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Comment by NDT | Hacker News Reader

He was manipulating the market by generating large sell orders. This would drop prices (because others can see that some stock is being rapidly sold off -- especially by high-frequency traders or other automated programs who will also start selling). He would then cancel these orders to buy at the new low prices. This is called spoofing orders.

It was a large reason for the crash (though not the only component in my opinion) because these orders amounted to $200 million worth of bets that the market would fall and they were replaced or modified 19,000 times. And of course this is just one person. The market involves multiple people so you can imagine how much money was at stake here.

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Of course investment banks do this sort of thing all of the time, this guy's crime is that he wasn't associated with one of the big incumbents.

HFT generates and cancels orders on magnitudes like this all day long, but they have to be allowed to do so because it "creates markets", whatever that means.

> HFT generates and cancels orders on magnitudes like this all day long, but they have to be allowed to do so because it "creates markets",

No, they are allowed because HFT firms have the intention to (and in fact, will gladly) trade.

I don't think the intention matters if the result is the same.

it matters because the law says it matters.

Well, the law doesn't really say anything beyond "manipulative devices" and "contrivances," but right now, judges have kinda ruled that intention matters. But we don't know much, because most of these cases get settled out of court, so we don't have a robust case law to base any of this off of. Basically, if you participate in a financial transaction in any way, be prepared to be accused of a crime.

The law strongly disagrees, and for good reason. See: manslaughter vs murder.

Intention mostly matters, sometimes doesn't. Sometimes the left arm doesn't talk to the right arm and conflicting orders go out. Technically this could be construed as spoofing, but sometimes it's business unit A not talking to business unit B, because A isn't in the same location as B, or there's a Chinese Firewall between A & B. It might not be intentional spoofing, but it can happen, anyway.

Sort of true. They will do the trade, but only if there was already someone in the system willing to make the same trade. HFT firms don't hold positions at the end of the day.

AIUI, the difference is that, at the moment the HFTs place the order, they have every intention of filling them. Just because they might change their mind a fraction of a second later and modify their orders isn't particularly relevant.

Whereas spoofing is placing orders that you don't have any intention of filling. The only point of the orders is to move the market, rather than to actually make trades. And that's the thing that's illegal.

Therein lies the rub. How can regulators or prosecutors discern after the fact that a canceled order was one you intended to have filled?

I also don't understand why this is illegal. The markets should not be predictable.

People like that guy should be rewarded financially for making it unpredictable.

You don't want to have an economy where only a tiny group of powerful people understand what's happening while 99.99999...% of the population are at in the dark and at their mercy.

A fair system should be simple enough to be understood by everyone or complex enough to be understood by no one - Anything in-between is not a fair system.

> The markets should not be predictable.

Uh, yeah they should. To someone with perfect knowledge, a proper free market should be 100% predictable. It's only unpredictable if other people know things that you don't (and the market itself is the vehicle by which that knowledge is disseminated). Introducing uncertainty into the market without introducing knowledge into the market is a bad thing. And spoofing trades in order to move the market isn't providing any knowledge, and it is in fact making the market less efficient because it no longer matches the knowledge of the participants.

shouldn't a spoofer's action just be an opportunity for someone who has said knowledge to exploit the spoofter's enhanced liquidity?

Well, I'm not really sure how exactly to exploit this (I'm not a trader, all I really know about this is what I've read in all of the previous discussions about this), but that's really besides the point, because nobody has perfect information. In any case, I suspect the only real way to take advantage of this situation is to determine the orders that the spoofer actually does intend to make (e.g. spoofing to depress the price and then buying low) and making those trades first yourself. But you're not actually harming the spoofer in that case (except in that they didn't get to make the trade they wanted), because the spoofer won't actually have executed any trades, they'll have simply attempted (and failed) to execute them.

Which is to say, if you have perfect knowledge, you might be able to prevent the spoofer from reaping the benefits of their spoofing, but you won't actually have harmed them, and of course the effect on the market is just as bad as if you let the spoofer spoof in peace.

spoofing is largely defined in its relationship to people submitting large orders that they intend to cancel for the purpose of moving the market. so, while the rest of the market thinks there is buying or selling pressure coming from the spoofer's large order, the spoofer has private information that he does not intend to actually trade that large order. he simply wants to move the market towards one of his much smaller orders, and get it filled instead. then, he cancels the large order, and the market in theory should revert back to its old price, because the information that a large order will be moving the market has been taken away. now, what's important is that the spoofer actually has to send a large order. and even if he has no desire or intention of getting it filled, it's still available to be filled. so, if someone thinks a market is going up, but there isn't enough liquidity for him to express his opinion, he could wait for a spoofer to come along to inadvertently provide liquidity with a large offer, and trade with that offer before the spoofer has time to cancel.

What you describe isn't someone taking advantage of the spoofer's intention not to actually trade, though. Or rather, it's not someone who has perfect information using that information to understand that the spoofer's order does not represent actual knowledge. It is, in fact, someone who has limited information and believes the market does not reflect reality, and then using that to place an order that just happens to use the spoofer's order. So in this case, it's no different at all from them trading with a market maker.

Also, I would assume spoofers don't typically place orders in illiquid markets, precisely because they risk having someone use their new order as a source of liquidity. I mean, spoofers don't actually want their orders filled. Plus, the whole point of the spoofed order is to trick market makers into moving their positions, and if the market isn't liquid then clearly there's no market makers (because if there were market makers, then the market would be liquid), and if there's no market makers then spoofing isn't going to work to begin with.

I don't think it's fair that people can make money from having 'perfect' knowledge of the market. I don't buy into the efficient market hypothesis.

I can point out many significant inefficiencies in the system - E.g. Nepotism (allocating employee rank and pay based on social connections instead of skills/results), executive bonus structures which favor short-term gains over long-term gains, monopolies which make companies complacent and employees less productive, other anti-competitive behaviours - These factors allow large, inefficient companies to beat competitors in the market in spite of significant internal inefficiencies.

Anti-competitive behaviour will probably always exist in the markets; it's part of human nature and it's basically universally accepted except in the most extreme cases (E.g. antitrust cases).

Maybe if humans become smarter and more psychopathic (like in the novel 'Atlas Shrugged'), then we could have an efficient market, but right now, I think it's very far from efficient.

Maybe it's efficient on a human psychological level (from the perspective of an average trader/investor) in that there is some sort of universal consensus about the value of everything. The problem is that this consensus is not rooted in reality but on a superficial, socially-constructed representation of it - That means it's not necessarily efficient in terms of maximizing the output of companies and the happiness of their customers.

> I don't think it's fair that people can make money from having 'perfect' knowledge of the market. I don't buy into the efficient market hypothesis.

These two statements don't seem related. And I don't understand the first one anyway. Where does "fairness" come in? It doesn't seem unreasonable to me that one person who has perfect knowledge about a financial market would be able to make money that someone who doesn't have perfect knowledge wouldn't. And it seems quite "fair" to me that this would be so; why should the person with better knowledge not be able to benefit from their better knowledge?

Markets already are unpredictable. Spoofing is the equivalent of running an auction on ebay and submitting bids yourself under fake accounts to drive up the price to trick the one person who actually wants it into paying more.

Market makers do this sort of the thing all the time in trading stocks.

There is a difference between unpredictability and instability. Things like this cause instability and can destroy the market altogether.

What happened if someone took him up on an order before it was cancelled?

He got some partial fills.

And he had a separate account that would trade the market distortion.

His big orders weren't the best bid or ask. They were a few orders deep in the market.

Basically people and machines would jump further in front of the big buy or sell order with their own orders, and move the price in a direction. His smaller account would make profits from those trades.

Yes you could affect trillions of dollars of derivatives and the sentiment of the entire market with just a few dozen millions.

It is still a widespread practice and tough to prove. But spoofing was made illegal in the Dodd Frank Act. So if the government can nail some easy cases and create case law, then they could think about going after the banks that do it. Emphasis on think.

Should it be illegal for s man to shout SELL! on a crowded trading floor?

>on a crowded trading floor?

does such a thing even exist anymore?

Yes just not for many products. You can tour it in Chicago.

If he has no intention of selling, yes.

But he did. He just shouted, "nevermind," a few milliseconds later.

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