This page has been archived and commenting is disabled.

The Feds Are Now Investigating The High Freaks For Quote Stuffing

Submitted by Tyler Durden on 04/30/2011 08:02 -0400

About a year ago, we wrote an article titled "How HFT Quote Stuffing Caused The Market Crash Of May 6, And Threatens To Destroy The Entire Market At Any Moment" in which we advanced the proposal, first suggested by Nanex, that while High Frequency Trading was the primary reason for the May 6 flash crash, it was a specific aspect of HFT that permitted the Dow to drop 1,000 points in the span of minutes, namely "quote stuffing", or the process of blasting millions of bids and offers without and interest in executing a transaction, merely as a fishing expedition to isolate any "whale" orders and to front run them, making a few guaranteed cents in the process even as this materially distorts true market depth, liquidity and overall stability. And while we were not surprised that the toothless, incompetent and corrupt US securities regulator did take a passing interest in the issue, the topic of "quote stuffing" has finally attracted the interest of US prosecutors. From Bloomberg: "U.S. prosecutors have joined
regulators’ investigation into whether some high-speed traders
are manipulating markets by posting and immediately canceling
waves of rapid-fire orders, two officials said...Justice Department investigators are “working closely” with the Securities and Exchange Commission to review practices “that are potentially manipulative, like quote-stuffing,” Marc Berger, chief of the Securities and Commodities Task Force at the U.S. Attorney’s Office for the Southern District of New York, said today at an event in New York." But, the traditional red herring justification for this criminal behavior goes, they provide so much liquidity which would forever be gone if it weren't for the high freaks.

From Bloomberg:

While regulators previously said they were probing possibly abusive algorithmic trading practices, the attention of criminal authorities ramps up the stakes.

The SEC and Commodity Futures Trading Commission sharpened their focus on technology-driven trading after the so-called flash crash on May 6, which temporarily erased about $862 billion from the value of U.S. equities in less than 20 minutes. Regulators have placed limits on price moves and proposed rules limiting other practices, and lawmakers banned “spoofing,” in which market participants try to trick other computers into making decisions that can be exploited for profit.

A joint SEC-CFTC report released in October found no evidence that the May 6 sell-off was triggered by manipulation.

The SEC last year established a market-abuse unit to investigate cases of manipulation. At the securities law conference in New York today, SEC Enforcement Director Robert Khuzami said investigators need better technology to adequately police markets and detect possible misconduct coming from high- speed and algorithmic trading.

“The question is, do we have enough transparency to detect wrongdoing if it was going on,” Khuzami said, adding that SEC investigators are probing other matters arising from the May 6 market crash.

This is all wonderful, although please wake us up when the SEC and/or regional DAs have actually put in one of the bigger hedge fund fish, instead of the 25 year old traders who only follow orders, and immitate what their bosses do. Until then we are a little skeptical anything will change.

Yet if it does, naturally, the elimination of HFT would remove opportunities for those who keep track of the weakest links in the market which provide easy ways to take advantage of algos gone wild. However since the trade off is a far more stable market structure, and one which may finally have a chance to revert to equilibrium pricing, the trade off of some return to fundamental analysis is more than worth it.

- advertisements -

Sat, 04/30/2011 - 08:10 | 1223586 FOC 1183

I forget, what's fundamental analysis again?

Sat, 04/30/2011 - 08:15 | 1223589 Tyler Durden

It's what happens when the post-money valuation of heatmap.com is under $100 billion

Sat, 04/30/2011 - 09:56 | 1223726 Texas Gunslinger

Excuse me Sir...

Can you please tell me what "HFT Quote Stuffing" is?

Also, I went to WalMart today, and there is NO CHANGE IN DOG FOOD PRICES FROM LAST WEEK! PRICE IS SAME. COUPONS ARE STILL SAME. NO INFLATION IN THAT SECTOR THIS WEEK.

Ok? I will report again next week, so we can measure the changes week to week.

Thank you in advance, and God bless us all.

Sat, 04/30/2011 - 11:04 | 1223899 EscapeKey

Jeez, and I gave you the benefit of the doubt...

I can report that a 2004 Rioja Gran Reserva went from £5.99 to £7.99 in one week alone!!! That's over 300,000,000% inflation annualized!!!!eleventyone11

Seriously, lurk more.

Sat, 04/30/2011 - 11:13 | 1223918 piceridu

Classic!

Sat, 04/30/2011 - 11:16 | 1223925 ArsoN

http://www.zerohedge.com/article/how-hft-quote-stuffing-caused-market-crash-may-6-and-threatens-destroy-entire-market-any-mom

Sat, 04/30/2011 - 13:32 | 1224139 Canucklehead

Texas, you've run out of mulligans. It's clear you are not as you present yourself.

Sat, 04/30/2011 - 22:34 | 1224828 StychoKiller

"Son, fat drunk, and stupid is no way to go through life!" -- Dean Wormer, "Animal House"

This person is probably under 21.

Sat, 04/30/2011 - 23:09 | 1224876 fxrxexexdxoxmx

TG eating dog food while millions of dogs have none is evil.

WWJD?

Sat, 04/30/2011 - 08:18 | 1223592 Boilermaker

Yea, right, they are going to 'investigate' why the market has doubled from the lows and goes up perpetually.

So, they are going to investigate themselves?

Sat, 04/30/2011 - 08:27 | 1223601 Mike2756

A few kickbacks and fines, we promise not to do it nomo'.

Sat, 04/30/2011 - 08:41 | 1223621 Ray1968

I expect them to investigate themselves right about the same time that the ES margin requirements are raised: NEVER.

Sat, 04/30/2011 - 09:12 | 1223655 disabledvet

"call it a people's revolution."

Sat, 04/30/2011 - 14:52 | 1224277 Oracle of Kypseli

When I see 2 or more big fish behind bars, then and only then, I am going to start believing.

Sat, 04/30/2011 - 22:35 | 1224830 StychoKiller

Waddell & Reed star in the re-make of "Stir-Crazy!", along with a large supporting cast of HFT Robots!

Sat, 04/30/2011 - 08:22 | 1223593 Badabing

The SEC and Commodity Futures Trading Commission sharpened their focus on porno

Sat, 04/30/2011 - 13:17 | 1224114 Id fight Gandhi

They are the masters of ghost loads.

Nothing will "come" of this.

Sat, 04/30/2011 - 08:23 | 1223596 Cognitive Dissonance

A 1000 days late and $10 Trillion dollars short.

Sat, 04/30/2011 - 08:36 | 1223613 augie

well i mean, you have to adjust for inflation Cog... give them SOME credit. Shesh.

Sat, 04/30/2011 - 22:37 | 1224832 StychoKiller

NO! No mo' credit! You pay now...you pay cash (preferably Silver Eagles!)

Sat, 04/30/2011 - 09:13 | 1223657 disabledvet

you mean "the government is out of money" not Wall Street?

Sat, 04/30/2011 - 09:26 | 1223682 EscapeKey

More importantly, though, how will this be resolved?

a) $10m fine, a promise never to do it again, and watered down regulation.

b) Retroactive change in regulation, which allows quote stuffing if you're a "market maker".

c) Completely ignored.

Sat, 04/30/2011 - 08:29 | 1223600 Oh regional Indian

I think they should be called FHT, Frequently "High" Traders.

That would "crack" this one right open, if you get me drift.

ORI

http://aadivaahan.wordpress.com

Sat, 04/30/2011 - 08:38 | 1223614 snowball777

These Freqs are Here to Partay...

http://www.youtube.com/watch?v=-Twzj46QqjU

Sat, 04/30/2011 - 08:28 | 1223602 boooyaaaah

http://www.deepcapture.com/the-miscreants-global-bust-out-chapter-one-was-the-united-states-attacked-by-financial-terrorists/

As the authors of the report for the Defense Department’s irregular warfare unit conclude, there is no question that short-side market manipulators contributed to the collapse or near-collapse of many of America’s largest financial institutions in 2008. The report states further that “the [short selling] attacks on [America’s biggest banks] were so brazen that it is difficult to imagine that they were uncoordinated.”

And it wasn’t just the banks that were attacked. The SEC’s partial data shows that there was also massive naked short selling of exchange traded funds, or ETFs. These are publicly listed funds that are often highly leveraged and typically trade a basket of multiple stocks across a given industry. When market manipulators attack an ETF, they inflict damage on the entire industry that the fund indexes – and the high leverage magnifies the impact.

Meanwhile, there is strong evidence that the markets for U.S. government debt have also come under attack. The first naked short selling assault on U.S. Treasuries was launched in September 2001, at the time of Al Qaeda’s attacks on the World Trade Center and the Pentagon. In the months and weeks before the 9-11 tragedy, a daily average of $1.5 billion worth of U.S. government bonds failed to deliver. On the days immediately before 9-11, the daily failures to deliver soared to an astounding average of $1.5 trillion and continued to rise in the days after the attacks.

This was new and unusual market manipulation on a Herculean scale, but it was even worse during the months leading up to and following the 2008 crisis, when an average of $2.5 trillion worth of U.S. Treasuries failed to deliver every day. The authors of the report for the Defense Department speculate that financial terrorists, having precipitated the financial crisis, might have intended to attack the government bond markets in an attempt to bankrupt the national treasury

Sat, 04/30/2011 - 08:46 | 1223624 Dejean Splicer

What a great laugh for the morning. Blame the whole thing on Al Qaeda.

Brilliant and long overdue.

Sat, 04/30/2011 - 10:01 | 1223740 DeadFred

And done with typical Al Qaeda efficiency. The people who gave you the "light with a match" shoebomb try to bankrupt the treasury when they just wait three years and we do it ourselves? No, it would take deeper pockets than Al Qaeda has to do this. China on the other hand...

Sat, 04/30/2011 - 08:45 | 1223628 Chuck Walla

Ten years later, we did it for them. Just doing the job that non-Americans can't do....

Sat, 04/30/2011 - 09:18 | 1223659 disabledvet

So is there no Silver in SLV? Or no silver in Comex? Can't have it both ways, can they?

Sat, 04/30/2011 - 09:42 | 1223700 cossack55

Why not? They write the rules, they can have it any way they want it.

Sat, 04/30/2011 - 08:30 | 1223603 Lord Welligton

I won't hold my breath.

Sat, 04/30/2011 - 08:31 | 1223606 Careless Whisper

Justice Dept. + SEC = yawn. Why isn't the FBI involved in this investigation?

Sat, 04/30/2011 - 08:47 | 1223627 augie

I was going to try to make another wise ass comment but the bureau needs no help from my non-degree-having plebian self.

http://www.fbi.gov/about-us/quick-facts

If you want a quick laugh:

Our Core Values

Rigorous obedience to the Constitution of the United States;
Respect for the dignity of all those we protect;
Compassion;
Fairness;
Uncompromising personal integrity and institutional integrity;
Accountability by accepting responsibility for our actions and decisions and the consequences of our actions and decisions; and
Leadership, both personal and professional.

Sat, 04/30/2011 - 09:30 | 1223687 spelledwrong

I guess the first bullet means that the FBI is on thier own watch list?

Sat, 04/30/2011 - 09:43 | 1223703 cossack55

I hit the link and was shot to The Onion. Good one.

Sat, 04/30/2011 - 15:01 | 1224293 Oracle of Kypseli

American hegemony made Americans complacent and the enemies both external and internal are striking back while the Sheeple are either on chemical stimulants or watching the boob tube. (Roman Empire anyone?)

Sat, 04/30/2011 - 08:32 | 1223607 Dejean Splicer

Magnificent actors with words and motions that almost breach the barrier of action.

The regulators are once again proving their worth to their masters.

Sat, 04/30/2011 - 08:45 | 1223632 snowball777

+++

Shocked, shocked I tell you, to learn that there have been bogus quotes by the trillion flooding our exchanges.

Sat, 04/30/2011 - 08:41 | 1223615 Rogerwilco

C'mon ZH it's "high freq", not "high freak", even if the latter is more descriptive.

Sat, 04/30/2011 - 08:52 | 1223639 Tyler Durden

Actually, no.

Sat, 04/30/2011 - 15:05 | 1224302 Oracle of Kypseli

Humor is great, but we need to do our share to strike back.

Like,

withdraw all money from big banks
sell all stocks and mutual funds
buy physical gold and silver
spread the word

Any more suggestions?

Sat, 04/30/2011 - 18:25 | 1224541 malusDiaz

Done Done Done Done 6-12 months of dried food goods : rice, beans , flour, sugar, salt,.... Don't forget popcorn & coconut oil ( self preservative) for the show

Sat, 04/30/2011 - 22:12 | 1224807 razorthin

LOL for the first time. Awesome.

Sat, 04/30/2011 - 08:39 | 1223616 101 years and c...

without HFT, volume would drop 80% and the market would just die a quiet death as 80% of americans couldnt give a rat's ass.

Sat, 04/30/2011 - 22:41 | 1224839 StychoKiller

You type that like it's a bad thing...

Sat, 04/30/2011 - 08:44 | 1223622 Dan The Man

can you maintain price without volume?

Sat, 04/30/2011 - 09:17 | 1223665 disabledvet

go ahead and short it. the government won't stop you.

Sat, 04/30/2011 - 08:55 | 1223643 SwingForce

Did you guys know that a submarine costs $1,200,000,000 these days?

http://www.generaldynamics.com/news/press-releases/detail.cfm?customel_dataPageID_1811=16674

Sat, 04/30/2011 - 09:11 | 1223654 snowball777

But you'll never need to buy diesel.

/sarc

Sat, 04/30/2011 - 15:10 | 1224305 Oracle of Kypseli

Bernanke and Geithner can pay digitally in as many seconds as you pay your cable bill online. What's the problem here?

Sat, 04/30/2011 - 09:23 | 1223675 ml8ml8

The whole point of HFT is to gain an advantage by being fast. Is the point of this exercise to systematically identify and then eliminate by regulation the advantages of HFT? If so, then just ban HFT altogether. New rule: every quote must be offered until filled or for 1 second, whichever lasts longer. Simple as pie.

Sat, 04/30/2011 - 10:34 | 1223820 Cdad

The whole point of HFT is to gain an advantage by being fast.

Not entirely correct. The point of HFT is also to lift bids, create gaps, and magically dump at the close on a higher closing price, while either having no capital left at risk by the end of the session [or by the end of the AH session], or ending the day with a short bias to the book. Haven't you noticed how even titanic selling at the end of the day does not bring prices in?

It used to be the case that volume was the only honest statistic in the market. I think it still applies; however, a quick glance at last week's volume [especially on the Roach Motel/SPY] reveals a situation that is laughable. The HFTs are the only ones left in this Kabuki theatre.

I watch flow on the Roach Motel, and what I saw in the AH session last night was entirely absurd dumping of that ETF in the AH session. Very TOP indicative. Frantic selling of 5-50 k lots as things magically levitated ABOVE the high of the day.

Based on what I saw last night, the HFT will now likely shift in its mission to that of threatening Congressman to raise the debt ceiling.

This is the wasteland that Ben Bernanke, Hank Paulsen, Mary Schapiro, Eric Holder, J. Dimon, and L. Blankfein have made for us.

Sat, 04/30/2011 - 09:25 | 1223678 Sylvia Plath

They said construction of 2 boats ... sounds like washington math to me...

Sat, 04/30/2011 - 09:42 | 1223702 max2205

Whatever happened to the $1 or .001% tax on all trades?!

Oh Jpm lobbyist nexed that one

Sat, 04/30/2011 - 22:23 | 1224817 Pepe

yeah like extra time granted on US reforms, exemptions for Forex swaps etc... :http://www.ft.com/cms/s/0/6b6d589a-70f5-11e0-962a-00144feabdc0.html#axzz1L3ua5mxu

Sat, 04/30/2011 - 09:53 | 1223713 Atomizer

The snake is slowly eating its tail. The progs are frantically looking for new revenue streams to keep system at a break even status (Sarcasm). The progressive clowns that participated in the charade will be thrown under the bus. The useful idiots will find that their purpose has been fulfilled, and no future services are required.

Yuri Bezmenov - Deception Was My Job

http://www.youtube.com/watch?v=y3qkf3bajd4

Sat, 04/30/2011 - 09:55 | 1223722 digalert

"SEC-CFTC report found no evidence that the May 6 sell-off was triggered by manipulation"

Ah hah, the ole "we didn't see it...didn't happen" trick is funny. More hilarious is Bloomy putting the FED and criminal in the same story, very rich.

Sat, 04/30/2011 - 10:06 | 1223733 Atomizer

Wait til Grandpa "Warren" tells us we have to tighten our belts and pay higher taxes to avert a new crisis. He'll softball the statement as, this is the only way United States can recover.

Sat, 04/30/2011 - 09:57 | 1223732 ReallySparky

I view this as the snakes turning on each other. Or perhaps someone has become better at the game than the majors and needs a good smack down.

Sat, 04/30/2011 - 10:05 | 1223744 max2205

TD. Can you cover what I was notified of Friday. Weekly options on select stocks please. Casino on steroids but Fridays could become boring with big names magnetized to the nearest strike price

Sat, 04/30/2011 - 11:30 | 1223959 Waterfallsparkles

I saw that too on the weekly options. Many were talking about it on the yahoo message boards. The Market will be permanently trading around Option strike prices.

Worst part is that it almost is like a bribe. Whoever pays the most for options at a certain price will gravate the stock to that price.

In my opinion, watching the trading it appears to me that all they are doing all day long is selling options. It is like they either hold it at a strike price or inbetween strike prices to sell options all day and HFT churn, churn, churn. Then only move the stock at the begining or end of the day.

I think this is just going to stagnate the Market even more.

Sat, 04/30/2011 - 10:05 | 1223749 dwdollar

What this means is NOT ALL of the SEC has been paid off, yet. On the specific issue of HFT anyway.

Sat, 04/30/2011 - 10:27 | 1223780 topcallingtroll

It is still government by the squid and for the squid (Goldman Sachs to the uninitiated.

When are they going to prosecute the massive mortgage backed securities fraud? After all that was what caused the collapse.

How about investigating fannie mae for bid rigging? They are bidding above market rates for houses to give the banks an illegal subsidy.

How about all the insider trading approved and condoned by the federal reserve? They apparently pass along their intentions thru previous fed members who have set up their own expert networks.

Too late....the people have lost faith. The revolution commences after the next major market crash.

Sat, 04/30/2011 - 10:19 | 1223782 Atomizer

Continue mocking the criminals and sock puppets. They truly get worn down by paranoia coupled with sleepless nights.

Your pressure cooker is not adjusted to max temperature. Flip the switch to max heating. Your results will be astounding.

Keep up the good work TD.

Sat, 04/30/2011 - 10:31 | 1223805 Dan The Man

the rooster crowed at dawn...and the sheep are in their pens. oh yah... the spider is in the attic.

Sat, 04/30/2011 - 10:45 | 1223836 Bob

Justice Department investigators are “working closely” with the Securities and Exchange Commission to review practices “that are potentially manipulative, like quote-stuffing,”

Potentially manipulative? I can understand giving the benefit of the doubt--when there is any doubt. But some things speak for themselves. WTF?

Sat, 04/30/2011 - 10:42 | 1223840 Atomizer

I'm going merely on a conspiratorially thought. Considering Iran has been allegedly attacked twice by a computer virus, I wouldn't be surprised to hear that Iran caused the US market meltdown by retaliating with a computer virus. Throwing BRICS will have a new meaning. lol

Sat, 04/30/2011 - 10:49 | 1223859 divide_by_zero

As long as Holder is on it, expect nothing.

Sat, 04/30/2011 - 11:08 | 1223907 topcallingtroll

Oh but they are really aggressive against a half dozen amish farmers selling raw milk. It is massive government sting operation. Google it.

Sat, 04/30/2011 - 10:51 | 1223870 Youri Carma

LOLz They gonna defend themselves with the good ol but bogus "Market Making" argument.

We've heard that before.

Sat, 04/30/2011 - 10:52 | 1223873 Use of Weapons

Realistically, doesn't all this mean is that the Citi dark pools in Singapore are fast tracked (even more so, HSBC already made the move) & utilised more?

Anyone explain why this wouldn't be the outcome? (And probably a large portion of the appeal of Citi's plans)

Sat, 04/30/2011 - 11:02 | 1223893 topcallingtroll

You are right.

The nasdaq and nyse will be just for little people and fade into insignificance

Sat, 04/30/2011 - 11:09 | 1223911 Atomizer

Something like another AIG blow up. New monies from the shell companies will transfer & come up short. Taxpayers will be threatened.. again.

Money is always laundered during this event. Today is the event!!

http://www.legatusmagazine.org/?page_id=117

Keep watching Grandpa on CNBC so you are distracted from the true events.

Sat, 04/30/2011 - 12:27 | 1224054 Bob

Interesting re-touching of Boehner's weepy alcoholic eyes there. I hardly recognized him. What are you getting at, though, Atomizer?

Sat, 04/30/2011 - 11:29 | 1223957 Rainman

Just a coincidence that Bloom posted this news 39 minutes after the close on Friday. It'll be interesting to see the impact on the Monday markets. Betting on zero.

Sat, 04/30/2011 - 12:15 | 1224040 Dollar Bill Hiccup

Program trading, fine. You're not going to turn back the clock on technology.

Quote stuffing? Co-located servers and rebates from the exchanges? Give me a break.

As we've seen, this leads to greater instability when stability is needed the most. It also clouds price discovery when volume no longer confirms price and price is a manipulated ping.

Market making needs to function in times of crisis, just as a central bank needs to be a liquidity provider in times of crisis. It should not create the crisis itself.

Sat, 04/30/2011 - 15:35 | 1224346 you enjoy myself

so would this investigation explain why, for the last 2 weeks, stocks only move from 9:30-9:45am and 3:45-4:00pm?

Sat, 04/30/2011 - 16:05 | 1224384 YC2

Funny how Bunge submitted a bunch of orders premarket with no intention to get filled in the Ags space, and got fined soon after. Do it in equities times a trillion and its just a normal day in the office.

http://www.reuters.com/article/2011/03/22/financial-regulation-bunge-idUSN2216969120110322

Could you imagine this half mil fine extended out to all the quote stuffing over the past few years? Boom - budget problems solved.

Bunge is not too big to fail apparently. I mean, they are only an integral part of the agricultural supply chain, its not like they caluclate compound interest in lower manhatttan or some other essential function in society.

The Feds Are Now Investigating The High Freaks For Quote Stuffing

Comment viewing options