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.

Intentions are hard to prove and are very subjective. Big financial players who believe they are being exploited by smaller players who game their algos can lobby the regulatory bodies to punish those smaller players. This contributes to an ever increasing concentration of power in the financial sector to the large, too big to fail banks.

It's the reason that, even after tens of billions of dollars in fines, there have been no criminal cases brought against those in the big banks, while this guy faces a maximum sentence of 380 years if found guilty on all charges [0]

Spoofing is best handled by the particular exchanges but should be weighed against the harm it would do to honest market makers who have to place and cancel orders regularly

> In looking at Mr. Holder’s legacy in white-collar crime cases, the pursuit of corporations, especially banks, stands out. The highest settlements for violations have come in the last year. These include the $13 billion from JPMorgan Chase and the $16.65 billion from Bank of America for their roles in issuing mortgage-backed securities tied to faulty subprime loans. BNP Paribas also paid a $9 billion fine for violating economic sanctions laws. BNP was also required to enter a guilty plea to a criminal charge, a rarity in the world of corporate criminal prosecutions. But prosecutors did not file charges against any individuals for the wrongdoing that led to the large settlements. [1]

[0] http://www.telegraph.co.uk/finance/financial-crime/11554471/... [1] http://dealbook.nytimes.com/2014/09/29/eric-holders-mixed-le...

People use the term spoofing in an overloaded way:

1) As this article describes, spoofing is the use of orders to change the perception of the supply and demand of an instrument. It is often also called layering (a term that is also overloaded). It does not involve mass amounts of orders or cancels. In fact, good spoofers go to great lengths to make their order flow look identical to someone who has regular trading intentions.

2) Spamming lots of orders into an exchange for some nefarious purpose (I've heard this described as a DDoS on the exchange). Which is both widely over reported (to the point that I believe it is largely urban myth) and trivial to detect and prevent on the exchange side (the exchanges know exactly who is sending the orders, the specific order gateways have rate limits, etc).

Finally, exchanges do penalize market participants that cancel too many orders. This is typically done via a fill ratio (the % of orders to those that trade) and enforcement can be either in the form of price levels, fees or potentially banning from the exchange.

To make it more complicated, there are people who run bargain hunter strategies - people who deliberately place orders way outside the NBBO in the hope of getting fills at really good prices. E.g., I'll buy TWC at $140 but not it's current $148.

This is functionally identical to spoofing except that these people are explicitly hoping to get a fill. (Hence it's legal.)

Question: Matt Levine keeps pointing out that this is some rando in a track suit working from his basement in London, and MF Global is providing him with execution services for ostensibly zillions of dollars worth of orders. There's no way he could have taken fills, right? The trading intent was fiction, but so was the trading capability, right?

This is where the "intent" of spoofing becomes very very murky. There is a trading strategy called laddering (or sometimes confusingly layering) where a market maker will put orders at many levels of the order book at once (and sometimes at extreme depths, like 100s of levels). If they were to get swept in one direction there is absolutely no way they could trade all of those levels (their risk controls would kick in long before that). But, if the fills come in the correct order (ie 1 buy/1 sell) then the market makers would happily trade all of them.

Its even worse in pro-rata matched markets because participants will often put orders in at much higher quantities than they actually want to trade, so that they can get any of the fills. That is, they'd love to get filled for 100 contracts, but are putting in orders for 10000 contracts in order to get any of the matching. Again, if that filled in the proper order they'd happily trade it, but if not they don't want to.

So in both cases, spoofing and not spoofing, the actual ability to honor the orders is in question. So that in and of itself is not evidence of spoofing.

The difference (I believe) is that the market makers in the laddering cases would LOVE to trade every single one of those orders if it came in the right order and are not intending to change the markets behavior with the placing of those orders.

The intention of a trader on these kinds of markets is to make money. End. Telling him that you'll arrest him, or that he should feel bad, if he doesn't have the intentions and morality you want him to have - does absolutely nothing to change his intentions.

Markets work, despite this incredibly misaligned incentive, because markets can eventually reward people who are eventually more correctly predicting the future value of the assets.

FYI - your usage of the phrase "true price" makes me strongly confident that you totally misunderstand markets.

There's an argument for spoofing from earlier this year [1] which I would tend to agree with if the proportion of spoofers and HFT front-runners actually balanced out. Not sure how it really is in reality though.

[1] http://www.bloombergview.com/articles/2015-01-23/high-freque...

From what I can tell, the argument for spoofing devolves pretty rapidly into an argument for private order books (that is prices are not published at all).

This is available currently in the form of dark pools. They don't tend to work out as liquidity is much lower on them and bid/ask spreads are wider.

That may not be true if ALL venues were required to be private, but that would be a pretty dramatic change (and exactly the opposite of what we have now, which is a requirement to publish and meet other published prices).

> They don't tend to work out as liquidity is much lower on them and bid/ask spreads are wider.

If you're a big institutional investor though, and you know that buying a bunch of shares will move the market for sure, well, it might be worth suffering a wider spread. As long as that spread looks small relative to how much you think you'll move the market, it's not a bad deal. And if you already have a subscription to the pool you might as well try it before you get the algorithms involved to buy on the open market.

Absolutely if you are a large block trader your dream scenario is a very liquid market with very inefficient price discovery.

Dark Pools were meant to provide that, but it turns out that in practice it didn't work (because no one wants to provide liquidity in that environment) and Dark Pools ended up resorting to either letting liquidity providers in, going out of business, or extremely scammy things to keep up the ruse.

So there are no institutional investors who ever need to sell? Or maybe it's that people aren't willing to wait at all when they want to sell, so putting it on the dark pool for a few hours or days isn't really an option. Where as if you want to buy you might be willing to wait a day or two.

You are under the incorrect impression that providing liquidity means selling shares. Providing liquidity happens on either side of a trade. Market makers are full time liquidity providers offering to both buy and sell (usually at the same time). They make their money by bridging the temporal gaps in the supply/demand of an instrument.

So if you are using a liquidity providers it is evidence that you do not want to wait. If you did want to wait, you yourself can just put the order out and provide the liquidity to others.

Nasdaq has an excessive messaging policy and charges the exact fees you suggest.

http://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing

Fees only kick in if you cancel 100x the orders than you actually execute. And then you only pay half a cent per order over that limit.

I was suggesting something much more like a txn fee per order closed above a much tighter threshold (like 3x)

And none of those limits currently apply to registered market makers... And I agree with their exemption from the harsher rule too, but they should bear increased scrutiny and guaranteed liquidity rules for the privilege.

Market makers are obligated to keep lots of orders way outside the NBBO in order to maintain an "orderly market".

If a trade occurs at $10.00 and then the next trade is $12.00, that's considered "not orderly". So a market maker must keep orders at $10.00, $10.20, $10.40, ..., $11.80, $12.00. This way if someone comes in and buys everything then the sequence of trades will be $10.00, $10.20, $10.40, etc.

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.

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?

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?

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.

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?

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.

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.

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.

Please don't complain about downvotes...

I was doing as you asked. See how fruitful it was?

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.

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

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

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.

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

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.

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.

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.

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.

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?

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.

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.)

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.

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.

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.

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.

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).

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.

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.

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

Levine is being sarcastic about the "fundamental human right" part, by the way.

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.

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.

The most convincing case I heard for making insider trading legal was in a 2003 Wall Street Journal op-ed [0].

[0] http://www.wsj.com/articles/SB104786934891514900 (Paywall) [1] https://www.google.com/#q=%22the+case+for+insider+trading%22 (Google search results, top result)

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."

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)/

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