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Another Blatant Example Of Sub-Penny Frontrunning By Broker-Dealers
By Dennis Dick, CFA
Front Running Order Flow by Using Undisplayed Trading Centers.
Bright Trading LLC
My firm, Bright Trading LLC, recently provided comments to the SEC concerning a predatory trading practice that is compromising the NBBO. It is the practice of using undisplayed trading centers to step in front of displayed orders by an infinitesimally small amount. Today I was trading a very thin, illiquid stock where these predatory trading practices run rampant. I decided to document the sequence of events.
Time & Sales
Time Last Share (100 lots) Exchange
10:19:35 14.04 1 FINRA
TRF
10:19:48 14.04 1 FINRA
TRF
10:20:00 14.0399 1 FINRA
TRF
10:20:14 14.0399 1 FINRA
TRF
10:20:28 14.0399 1 FINRA
TRF
10:20:43 14.0299 1 FINRA
TRF
10:20:58 14.05 1 FINRA
TRF
10:21:15 14.0399 1 FINRA
TRF
10:21:31 14.0399 1 FINRA TRF
10:21:49 14.0299 1 FINRA
TRF
10:22:06 14.0199 1 FINRA TRF
10:22:22 14.05 1 FINRA TRF
10:22:41 14.05 1 FINRA TRF
10:23:00 14.0499 1 FINRA
TRF
10:23:18 14.05 1 FINRA
TRF
10:23:37 14.05 1 FINRA TRF
10:23:57 14.05 1 FINRA TRF
10:24:15 14.05 1 FINRA
TRF
10:24:36 14.05 1 FINRA
TRF
10:24:56 14.0299 1 FINRA TRF
10:25:16 14.0299 1 FINRA
TRF
10:25:34 14.03 1 NYSE
10:25:34 14.04 1 NYSE
10:25:37 14.0399 1 FINRA
TRF
10:25:58 14.0299 1 FINRA
TRF
10:26:20 14.0299 1 FINRA
TRF
10:26:40 14.0199 1 FINRA
TRF
10:27:02 14.0199 1 FINRA
TRF
10:27:24 14.0299 1 FINRA
TRF
10:27:44 14.0299 1 FINRA
TRF
10:29:58 13.99 10 FINRA TRF
Sequence of Events
Time Event
10:19:34 I place an order to sell my 300 shares of RBS.PRE at $14.05
10:19:35 An algorithmic trader steps in front of my order at 14.04 (offering on NYSE exchange).
10:19:35 The stock trades at 14.04. The displayed 14.04 offer is not filled as the quote remains the same, despite the stock trading at that price. The trade was reported on FINRA TRF (FINRA Trade Reporting Facility). This means it was traded off the exchange.
10:19:48 Stock trades again at 14.04, reported on FINRA TRF, displayed offer is again not filled.
10:20:00 Stock trades at 14.0399, in front of displayed offer of 14.04.
10:20:14 Stock trades again at 14.0399, in front of displayed offer of 14.04.
10:20:18 Stock trades for a third time at 14.0399. Displayed seller is again not filled.
10:20:38 Frustrated, I move my ask price from 14.05 to 14.03. I am now the best offer.
10:20:43 Stock trades at 14.0299 in front of my 14.03 offer.
10:20:50 Frustrated, I cancel my order. The best displayed offer is now 14.05.
10:20:58 Stock trades at 14.05, but the displayed offer is again not filled. Trade is reported on FINRA TRF (off exchange). The displayed offer moves down to 14.04.
10:21:15 Stock trades at 14.0399 in front of displayed 14.04 offer.
10:21:31 Stock trades again at 14.0399 in front of displayed 14.04 offer.
10:21:41 I decide to try and offer my 300 shares again at 14.03.
10:21:49 Stock trades at 14.0299 in front of my displayed 14.03 offer.
10:21:55 Frustrated I move my offer down to 14.02.
10:22:06 Trade goes off in front of me again at 14.0199.
10:22:15 I move my offer back to 14.06. Another trader offers in front of me at 14.05.
10:22:22 - 14.05 trades 7 times, and 14.0499 trades once, but displayed offer is not
10:24:36 filled on any of these orders.
10:24:44 I move my offer down to 14.04. Other trader immediately steps in front of me and offers stock at 14.03.
10:24:56 and
10:25:16 14.0299 prints twice, displayed offer not filled again.
10:25:34 Displayed offer 14.03 gets filled, and I get filled on 100 shares at 14.04. Hallelujah!!
10:25:37 14.0399 trades in front of my remaining 200 shares offered at 14.04. Another trader places sell order at 14.03.
10:25:58 14.0299 trades in front of displayed 14.03 offer.
10:26:20 14.0299 trades in front of displayed 14.03 offer again.
10:26:39 I move my offer from 14.04 to 14.02.
10:26:40 14.0199 trades in front of my displayed 14.02 offer.
10:27:02 14.0199 trades in front of my displayed 14.02 offer again.
10:27:10 I move my offer back to 14.03.
10:27:24 14.0299 trades in front of my displayed 14.03 offer.
10:27:44 14.0299 trades in front of my displayed 14.03 offer again.
10:27:50 I give up and move onto another trade. Later I am filled at 14.03, and the stock proceeds to go higher (only reason I am filled).
Who is this market participant stepping in front of my displayed offer? Who is this market participant intercepting the buy orders that are trying to take my displayed offer? Who is this market participant forcing me to pay the spread and hit the bid below? According to the implied exemption given under SEC rule 612, the only market participants capable of trading in sub-pennies are broker-dealers, to offer price improvement. Is this $0.0001 price improvement justification for compromising the displayed quote? This isn’t an isolated event, these events happen continuously every day in this two-tiered market structure. This is a crime of epic proportions, and our regulators need to deal with this immediately.
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It's happened on all most ALL MY TRADES, like SD, bid 7.60 ask 7.61, at LEAST 6 TRADES BETWEEN @ 7.6120, 7.6250, etc...
CCJ same thing this am, this should be CRIMINAL.
THEY ARE SCALPING THI$$$$ ! Assholes.
I barely even trade stocks, and even I have noticed it. I put in a buy order, and there are tons of trades done at subpennies above my bid.
Since I don't give a fuck, I am just trading for entertainment, I leave the bid out there, and sooner or later it gets hit when the robots realize I am not budging.
But it is really annoying.
Those criminals are taking my spread down from a dollar to 1/4, how can they do it?
Some asshole is taking my spread down from 1/4 to 1/32, how can they do it? This is criminal behaviour! Someone call the SEC.
Assholes decided to remove the spread even more going from 1/32 to penny increments. Why would they do it? It just doesn't make any sense?
Criminal cocaine sniffing algos are trying to take the spread down even more from penny to sub penny!! Seomeone call the SEC. The SEC is always crooked and is always on the side of criminals! Why on earth would they have a spread to 4 decimal places! This is clearly designed to take my money from me! This gam is completely rigged!
You do realize that if you trade 7.60/.61 you have a spread .1316% as opposed to trading a 100 dollar stock where 1 cent spread would be 0.01%
There are plenty of 60-200 dollar stocks with 1 penny bid/ask spread, if you're daytrading, why are you trading $7 stock and complaining that there are sub-penny trades going off? Realistically, what did you expect?
the problem is not all traders are allowed to trade in sub-pennies.
If I enter an "all or none" trade for an amount that adds up to a whole penny, why shouldn't I be allowed to enter a sub-penny trade? That is, why can't I try to buy 4 shares for 1/4 cent each?
I watch that all the time on IB natty gas front month futures. The millisecond I press the button, the invisible hand jumps my bones. The only fun was trying to throw in a low bid when they removed the floor on spotting a market sell order that swamped the bid sizes...after a while I realized that intellectual property development was a better use of my neuron's firing.
Yup, just another way we are being shafted.
I never really realized what I was seeing when orders come in at thousanths of a penny off from nearest bid/ask.
I would always try and enter an order using fractions, but it would never let me. Never really bothered with finding out why...I'm just a lowly 27 year old living in a rigged environment.
I guess I now know what the hell was causing that. Nice...
Retail can't order limits below a penny
Yeah, and that's the problem, when you have different rules for different types of traders.
It's never really been a level playing field though. Im for equality, only under certain circumstances.
And why compare a retail guy with a $20k account to institutions who move $xMM each day. The institutions are the ones providing market depth so that retail can go in and get their 100share fill. Should they go in before the retail order and frontrun his ass? Probably not. Does the average retail dude care or even know whats going on, 99% of the time (aka isnt a ZH reader). No.
Don't worry, the SEC is already sorting the punch cards on this.
The teletypes in the enforcement office are chattering, but the perforated, fan-fold paper ran out some time ago, and the ribbons are dry. Is it lunch time yet?
"The teletypes in the enforcement office are chattering..."
Actually... the teletypes are down waiting for replacement parts nobody has made since the Reagan administration... they just stack the porn dvds they burn on top of the teletype now...
Must be porn time...
**puts on sunglasses**
YYYYEEEEAAAAAAAAHHHHHH
I have called the SEC and the CFTC about "insider" trading on information ... or Bill Gross blasting bonds on TV while the PIMCO broker is buying them with both fists in the pit (when they were traded on the CBOT floor) - NEWS FLASK - they don't care. They told me they monitor trades / flows and look for suspicious orders. My reply was - so when GS buys 5k 30yr contract 10 seconds before the EMP report shows massive job losses, we rally 2+ points and they dump the trade for 12+M ... you guys don't find that odd? They said no sir, as we said, we watch all the flows and investigate suspicious orders / trades ... it's unbelievable.
Whenever I do a market order, as opposed to a limit, it gets filled at 4 decimals, but don't know that it helps.
Youre getting whatever fill price was routed to you. Since its market, its whatever is matched next in the book.
Your discount broker doesn't allow for subpenny limits
Just business as usual in the gulag guys... I'm told its called free market capitalism.
Unfortunately, the only way to get the SEC to look into this matter is to re-label the post as "MILF goes down on Penny on the offer"
"MILF goes down on Penny on the offer"
+1, funny, that would be a top hit on Google as well
Speculation + fellatio = specufellation.
>Today I was trading a very thin, illiquid stock where these predatory trading practices run rampant.
OMG!!! Manipulation in a thinly traded asset?! How can that be!!! I just can't believe it!
Oh but they are liquidity providers are they not?
Are you in the market to argue about microstructure or to make trades to make money? It's not like you don't have a choice of what to trade.
Yet one more example of the complete lack of true competition and a real free market. My real question though, is anyone really surprised when you get up every day and find another report of blatant lawlessness by the banksters???
I am far from sophisticated in this stuff, and trade some, and actually make a buck or two. I use Schwab and Fidelity trading programs...mainly Fidelity.
It will now let me input an offer that is not a whole cent, for example: $10.05 is allowed, but $10.049 is not.
So, are any other brokerages letting us common folks participate in this .00001 cent get-between shenanigan?
Its even posted in the article... only broker-dealers can trade in sub pennies. In reality, you have to ask yourself if buying that 100 share lot of SIRI at 0.9399 vs 0.9359 will get you that much more alpha
"It will now let me input an offer that is not a whole cent, for example: $10.05 is allowed, but $10.049 is not."
I'm hoping you meant to say 'not' instead of 'now', otherwise you have a funny idea of how many cents are in a $. :)
To reply to Dennis directly,
YOU ARE DOING IT WRONG
YOU ARE DOING IT WRONG
YOU ARE DOING IT WRONG
YOU ARE DOING IT WRONG
don't chase it, if the algo moves it down, move your offer up 2 cents. 5 min later, move it up another penny. You have to attract the algo, right now , the algo is attracting you and hence a simple linear program is doing it's job of taking your money. Try moving the offer up 4 levels, then drop it 3 levels, move it up again. You may be pleasantly surprised.
The use of Fill or Kill orders might also work. Love that name. Of course you need a pro broker for that type of thing.
Unfortunately, this type of nonsense is detrimental to the establishment of a NBBO. It will likely result in a very twitchy NBBO. I don't mind giving the broker dealer an advantage given the liquidity they inject but they should be required to beat the NBBO by at least half the spread.
If you want to see the biggest comedy of all take a very, very close look at SPY on a 10 TICK chart. Government sponsored program trading at its best.
It is no longer a financial based system but rather an IT race. Co-located servers etc.. It is no longer providing liquidity but rather it is a transaction cost.
You are right you have to know how they use their new IT systems to exploit them.
I used to think these guys had turned into alligators because they had spent too much time in the swamp. Now I realize that they were born alligators, and they bring the swamp with them wherever they go.
It happened to me last spring when I was trading shares of CME. For those familiar, the stock has a wide spread (sho 'nuff!) so there is already an intrinsic handicap.
In my case the violation was more blatant: Even hitting the displayed best offer (on a buy order) or displayed best bid (on a sell order) very often resulted in no fill, disappearance of the displayed quote and an instantaneous widening of the spread. The phenomenon was reproducible.
I complained to the SEC. I got a bewildered response to my online complaint asking for more detail. I provided everything down to records from my order log from my securities account. I never heard back. I called a lawyer with experience in securities fradud who had no real interest. Sometime later, as you all know, Senator Schumer began an investigation into flash order trading practices. Quietly, order flashing was said to have ceased under pressure. I have my doubts. Bots are sneaky.
And again a misconception about flash orders - 'hey thats like HFT right?'
Flash orders are strictly optional
If you don't put in an AON order, they'll often fill only a small portion of your order and then move the bid or ask away from you.
For example, buying 1,000 shares at a $5.00 ask and you don't put it in an all or none and you may get 45 shares at $5.00 and then have 955 shares waiting for a fill at $5.00 but the ask has been moved to $5.01.
If you move your offer up to $5.01, you may get another partial and the ask will move up another penny to $5.02.
Now I just leave the order and wait for it to come to me. That works 95% of the time.
That's also good avice
I have noticed that too - just leave the order for however long it takes. Sooner or later the algo realizes you won't chase it, and you get filled.
I swear there have been times when I have waited hours to get 1000 share bids filled - the robots just trade a penny above me, hoping I will move up my price.
That's crazy - the exact same thing happened to me yesterday. I've been bitching about it for the last 22 weeks, but it really came to a head yesterday.
I was holding 10K shares of SPIR, this illiquid POS solar stock that usually trades between 4.50 and 6. Well, a few weeks ago it went down to 3.38 on about 150K shares (I don't know how they do it, but they did it) so I jumped in @ 3.40 and got me my 10K shares. I got tired of holding it, so yesterday, the bid was 3.87 and the ask was 3.89. I put in a sell order for 5K shares @ 3.88. And someone kept stepping in front of my ask and selling @ 3.8799. For about an hour. So I said fuck it, and put in a sell order for the same 5K shares @ 3.85 (remember - the ask was @ 3.87.)
Well, about 2K of them got sold, but all of the sudden some OTHER motherfucker managed to get 4K of HIS sold @ 3.86, 3.8699, 3.8499.
It took me all day to get rid of that, and I will NEVER trade an illiquid stock again in my life.
But this is the first I'm hearing that it's illegal.
The only thing I can figure is that the market makers are doing some naked shorting, and don't even have the shares to sell. They just see a buy come in, the naked short it and undercut my bid.
that was a mistake, you should have just let the fucker sit at 3.88 for another hour, I bet it would have been filled. I find it often takes a couple hours.
It's illegal when a bank employee diverts fractions of cents into his own account, and usually comes with jail time when he is caught. Therefore, it should also be illegal for the banksters on Wall Street.
Well that explains it. I've noticed that the past few years trading through several brokerages, I'd have to put in my limit order about 10 cents above or below the displayed quote to get a quick fill, and, when the fill came back it is almost always in increments of ten thousandths of a cent (0.0001), which is weird.
And, every once in a while when the market was slow, say around lunch time, and I was looking to trade something somewhat illiquid like FXA, which was quoted as 90.1 x 90.2 (an example), I'd put in a limit buy order at 90.22. No fill. I'd recheck the quote and it would be 90.1 x 90.25, with no volume change. Hmmmm. So I'd up my limit order to 90.25. No fill. Recheck the quote. Now its 90.1 x 90.3. Hmmm. Then I'd cancel the order. The quote would change back to 90.1 x 90.2.
Trading stock options seems even worse given the high spreads, high commissions, and failure to get an execution at the quoted prices.
Sorry, guys, but you don't know what you're talking about. This isn't "blatent frontrunning". This is your broker trying to save money by routing your order to a market maker before going to an exchange. Remember, an exchange charges about $0.002 to $0.003 to a broker for removing liquidity. If you adjust the exchange's NBBO to account for this fee, then these orders are actually a big price improvement, not sub-penny front-running.
How do you think you get that 0.5 bps rate from your broker? It's because of this competition. Most of these operations are legit, so coooool down.
Thanks for admin.nice sharing.very nice..
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