Eliminating Spoofing = making bluffing illegal

[Rum Runner]

I would hope that most HFT firms do not fall victim to the type of spoofing that Sarao did. If they did (for an extended period of time), I'd agree that it was some pretty sloppy development on their part.

I'm guessing that most of the victims aren't really HFT, but algos that do some very simple measuring of the order book.

In my opinion. any sort of placing orders without the intent of getting filled at the time of entry should be flagged and legally pursued after a warning. I don't care who is doing it.

 

[cjbuckley4]

I would hope that most HFT firms do not fall victim to the type of spoofing that Sarao did. If they did (for an extended period of time), I'd agree that it was some pretty sloppy development on their part.

I'm guessing that most of the victims aren't really HFT, but algos that do some very simple measuring of the order book.

In my opinion. any sort of placing orders without the intent of getting filled at the time of entry should be flagged and legally pursued after a warning. I don't care who is doing it.

I actually agree wholehearted. I didn't want to mention that no one with the technical competency to use the fork function in linux is gonna be fooled by a spoofing order like Sarao's because it would sound pretentious, but you're absolutely correct.

The types of spoof-esque orders that used to fool HFTs consistently were other HFTs layering and shaping the book. It takes someone anonymously and systematically adding liquidity to fool HFTs, not just one huge order being conspicuously paraded to the back of the queue every time it gets made remotely more marketable. When you look at the DOM, you just get a cursory look at the aggregate liquidity at a level, so it could fool a human being, but HFTs are mindful of patterns. They pay attention to how the queue at any visible level evolves over time and keep a tab of all the orders in the queue; they know the time, the order number, and the size for each order in the queue excepting those that were there when the level first comes into the sliding 10 level window. A large order intentionally moving to the back of the queue isn't gonna fool me and it isn't gonna fool the myriad of folks way smarter than me in this industry. Also, there's a whole cottage industry in NYC/Connecticut/Chicago of entities including trading divisions at banks that just do execution for clients such as hedge funds, mutual funds, etc. The folks who are actually interested in placing large orders invest a lot of energy into disguising their intentions. The idea that someone would leave a couple percent of the ES daily volume just sitting in the book for HFTs to pick apart and flip is quite literally too good to be true.

Your opinion on what constitutes a legitimate order is exactly how the Dodd Frank Act ruling on the matter reads, however it was left to the CFTC and SEC to come up with the exact rules. The CME also has rule 575 which is exactly what you've suggested. It's black and white. Extremely explicit. Hard and fast rules are what the vast majority of HFTs want. They don't invest millions a year in compliance departments because they like murky rules.

 

[paperbid]

In my opinion. any sort of placing orders without the intent of getting filled at the time of entry should be flagged and legally pursued after a warning. I don't care who is doing it.

Define intent - the issue that myself and many other traders have is that the argument is often put forward in black and white.

If I bid a large size order in the order book and consistently work small offers a few ticks higher, and regularly scalp the small range, once in a while I get swept on the large order and have to spread it off, scalp it out, or eat the loss. I have an intent to trade on that order. I would happily like to get filled 4 ticks off market, all day, every day.

The regulators now have said that the above scenario doesn't constitute an intent to trade. Even if I could show regular instances of being traded on the large order. They will quote that your average trade size is X and you were working an order 20X, etc, and you are gaming other participants.

Again, who is actually loosing from what is going on here? Momentum driven algos, or any type of automated strategy looking at the order book, and making an poor trading decision. In my opinion, this again is rewarding poorly designed strategies.

Notions of "intent" and "legitimate" orders are actually pretty grey areas in the real "market" world.

 

[sprstpd]

The regulators now have said that the above scenario doesn't constitute an intent to trade. Even if I could show regular instances of being traded on the large order. They will quote that your average trade size is X and you were working an order 20X, etc, and you are gaming other participants.

Which is complete bullcrap because the cancel rates of HFTs must be astronomical. So spoofing is illegal because spoofers do not want to trade all of the orders they enter. But I am assuming that HFT cancel rates are in the same league as spoofers so they are not trading the same percentage of orders. One is good and one is bad. It's bullcrap. Once an order goes live, that is an intent to be filled, regardless of how the HFT apologists try to justify their morality.

 

[Rum Runner]

Which is complete bullcrap because the cancel rates of HFTs must be astronomical. So spoofing is illegal because spoofers do not want to trade all of the orders they enter. But I am assuming that HFT cancel rates are in the same league as spoofers so they are not trading the same percentage of orders. One is good and one is bad. It's bullcrap. Once an order goes live, that is an intent to be filled, regardless of how the HFT apologists try to justify their morality.

I have to disagree. While I think there are some HFT strategies that are up to no good. I think the majority of HFT cancellation rates are largely explainable. And, I don't think they (for the most part) are putting orders in with no intent of getting filled. It is just that when there is a fill, it may completely change the dynamic of their model and they must cancel orders that no longer fit in that dynamic.

 

[Rum Runner]

If I bid a large size order in the order book and consistently work small offers a few ticks higher, and regularly scalp the small range, once in a while I get swept on the large order and have to spread it off, scalp it out, or eat the loss. I have an intent to trade on that order. I would happily like to get filled 4 ticks off market, all day, every day.

Sounds like your intent is to trade the small orders and if the large one gets filled you just deal with it. But honestly, your preference (intent) is not to have that large order consumed...? And, I don't know what sizes you are talking about. But if there is a large discrepancy in order sizes, well, that sounds like spoofing to me too. imo of course.

 

[sprstpd]

I have to disagree. While I think there are some HFT strategies that are up to no good. I think the majority of HFT cancellation rates are largely explainable. And, I don't think they (for the most part) are putting orders in with no intent of getting filled. It is just that when there is a fill, it may completely change the dynamic of their model and they must cancel orders that no longer fit in that dynamic.

There is no way you can measure intent once an order is live. All live orders can be executed against. If regulators are so concerned with cancel rates of spoofers, then surely they should be concerned with the cancel rates of HFTs. And finally, if spoofers need to go to jail for some idiotic reason, then it makes sense to me that all people responsible for HFT algorithms should go to jail along with them. Let's not give one trading technique some moral shield when they are statistically equivalent.

 

[Rum Runner]

There is no way you can measure intent once an order is live. All live orders can be executed against. If regulators are so concerned with cancel rates of spoofers, then surely they should be concerned with the cancel rates of HFTs.

I sorta agree with you. However, given a pattern that happens over a period of time, I think you can start to see intent. This is just like any other crime. You can't always prove intent, but you can show that it was probably intent with enough supporting info. No one is going to get in trouble for high cancel rates alone (at least I hope not). There is going to be more that goes along with it.

then it makes sense to me that all people responsible for HFT algorithms should go to jail along with them. Let's not give one trading technique some moral shield when they are statistically equivalent.

Come on. Not all HFT (whatever that means) are the same. They aren't all malicious. And by the way, Panther was considered HFT and they just got slammed. No shield there.

 

[Guile]

I sorta agree with you. However, given a pattern that happens over a period of time, I think you can start to see intent. This is just like any other crime. You can't always prove intent, but you can show that it was probably intent with enough supporting info. No one is going to get in trouble for high cancel rates alone (at least I hope not). There is going to be more that goes along with it.



Come on. Not all HFT (whatever that means) are the same. They aren't all malicious. And by the way, Panther was considered HFT and they just got slammed. No shield there.

Come on...this is bullshit. Panther was a glorified day trader just like Sarao. He wasn't policially connected in Chicago and I bet he wasn't writing direct to the exchange. Nobody at Jump will ever face a serious punitive action. True HFT = immunity from prosecution.

 

[cjbuckley4]

Which is complete bullcrap because the cancel rates of HFTs must be astronomical. So spoofing is illegal because spoofers do not want to trade all of the orders they enter. But I am assuming that HFT cancel rates are in the same league as spoofers so they are not trading the same percentage of orders. One is good and one is bad. It's bullcrap. Once an order goes live, that is an intent to be filled, regardless of how the HFT apologists try to justify their morality.

Cancelling orders doesn't imply that the orders were initially places without the intention of them being executed.

HFTs are trying to make markets. To make money as a market maker, you need to be able to cross the spread before the market moves against you. They need good queue position in order to do this, so they send orders tactically at several levels on either side to maintain good queue position before the market actually reaches them. If price reaches that level but it's no longer a trade that the market maker wants to take, they cancel the order. They fully intend to execute the order when they place it, but something along the way convinces them that they're unlikely to capture the spread or that they have too much inventory representing a similar directional bet on a given security, so they simply cancel. There is no attempt to mislead other participants here and nothing manipulative about this activity, unlike spoofing.

Exchanges like CME provide mass quoting in their protocols to facilitate market makers doing exactly this without it counting against them in the Efficient Messaging Ratio calculation--one of the rules put in place to discourage manipulative practices like layering--a form of spoofing that people who know what they're doing prefer to spoofing because it's more deceptive and easier to defend as a legitimate market making tactic. There are a myriad of other accommodations made by exchanges to encourage market makers and make sure they provide continuous liquidity because it leads to more fair markets.