SEC Wins Jury Trial in Layering, Manipulative Trading Case
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sec.gov
Here's the original SEC complaint from March 2017: https://www.sec.gov/litigation/complaints/2017/comp-pr2017-6...
First thought: settle with the SEC. Don't fight it.
Second thought: and a quick perusal of the original complaint finds multiple examples: if you're going to do something illegal don't write about your illegal activities in an email. Let alone explain "layering works like this..."
Third thought: I'm surprised it took this long to get these guys. There were a few spoof related cases back in 2016... Famously the London spoofer with s&p futures. This one didn't show up until 2017... And then took almost 3 years through a jury trial.
I personally don't see the crime here though. What does it mean to place orders you don't intend to execute? (It is not like they have some way of reneging on the transaction if their bid/offer gets hit.) And in the manipulation of prices, why would simply flashing new non-executing orders on the screen cause market makers to change their prices? Don't the market makers have some responsibility / agency around deciding what to price something at?
Remember, market makers aren't making a profit on every trade, they're making a profit over many trades by taking on risk. Sometimes the market will genuinely move due to outside news and they'll take losses in those cases. They don't know they're going to be able to sell their position for a profit, they just know if they quote correctly that they can extract a premium for taking on that risk (and then alpha for being able to price better than other people).
If you start systematically putting orders in the market that you don't want to trade in order to influence other people's willingness to trade and then pulling the orders out then you can make money off those market makers. The problem is, that if you can trick people into doing bad trades they're going to be systematically losing money. This means they'll change their strategy - they can no longer trust the offers in the market as a source of information. So now, because they don't have reliable information on what other people in the market are offering, they can't be as confident, so they have to quote a wider spread between bid and ask. So now the average punter who wants to sell their position is going to pay a bigger premium to the market maker. So there's less liquidity and it's more expensive to use the market- which goes fundamentally against what the markets are there for.
2. Placing orders causes prices to move. This is how the markets work.
So if you do #1 with the intention of #2, that's market manipulation.
> Lek Securities will pay a $1 million penalty plus $525,892 in disgorgement and prejudgment interest, and Sam Lek will pay a $420,000 penalty.
Curious what Avalon will do with the $25 million it earned. Sam Lek being an owner of Avalon as well.
Layering and spoofing are not done in good faith: there is never any intent to trade, just to convey a false appearance of market demand.
Perhaps they were unable to find otherwise legitimate trades from the traders ?
So to be clear, the HFT firm that places orders in the market want to trade those offers. They're comfortable placing those orders more competitively than your average punter because they can respond to market moving events quicker.
Layering and spoofing is something different - you're placing orders in order to make people think you want to trade, but you don't.
It's like asking me what's the difference between Al Gore offering you money to tackle climate change and a climate change denier offering you money to tackle climate change? Well one of them is clearly lying.
Spoofing can be done many ways, but it's usually something like submitting a day order at an unreasonable price, then cancelling, say 10ms later.
Of course, reality is a bit more nuanced than that.
Source: I've worked in IT in Finance my entire career and have often dealt with SEC/FINRA/FBI requests for order history, and identifying which of our client(s) made the orders. Typically for specific tickers on specific dates, but sometimes for all tickers on specific dates, or for specific tickers for several years. Last I had to run these reports, it was for a small dark pool (like an exchange with unpublished prices). We typically had 10s of millions of orders a day. Quite a bit smaller than an HFT firm will be handling, but still quite a bit of data to work with and have to hand over on DVDs.
Spoofers put out orders without intention to trade. In fact, usually they would be horrified if their entire order trades. Their order price is not based on another market; their only intention is to impact prices in the book where they put the spoofing order. To achieve that, they often use disproportionately large order sizes, such as posting quantity 1000 where most other orders are between 1 and 20. Often they keep “applying the pressure” on the market by modifying the large spoofing order multiple times towards the market - moving the sell order lower and buy order higher - not as a response to changing market conditions in some other instrument but with the sole intention of impacting the price in the book in question.
Probably a lot less jurisdiction than people mucking about in US markets...