The Feds Are Now Investigating The High Freaks For Quote Stuffing

Tyler Durden's picture

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.

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FOC 1183's picture

I forget, what's fundamental analysis again?

Tyler Durden's picture

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

Texas Gunslinger's picture

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. 

 

EscapeKey's picture

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.

 

Canucklehead's picture

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

StychoKiller's picture

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

This person is probably under 21.

fxrxexexdxoxmx's picture

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

WWJD?

Boilermaker's picture

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?

Mike2756's picture

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

Ray1968's picture

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

disabledvet's picture

"call it a people's revolution."

Oracle of Kypseli's picture

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

StychoKiller's picture

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

Badabing's picture

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

Id fight Gandhi's picture

They are the masters of ghost loads.

Nothing will "come" of this.

Cognitive Dissonance's picture

A 1000 days late and $10 Trillion dollars short.

augie's picture

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

StychoKiller's picture

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

disabledvet's picture

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

EscapeKey's picture

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.

Oh regional Indian's picture

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

boooyaaaah's picture

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

Dejean Splicer's picture

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

Brilliant and long overdue.

DeadFred's picture

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...

Chuck Walla's picture

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

disabledvet's picture

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

cossack55's picture

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

Lord Welligton's picture

I won't hold my breath.

Careless Whisper's picture

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

 

augie's picture

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.
spelledwrong's picture

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

cossack55's picture

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

Oracle of Kypseli's picture

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?)

Dejean Splicer's picture

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

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

snowball777's picture

+++

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

Rogerwilco's picture

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

Oracle of Kypseli's picture

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?

malusDiaz's picture

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

razorthin's picture

LOL for the first time.  Awesome.

101 years and counting's picture

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.

StychoKiller's picture

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

Dan The Man's picture

 

can you maintain price without volume?

 

disabledvet's picture

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

snowball777's picture

But you'll never need to buy diesel.

/sarc

Oracle of Kypseli's picture

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