A year or so ago when I was watching the volume tick bars for the SPY more closely, I kept noticing a few huge transactions, multiple times above average volume, occuring almost instantly at a single price without moving the markets. I've read lots of theories as to why/how that happens, but none were really convincing as of yet. So, as usual, I kept it in the back of my mind and came up with a handy conspiracy theory, as to how money can be laundered by employing HFT (market makers) completely legally, or at least seemingly so.
Money laundering involves transferring wealth from one questionable account to another less questionable account, or, to accounts of a related owner with intention of tax avoidance.
Let's say our "player1" has obtained a nice sum of cash but needs to transfer it to a legit account of "player2" and pay almost no taxes. They expect the S&P to go up so P1 starts slowly selling SPY and P2 starts slowly buying it, but they always do so at the exact same time. When the SPY has risen sufficiently, P1 will employ HFT1 to place a Bid, and P2 will employ HFT2 to place an Ask, and they will both execute market orders at the quantities they are holding. In effect, player1 has lost money, which player2 has gained. They have circumvented the open markets by in effect selling directly to eachother by the use of HFTs. The trade never occurs unless both HFTs are positioned exactly as they should (first on the bid/ask).
So, in effect, money laundering or not, one point is you can circumvent the open market by using HFTs, at least in my idealistic theoretical world, but judging by how many HFTs really do manage to stay on the bid/ask almost 100% of the time, i don't think it's that idealistic or theoretical at all.
The cost of this transaction is the spread (which is offset by the closing trade to a much smaller real spread cost, almost zero) plus whatever the HFTs charge for their "service". In many cases, it will probably be less than the cost of paying taxes on declared income from other sources... think about it..
What I don't like about my theory is that they still have to speculate which way the market will move, but even without that, the prospect of using the markets as a shady transaction venue between HFTs is interesting on it's own.
Don't tell me the SEC or whoever investigates these things, they hardly have enough money to go after completely obvious criminals, and hiding this activity is easy enough especially with multiple accounts and other accounting tricks.
Also, I used SPY as an example but there are many more suitable venues to do this with.
On the other hand, i'd like to hear of more opinions as to why/how some ETFs trade huge volume in a matter of milliseconds without price moving a single dime. Thanks.
Money laundering involves transferring wealth from one questionable account to another less questionable account, or, to accounts of a related owner with intention of tax avoidance.
Let's say our "player1" has obtained a nice sum of cash but needs to transfer it to a legit account of "player2" and pay almost no taxes. They expect the S&P to go up so P1 starts slowly selling SPY and P2 starts slowly buying it, but they always do so at the exact same time. When the SPY has risen sufficiently, P1 will employ HFT1 to place a Bid, and P2 will employ HFT2 to place an Ask, and they will both execute market orders at the quantities they are holding. In effect, player1 has lost money, which player2 has gained. They have circumvented the open markets by in effect selling directly to eachother by the use of HFTs. The trade never occurs unless both HFTs are positioned exactly as they should (first on the bid/ask).
So, in effect, money laundering or not, one point is you can circumvent the open market by using HFTs, at least in my idealistic theoretical world, but judging by how many HFTs really do manage to stay on the bid/ask almost 100% of the time, i don't think it's that idealistic or theoretical at all.
The cost of this transaction is the spread (which is offset by the closing trade to a much smaller real spread cost, almost zero) plus whatever the HFTs charge for their "service". In many cases, it will probably be less than the cost of paying taxes on declared income from other sources... think about it..
What I don't like about my theory is that they still have to speculate which way the market will move, but even without that, the prospect of using the markets as a shady transaction venue between HFTs is interesting on it's own.
Don't tell me the SEC or whoever investigates these things, they hardly have enough money to go after completely obvious criminals, and hiding this activity is easy enough especially with multiple accounts and other accounting tricks.
Also, I used SPY as an example but there are many more suitable venues to do this with.
On the other hand, i'd like to hear of more opinions as to why/how some ETFs trade huge volume in a matter of milliseconds without price moving a single dime. Thanks.
