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

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.