SEC Busts HFT Firms For "Tricking People Into Trading At Artificial Prices"

Tyler Durden's picture




 

On Monday, in "High Frequency Trading: Why Now And What Happens Next" we predicted that "the high freaks are about to become the most convenient, and "misunderstood" scapegoat, for when the market finally does crash. Which means that those HFT-associated terms which very few recognize now, especially those on either side of the pro/anti-HFT debate who have very strong opinions but zero factual grasp of the matter, such as the following...

  • Frontrunning: needs no explanation
  • Subpennying: providing a "better" bid or offer in a fraction of penny to force the underlying order to move up or down.
  • Quote Stuffing: the HFT trader sends huge numbers of orders and cancels
  • Layering: multiple, large orders are placed passively with the goal of “pushing” the book away
  • Order Book Fade: lightning-fast reactions to news and order book pressure lead to disappearing liquidity
  • Momentum ignition: an HFT trader detects a large order targeting a percentage of volume, and front-runs it.

... will become part of the daily jargon as the anti-HFT wave sweeps through the land."

Of course, another name for "layering" is "spoofing" which is precisely the term that the SEC used today when it announced that it charged the owner of a New Jersey-based trading firm and several other defendants "in a scheme to manipulate the market through an illegal practice known as "spoofing."

From Reuters:

The Securities and Exchange Commission said that Joseph Dondero, a co-owner of Visionary Trading LLC, as well as several other owners and a New York-based brokerage firm called Lightspeed Trading LLC will collectively pay $3 million to settle the charges.

 

Spoofing involves a trader placing orders without the intention of having them executed, a strategy that tricks people into buying or selling stock at artificial prices.

 

Reuters reported earlier this week that the FBI is also investigating the practice of spoofing more broadly in a probe into high-speed trading.

The SEC was kind enough to step away from the porn for a minute for the following soundbite:

"The fair and efficient functioning of the markets requires that prices of securities reflect genuine supply and demand," said Sanjay Wadhwa, a senior associate director of the SEC's New York regional office.

 

"Traders who pervert these natural forces by engaging in layering or some other form of manipulative trading invite close scrutiny from the SEC."

 

The SEC's case comes just days after the FBI and the Commodity Futures Trading Commission each said they were looking more broadly into the practice of spoofing, as part of a wide-ranging investigation into strategies that may be deployed by high-frequency traders.

One HFTer down, millions of vacuum tubes to go:

Dondero has agreed to settle the charges, pay more than $1.9 million, and be barred from the securities industry.

So is this getting clearer now? Yes: precisely those same "strategies" so pervasively used by HFTs, because Virtu didn't have a 99.9% successful trading history in the past four years from "providing liquidity", and which the SEC had no problems condoning as long as the market was going higher, are suddenly being frowned upon, and HFTs are starting to finally feel the wrath of the regulator. But that will be nothing compared to the wrath of the general public, which just like the CEO of BATS has zero understanding of how HFT actually works, when the upcoming market crash is blamed not on the Fed but on 25 year old math PhDs who "trade" and whose lobbying cash at the SEC no longer works now that almighty Goldman has finally turned its back on the high freaks.

Just as we predicted would happen.

And just as a reference so readers can get a sense of the "valuable services" a company like Lightspeed "Our trading software gives you access to real-time quotes and executions faster than ever before" Trading provide, here is an entry from their blog titled, "Ways to Trade the Twitter IPO."

With the huge popularity and notoriety of the name, it is unlikely that many active traders will get their hands on shares at the offering price, but is there a way to trade this stock once it opens to the public? Some are easy, others aren’t likely to be available to you, but here some potential plays.

 

Stay Long

 

The same thesis for going short also works for going long. Especially if the stock doesn’t make a huge jump at the open and appears to be slowly moving higher, going long for the day or longer could be a lucrative play. Just as the outsized volatility could work in your favor in a short position, it could also work as a long position.

 

No Options Available

 

Each exchange determines how soon options will be available on an IPO. For a stock as large and public as Twitter, it’s likely to be fast – as quick as a week but that doesn’t help you on the opening day.

 

If shorting and options trading aren’t practical strategies, what can you do?

 

Trade Related Names

 

The popularity of Twitter will bring more attention to the social media space and that could cause a short term move higher in those second derivative plays tied to Twitter. $FB, $LNKD, and Chinese media company $SINA are likely to see buying interest. Go long or use options. Don’t blindly throw money at these names, though. Look at the charts and see if they’re due for a bounce.

With sage advice such as this, is it any wonder the firm had to "spoof" in order to immitate Virtu's trading perfection?

As for "tricking people into buying or selling stock at artificial prices", surely Visionary Trading and Lightspeed Trader are the only cockroaches. Surely.

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Fri, 04/04/2014 - 14:08 | 4625576 Crash Overide
Crash Overide's picture

I want to see people in handcuffs!

Fri, 04/04/2014 - 14:11 | 4625590 NotApplicable
NotApplicable's picture

Are low-level, back-office brown people with funny accents acceptable?

Fri, 04/04/2014 - 14:12 | 4625601 Bearwagon
Bearwagon's picture

No we want people with cufflinks in handcuffs ...

Fri, 04/04/2014 - 14:13 | 4625613 Pinto Currency
Pinto Currency's picture

 

 

Waiting for "SEC busts Federal Reserve for tricking people into trading at artificial prices"

Fri, 04/04/2014 - 14:18 | 4625627 Slave
Slave's picture

Immeadiately what I thought of too.

The sheep are being herded as we speak...

Fri, 04/04/2014 - 14:24 | 4625648 LawsofPhysics
LawsofPhysics's picture

LOL...    And the recent eCON graduate student from the "finest" school sayes "Price Discovery?  What's That?"

Fri, 04/04/2014 - 14:48 | 4625787 Thought Processor
Thought Processor's picture

 

 

Please.  If all the majors aren't already doing this 100% of the time I would be very surprised.

 

This is what is keeping this game afloat.  If it unravels, everything unravels.

 

That's why these 'Busts' will only be superficial.  It's a perp walk.

 

Move along people.

Fri, 04/04/2014 - 15:04 | 4625879 BTCTalks
BTCTalks's picture

Vietnam sentencing bankers to death by firing squad.

http://www.globalpost.com/dispatch/news/regions/asia-pacific/vietnam/140...

Fri, 04/04/2014 - 15:24 | 4625981 Doubleguns
Doubleguns's picture

They need an excuse for why the stock market crashed.....again. HFT are the false flag so no one will blame or suspect the FED, PPT, Treasury, Bankers etc........ 

 

I bet most sheeple fall for it. 

Fri, 04/04/2014 - 15:59 | 4626198 zaphod
zaphod's picture

The SEC is going to take down a few HFT firms as a token effort.

The ones selected to be made an example of will not be politically connected to the SEC.

The other 95% firms that remain untouched will be staffed by former SEC regulators in 3-5 years continuing the revolving door between the government and wall street.

Fri, 04/04/2014 - 14:55 | 4625829 AldousHuxley
AldousHuxley's picture

The tides are already turning.

 

Goldman put their chips in betting on IEX over xchanges where HFT are allowed to front run. 

 

THE Big Boss already switched sides....front running industry change dynamics. Once SEC and rest of goldman lobbysts go after banning HFTs through federal powers, GS will be there to profit while other brokers lose HFT revenue. THAT is the only reason B Katsuyama is even allowed to speak.

 

With rothchilds front running war news to fixed price retail brokers bundling orders and letting market makers in on the spread...(yes that's how they are able to give you trade at low cost) to the latest HFT front running institutional orders...the name of the game in the business of FUTURE PREDICTION has always been FRONT RUNNING 

 

http://www.bloomberg.com/news/2014-03-22/goldman-sachs-endorses-iex-stoc...

Fri, 04/04/2014 - 14:25 | 4625651 Say What Again
Say What Again's picture

Let's play this forward.  If these HFT firms start having HUGE legal fees, they will need to raise capital.  Just paying the retainer on this shit will be big, and if you aggregate them together, that's a lot of money.

Will they be forced to liquidate a significant portion of the positions?

That will be fun to watch.

Fri, 04/04/2014 - 14:29 | 4625663 centerline
centerline's picture

I'm just waiting for the bots to get turned off and everyone finds out there is no market.  lol.

Fri, 04/04/2014 - 14:40 | 4625739 mccvilb
mccvilb's picture

How unforunate literally and figuratively, CL.

Fri, 04/04/2014 - 14:40 | 4625735 eclectic syncretist
eclectic syncretist's picture

With the market having a hard time bouncing back for the first tiem in a while, and being that it is a Friday afternoon, the odds are looking like they'll be better than 50:50 that we start monday down too.

Fri, 04/04/2014 - 15:09 | 4625907 g speed
g speed's picture

SWA---they only have to do this-    http://www.laundryman.u-net.com/page5_mlstgs.html   --and thats a lot of money

 

Fri, 04/04/2014 - 14:22 | 4625642 McMolotov
McMolotov's picture

I want to see people with cufflinks in handcuffs being pushed out out of helicopters.

Fri, 04/04/2014 - 15:25 | 4625990 Doubleguns
Doubleguns's picture

Windows and Nail guns not enough for ya?

Fri, 04/04/2014 - 14:14 | 4625605 Pinto Currency
Pinto Currency's picture

 

 

Fri, 04/04/2014 - 14:35 | 4625708 Iam_Silverman
Iam_Silverman's picture

Yup, I was speechless too when I read the accusations!

Fri, 04/04/2014 - 14:18 | 4625630 American Dreams
American Dreams's picture

Goldman just got tired of their slice of pie getting smaller without their consent.  "If we can't deciede how much pie we want to give everyone else then fuck um, shit in this one, and kill the pastry chef"

The front line is everywhere

AD

Fri, 04/04/2014 - 14:16 | 4625598 DoChenRollingBearing
DoChenRollingBearing's picture

These are just Show Trials for the consumption by the masses.  HFT, while sleazy and probably illegal, is just a smokescreen, keeping us (rather, many Americans) from seeing the real criminals:

Banksters

Fri, 04/04/2014 - 14:31 | 4625673 Rainman
Rainman's picture

agree....round up the usual small fry suspects .... and wrist slap em ! 

Fri, 04/04/2014 - 15:12 | 4625926 g speed
g speed's picture

so  prevalent it has a name---"straw man"

Fri, 04/04/2014 - 14:16 | 4625619 Al Huxley
Al Huxley's picture

If you want to see people in handcuffs, go to a police station in the low-rent district.

Fri, 04/04/2014 - 14:19 | 4625632 B2u
B2u's picture

and then orange jump suits after conviction...

Fri, 04/04/2014 - 14:31 | 4625672 Proofreder
Proofreder's picture

and then orange jump suits ever afterward ...

fixed it

When Banksters go on trial, they wear Brooks Bro's or Armani - Orange IS the new Armani in the low-rent district (9 ?)

Fri, 04/04/2014 - 14:24 | 4625649 Pumpkin
Pumpkin's picture

Handcuffs? No, that won't happen.  I've seen this movie before.  They just fine the piss out of them to get their cut.  Just another cost of doing business to get that government stamp of 'approval'.

Fri, 04/04/2014 - 14:40 | 4625738 Crash Overide
Crash Overide's picture

I forgot, we don't have a justice system anymore, it's a "legal" system and if you have enough paper/digital currency you can buy just about anyone.

Sad.

Fri, 04/04/2014 - 16:25 | 4626312 Dr. Kenneth Noi...
Fri, 04/04/2014 - 14:09 | 4625581 Kaiser Sousa
Kaiser Sousa's picture

but Mary "Mo" White just said the other daythat the markets arent rigged????

what gives.........

Fri, 04/04/2014 - 14:18 | 4625604 NotApplicable
NotApplicable's picture

She was referring to the grocery stores where she shops. Their loyalty card programs are on the up and up. Honest!

Fri, 04/04/2014 - 14:21 | 4625636 disabledvet
disabledvet's picture

can't do it in the debt markets. "that's what gives." this isn't an SEC problem for "Governor" or "Mayor" so and so.

"If you like the burger don't ask how it got made."
This still looks like a plain and simple default to me..."as if 2008 never ended."
Sure the Government has Gone Crazy here ("shovel ready projects"...now known as "War here...and here, and here....oh, look! here as well!")

So sure..."we're shocked I tell you! Shocked!" But don't tell me these clowns haven't known since Day One they didn't understand the Freq Show. For all we know the SEC came up with the idea.

Fri, 04/04/2014 - 14:10 | 4625587 Catullus
Catullus's picture

To the CNN Money writer who still doesn't understand: it's like yelling out a price in an auction that you have no intention of executing on.

Fri, 04/04/2014 - 15:01 | 4625858 TN Jed
TN Jed's picture

Reminds me of early days eBay.  Multiple self-accounts raising the bid.  Then eBay implemented the "reserve" price.

Fri, 04/04/2014 - 14:10 | 4625588 yrad
yrad's picture

I had a hooker once accuse me of "spoofing" on her...

Fri, 04/04/2014 - 14:17 | 4625625 Al Huxley
Al Huxley's picture

You weren't using a condom?  With a hooker?

Fri, 04/04/2014 - 14:26 | 4625655 Relentless101
Relentless101's picture

Doesn't need one cause his dick is protected by all those red bumps.

Fri, 04/04/2014 - 15:28 | 4626010 holmes
holmes's picture

Not gonna ask how you would know that.

Fri, 04/04/2014 - 14:27 | 4625657 yrad
yrad's picture

Um, I was her portfolio manager. You guys are perverts.

Fri, 04/04/2014 - 14:28 | 4625662 Al Huxley
Al Huxley's picture

Then why did you mention she was a hooker, instead of referring to her as a muppet?

Fri, 04/04/2014 - 14:31 | 4625680 yrad
yrad's picture

Touché

Fri, 04/04/2014 - 14:24 | 4625647 booboo
booboo's picture

Was the "hooker" a guy? If so you were poofer spoofing and that is a whole other ballgame.

Fri, 04/04/2014 - 14:10 | 4625589 Bill of Rights
Bill of Rights's picture

He Gave us a Phone, He's gonna do more!

Fri, 04/04/2014 - 14:11 | 4625597 Kaiser Sousa
Kaiser Sousa's picture

and explain this chart on a day when the Fraud Markets r imploding....

http://www.kitco.com/charts/livesilver.html

Fri, 04/04/2014 - 15:18 | 4625949 monad
monad's picture

bullets or silver... bullets or silver... bullets or silver... bullets first, then silver.

Fri, 04/04/2014 - 14:14 | 4625606 ebworthen
ebworthen's picture

What?  S.E.C. didn't go after Goldman Sachs but a small unknown? 

And, slapping their wrists with a fine instead of jail time?

I'm shocked I tell you, shocked!

G.S. is already onto the next scam.

Not sure what it is, just that G.S. is onto it.

Fri, 04/04/2014 - 14:56 | 4625833 mccvilb
mccvilb's picture

SEC can only bring civil suits. To bring criminal charges you'll need tangible evidence. Best bet is to call Eric Holder and Geraldo Rivera for that. 

Fri, 04/04/2014 - 14:13 | 4625609 fonzannoon
fonzannoon's picture

layering...spoofing....i am excited for the day a small NJ firm or whatever gets accused of "fucking people in the ass with a telephone pole". maybe thats when we turn a corner.

Fri, 04/04/2014 - 14:23 | 4625644 NotApplicable
NotApplicable's picture

That would be "Corzining."

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