more likely it is simply a risk transference mechanism along the continuum from oil being pumped out of the ground to the point it is refined. Some look over a year's time frame, some at the monthly level and on and on all the way down to me who looks over minutes and hopefully milliseconds if I nail the turn.

So, do you know why the terms spoofing and layering seem to appear together so often? I don't really hear about layering except in conjunction with spoofing.

Scott, first of all- Amen. Whenever I see spoofing and layering plopped into the same discussion I sense that it is often an effort to sanitize spoofing as acceptable behavior. Essentially it is an argument depicting the two as similar of not the same process so permissible and consistent with fair practice and the trade regulations. Reading intent is a highly subjective pursuit. However, behavior patterns provide the circumstantial evidence to make a compelling case when dealing with misconduct. Those practicing layering or scaling can show executions according to their indications and provide bona fide reasons for cancellation. The behavior pattern constructs the chain of evidence. On the other hand spoofing actors are unable to demonstrate the same chain of evidence. All they can show is a string of orders trying to move price until it reaches a point satisfying their agenda. Then they frequently take the other side of the trade. In some cases they induce movement one way and participate in the inducement only to spin around and liquidate into the push that they induced. The evidence clearly demonstrates intent to manipulate.

This is an important subject. If unchecked the fall out will be quite injurious and stifle interest in the capital markets for a very long period.

I agree on all counts. Send me a pm if you would like the general concept of how to spot spoofing algorithmically and how to profit trading against it. You need decent infrastructure, decently low commissions (so you can afford to scratch if you are wrong) and the ability to code but beyond that, it really isn't all that complicated.

we teach traders how to spot "flipping & "spoofing " . they enjoy trading against them . It happens on futures most days mainly during quiet periods .

@Neil - how do you differentiate between exiting a position and flipping? This is assuming that you define flipping as taking positions and quickly exiting them (like flipping a house).

Oops, I apologize. I meant to delete my comment because of an error but I think I actually deleted your last comment by accident.

EXACTLY .... the difference is when you flip . As said before "flippers " normally work in quiet markets as know they won't be hit by big traders ;they pick their moments ; easy to spot . Hard for regulators or newbies to see ; look at volume nodes and similar volumes in order book . .

@Neil thanks for the clarification. Based on that I am definitely not a flipper because I rarely trade in quiet markets for the exact reasons you mention.