SEC Investigating HFT Quote Stuffing And Sub-Pennying
If you poke them enough, it appears they do eventually wake up. After many months of rants by Zero Hedge on both subjects of quote stuffing and sub-pennying, it appears the SEC is finally getting involved. Of course, this being the SEC, which a year after saying it will ban Flash trading, still allows HFT frontrunning as a perfectly acceptable and encouraged practice on such exchanges as DirectEdge (and Nasdaq, although the latter has recently voluntarily recanted from abusing the public's, tee hee, trust in regards to frontrunning), we don't have very high hopes. Nonetheless, the fact that the HFT marauders are finally in the regulator's bullseye, will promptly make such occurrences as daily flash crashes hopefully a thing of the past. In other news, we are happy that the SEC is finally starting to catch up with this thing called "teknoulogee."
Tom Lauricella from the WSJ reports:
Regulators are scrutinizing what some in the stock market are calling "quote stuffing," trading in which unusually large numbers of orders to buy or sell stocks are placed in a fraction of a second, only to be canceled almost immediately.
The Securities and Exchange Commission has begun looking into whether the practice is putting some investors at a disadvantage by distorting stock prices, according to people familiar with the matter. The SEC is looking at what role, if any, quote stuffing played in the May 6 "flash crash," when the Dow Jones Industrial Average collapsed 700 points in minutes, the people say.
In addition, the SEC is looking into another practice in which large numbers of orders are placed. In these cases, what's unusual is that the orders are priced in increments as small as one-tenth of a cent and far away from the actual price at which a stock is trading, says a person familiar with the line of inquiry.
The SEC is seeking to learn whether such orders, known as "sub-penny pricing," are used to manipulate the market, this person says, which would be illegal. At issue is whether the practice could artificially torpedo stocks' prices or help make it appear that there is more trading volume in a stock than there really is, allowing sellers to profit when demand for the stock appears elevated. The agency has identified about half a dozen investment firms to question regarding "sub-penny" orders, this person says, and the inquiry is expected to take months to complete. The firms identified aren't necessarily suspected of wrongdoing, and it is unclear whether there will be a formal investigation. An SEC spokesman declined to comment on the inquiry.
These issues are among the latest to have emerged as stock trading has become dominated by super-fast computer systems used by hedge funds. At the same time, the once-clubby world of a handful of stock exchanges has evolved into many more decentralized, loosely connected, high-speed electronic trading networks.
Tom also highlights another key issue: gratuitous cancellation on a gargantuan scale, as HFT's have made a complete mockery out of demonstrated liquidity:
An eye-popping number of the stock quotes entered in the U.S. market's exchange system are canceled.
For example, on Feb. 18, trading volume on the Nasdaq exchange totaled about 1.247 billion shares, according to data compiled by T3 Capital Management, a New York hedge fund. However, over the course of the same day traders submitted offers to buy or sell stock for roughly 89.704 billion shares. In other words, only 1% of the orders posted on Nasdaq actually traded.
While a portion of cancellations are part of the natural course of trading, Sean Hendelman, chief executive officer at T3, says he believes most of these canceled stock quotes are from traders loading up a stock's computerized order book with essentially fake bids and offers.
Ironically, this is precisely what we have been claiming for years, and over the din of the HFT lobby whose comments have been very amusing over the past 12 months (but, but, but, they provide so much liquidity... so muuuuuch), it is refreshing and gratifying that the SEC at least preliminarily is siding with our view of things. And just like in the case of Flash trading, which one way or another will disappear, so too shall the HFT quote stuffing, sub pennying, and all the other irregular aspects of a twisted market structure we have discussed incessantly since inception, with the hope of making the market at least a modestly saner (and safer) place.
Please do not be alarmed if soon a buy signal does not force you to sell, as the bizarro veil of the market is slowly removed.