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Comment by Animats | Hacker News Reader

This "high frequency trading" isn't making liquidity. It's faking liquidity. Buy and sell orders with specific price triggers can be put up and taken down rapidly without ever being executed. Most of this type of trading does just that. The Bitcoin world calls this "fake walls".

If an order couldn't be taken down until N minutes had elapsed, orders would represent real liquidity. You could look at the market and know you really could buy or sell a large volume at some amount. What actually happens is that there are orders that run away if they're close to being executed. That's fake liquidity.

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This is blatant misinformation. Please stop spreading it.

Canceling orders is something _all_ participants do. It's a vital part of risk management and a healthy market. Some markets do have minimum quote lives, but they typically fail as market makers cannot manage risk there, so trading moves elsewhere. The only time I've seen a market place survive adding MQL's is when they were on the order of milliseconds, not minutes.

There are certainly strategies that are manipulative. For example, having a hidden order on the ask and posting an inflated bid then pulling it once your ask gets filled. Since you posted it with no intention to get filled and with the intention of manipulating the price, that's spoofing, and illegal.

But the fact that someone placed an order and then canceled it when the price got close means exactly nothing -- everyone does it as a part of normal business.

Confused: you describe the practice as both 'spoofing, and illegal" and "means exactly nothing". Which is it? How do you tell the difference from innocent cancellation and malfeasance? Maybe that's what the Op was getting at.

Spoofing laws hinge on "intent". Like literally the exact same behaviors have a different legal status based on "why" you did it.

The way spoofing rules are usually proven is via examinations of patterns (like do you only do the cancel trick when it directly moves markets into your real position) or via old fashioned examination of documents (did you send an email that said "Let's spoof this market like crazy").

I did not. I described canceling orders as no big deal. Spoofing is illegal and very much a big deal. Spoofing implies canceling but canceling does not imply spoofing.

In the example I gave, the spoofer's intent is to encourage people to cross the spread into their resting order to avoid paying the spread themselves.

On the other hand, say someone has been resting an order for a long time, for example to buy at 9 because they think that's a good price. Until the bid is at that price, they are unlikely to get executed so they'll keep the order regardless of their position. But maybe they have a large long position on when the bid reaches 9, so they decide to cancel their order to prudently manage their risk by not buying more. This is obviously important in a healthy market -- firms that fail to manage their risk run the risk of cascading failures (if their clearing firm can't cover their losses.

It's pretty easy to tell one from the other most of the time, especially for regulators with access to account tagged data.

No, if you never get filled, you'll never make or lose any money.

Consider what would happen if orders had to stay fixed for a while: Any new information would cause the price to change beyond the fixed orders. People with the information would trade the orders, and the MM would lose. So what would the MM do? Naturally, they will keep things wider to minimise the loss. Which is bad for everyone when there's no new information.

Also, consider what you're saying about large orders. The MMs have said "well, given what the market looks like now, we're willing to offer 100 at this price". Anything up to 100 is fine; you will get filled on all of it so long if you send in a buy of 100. If you want more, they have to be able to reassess. If you're just dipping your toes with 10 at a time, they are entitled to guess that you're willing to pay more. If there's 100 shares offered, and someone wants to buy 1000, they are eating all the liquidity and more. This is information, and needs to be reacted to.

It's no different from any other market. If you're at the supermarket and you buy all the milk, the supermarket is more than entitled to say "hey, I think people are willing to pay more for milk" and restock milk at whatever price they think is sensible.

There's nothing fake about it. If the liquidity were truly "fake", by definition his orders would never trade which defeats the purpose. The more his orders get hit, the more liquidity his bot provides which also means the more potential profit for his bot. I don't understand why so many love being outraged by even the idea of algorithmic trading without knowing the simplest principles of market making.

I think what he's saying is that, say the price is $100 and the daily volume is a few million dollars. And someone places a huge, say $50 million buy order at $98.

This implies to the market that there is a ton of demand not far from the price. It shows support for the price level, it shows demand, confidence in the product for sale, and it shows that the price is not going to drop anytime soon even if many people sell, as there's a big-shot with $50m ready to soak up any sell orders for weeks (as normally, daily volume is only a few million).

That's a signal to the market: there is demand, there is confidence, and there is very little downside risk. If I buy, it's likely the price goes up. If many people sell, a large buyer will soak up the price drop and so my risk is small.

When in fact, the guy who put a $50m buy order at $98 will cancel it as soon as the price drops from $100 to $99. He never intends to let that order execute. It's 'fake demand'. He's got some of the product and he's hoping that his $50m buy order is the gesture that fuels more demand, raising the price to say $105, at which point he sells his product, cancels his order, watches the price drop and buys some more product at cheaper rates.

This doesn't have much to do with algorithmic trading, mostly it's a manual set up and the only thing you program is for a bot to cancel an order you set up once it's close to being executed.

His solution is to say you can't just cancel an order right after you created it over and over again. In other words, he's suggesting that instead of an order book, trades ought to only be allowed to buy or sell options. e.g. if you want to buy $50m at $95, you can sell the option for traders to sell you coins at $95 for some timeframe. As any contract, it can't simply be cancelled, and remains valid for some limited time, which means you can't fake demand as once you express demand, you can contractually be locked in to exercising demand. It's not a great solution, don't get me wrong, but I can see where he's coming from.

Just to tie things back to other discussions that have been going on in HN lately:

>When in fact, the guy who put a $50m buy order at $98 will cancel it as soon as the price drops from $100 to $99. He never intends to let that order execute. It's 'fake demand'.

This is precisely spoofing and is illegal in the United States on regulated exchanges (not a lawyer...).

See:

https://news.ycombinator.com/item?id=9427639

https://news.ycombinator.com/item?id=9425164

https://news.ycombinator.com/item?id=9421119

For recent discussions.

There are lots of reasons why regular exchanges don't use the the order standing times, but the simplest one is that spoofers can easily game that. Lots and lots of spoofers put orders in over the course of long periods of time. The issue is that they pull them all at once. Of course pulling all your orders at once can happen for any number of legitimate reasons so it isn't as simple as just banning that behavior.

> When in fact, the guy who put a $50m buy order at $98 will cancel it as soon as the price drops from $100 to $99. He never intends to let that order execute. It's 'fake demand'. He's got some of the product and he's hoping that his $50m buy order is the gesture that fuels more demand, raising the price to say $105, at which point he sells his product, cancels his order, watches the price drop and buys some more product at cheaper rates.

You can't reliably do that without a crystal ball.

Let's say there is a total of $1m of buy at $99. Then Alice sends a $50m buy order at $98.

Bob sends a $51m sell market order. It will immediately match $1m at $99 and $50m at $98. Alice cannot cancel her order. (if the market in question doesn't support market order, the example still works for a limit order at x<=98).

If you change the example so that there's more depth above Alice's order, e.g. there's $500m at $99 and $500m is relatively large for the average daily volume, then maybe we can assume Alice will have time to cancel her order before it's executed. However, in that case you cannot claim that Alice's order will significantly affect the price.

You can't have it both ways: if Alice's order affects the price then Alice faces the risk of having her order executed; if Alice has very high probability of being to cancel her order, then it means it's far from the best bid/ask, and it won't affect the market much.

The point is that Bob is not putting in a $51m sell order when exchanges average $1m a day. You'll be hard pressed to find people with that kind of money. Entire funds have less than that, the Bitcoin Investment Trust for example, ran by Barry Silbert's Second Market, is a $36m asset fund.

Anyway, you can argue the exact numbers, I just mentioned some hypothetical ones. Fact is that big whales and spoofing does exist, it's a well known phenomenon on bitcoin exchanges, and of course is not unique to bitcoin. It's been part of any market place for a long time, it's called spoofing and it's usually illegal because it's manipulative and effective.

As for whether there is risk, yes of course there is risk. People still do it and it appears people have been successful. Especially in immature markets.

> If an order couldn't be taken down until N minutes had elapsed, orders would represent real liquidity.

I have nothing to say about HFT, but this is terrible. For meny reasons. Thia is requesting every buyer/seller to be in effect be on a laggy connection. It would not be possible to look at the market and 'decide' as every buyer/seller is on the same lag.

A less risky solution would be to have a blackout period equal to something like the same account being unable to place new orders for 30 seconds (minus the amount of time the order was in the market) after cancelling an order.

People make mistakes and you need to let people get out of the market quickly if they do. (People mistakenly transpose the price and quantity more often than you'd expect, etc.) Having a forced cool down period after placing a short-lived order reduces the impact of these sorts of orders without increasing the risk of mistaken price/quantity/side.

I'm not sure if coinbase allows amendments of quantity and price on existing orders, but they should have similar time restrictions on amending up the quantity or amending the price to be more aggressive following a quantity amend down or price amend more passive.

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