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Comment by kasey_junk | Hacker News Reader

What sort of analysis are you suggesting? Because common analysis of supply and demand for instance is very much affected by a spoofed orders. If an exchange says that 10000 people want to sell at X and 2 want to sell at X-Y that is a pretty good mechanism for price discovery (something we want the markets to enable). That means nothing in the face of rampant spoofing. You might as well get rid of public price feeds at that point.

I think that there is an argument that spoofing should be legal, but we would need to de-anonymize the trades so that you could develop some digital analog for reputation. That way if I see an order from a known spoofer, I can discount it.

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You can still gauge supply and demand -- but you would do so using actual trades, and not unfulfilled orders. This is how pricing works in most markets, by analyzing transactions, not offers.

It seems to me that a law that hinges on proving the intent of the trader seems destined for failure. It looks like this guy got caught by his incriminating emails and not based on his actual trading.

I like your idea of de-anonymized trades. Perhaps it could be something like the blockchain ledger.

> You can still gauge supply and demand -- but you would do so using actual trades

This actually happens a lot in some venues, especially dark pools. This leads to pretty high bid/ask spreads and lowered liquidity.

> It seems to me that a law that hinges on proving the intent of the trader seems destined for failure.

Which is the primary argument for making it legal in my mind, because a law that is unenforced only penalizes honest market participants. Another option would be to dramatically increase the cost of the punishment.

Another big problem is that even the idea of "intent" is in question when it comes to algorithmic trading. Absent a code comment //spoofing goes here or an email it seems like you are getting into deep philosophical territory.

> I like your idea of de-anonymized trades.

To be fair, there are lots of problems with it. Big block traders would absolutely hate this as it would give market makers such an advantage. Tracking reputation would become yet another advantage of sophisticated market participants that would be largely unavailable (or expensive) to other participants. Further, nothing would prevent reputation gaming, and detecting it may be even harder than spoofing.

Basically anything that increases the bid/ask spread is likely to benefit market makers at the expense of the rest of the market and simplicity is a huge virtue.

This is exactly the case, and it's why "painting the tape" has rightfully been illegal for quite some time.

He's arguing that people should be trading based on an assessment of the actual value of the assets behind the stock, rather than the price that other people are trading the stock at.

Isn't that like arguing that we shouldn't have markets at all? The primary function of a market is price discovery. If we could all agree on the value of things, today and in the future, things would be a lot simpler.

But that price discovery should reveal the price that the underlying security is worth.

If shares were only traded based on what other people trade it for, isn't that the blind leading the blind, and the price it is traded for will have little grounding in reality.

I have several issues with HFT, however 'spoofing' as it is described sounds like it should be perfectly legal to me. If a player wants to trick the market, it is an irregularity that should be capitalised on by someone with a better understanding of the true value of the security

> But that price discovery should reveal the price that the underlying security is worth.

What does that even mean divorced from supply and demand? A share is worth precisely what someone will pay for it. You may think it will be worth more or less later, but right now that is what it is worth. That is the price discovery.

I think there is an argument for allowing spoofing, in that it is very hard to enforce.

But be clear, spoofing is bad for ALL market participants, not just HFT because it makes the supply/demand calculation more imprecise. This lack of precision leads to less fine grained pricing (in the form of a widened bid/ask spread) which hurts long term investors more than anyone.

You are ignoring the temporal element of the market; in the short term, prices are set by supply and demand, and trading to match supply and demand is exactly how market makers earn profits. The true value of a security can only be determined over a long period of time, which is why retail investors should pursue a "buy and hold" strategy. This is exactly what Warren Buffet does. The market is an ecology; the behavior of the ants is generally not all that relevant to the lions.

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