Money laundering via HFT

Discussion in 'Trading' started by braincell, Sep 2, 2012.

  1. A year or so ago when I was watching the volume tick bars for the SPY more closely, I kept noticing a few huge transactions, multiple times above average volume, occuring almost instantly at a single price without moving the markets. I've read lots of theories as to why/how that happens, but none were really convincing as of yet. So, as usual, I kept it in the back of my mind and came up with a handy conspiracy theory, as to how money can be laundered by employing HFT (market makers) completely legally, or at least seemingly so.

    Money laundering involves transferring wealth from one questionable account to another less questionable account, or, to accounts of a related owner with intention of tax avoidance.

    Let's say our "player1" has obtained a nice sum of cash but needs to transfer it to a legit account of "player2" and pay almost no taxes. They expect the S&P to go up so P1 starts slowly selling SPY and P2 starts slowly buying it, but they always do so at the exact same time. When the SPY has risen sufficiently, P1 will employ HFT1 to place a Bid, and P2 will employ HFT2 to place an Ask, and they will both execute market orders at the quantities they are holding. In effect, player1 has lost money, which player2 has gained. They have circumvented the open markets by in effect selling directly to eachother by the use of HFTs. The trade never occurs unless both HFTs are positioned exactly as they should (first on the bid/ask).

    So, in effect, money laundering or not, one point is you can circumvent the open market by using HFTs, at least in my idealistic theoretical world, but judging by how many HFTs really do manage to stay on the bid/ask almost 100% of the time, i don't think it's that idealistic or theoretical at all.

    The cost of this transaction is the spread (which is offset by the closing trade to a much smaller real spread cost, almost zero) plus whatever the HFTs charge for their "service". In many cases, it will probably be less than the cost of paying taxes on declared income from other sources... think about it..

    What I don't like about my theory is that they still have to speculate which way the market will move, but even without that, the prospect of using the markets as a shady transaction venue between HFTs is interesting on it's own.
    Don't tell me the SEC or whoever investigates these things, they hardly have enough money to go after completely obvious criminals, and hiding this activity is easy enough especially with multiple accounts and other accounting tricks.

    Also, I used SPY as an example but there are many more suitable venues to do this with.

    On the other hand, i'd like to hear of more opinions as to why/how some ETFs trade huge volume in a matter of milliseconds without price moving a single dime. Thanks.
  2. The high volume transactions that don't move the markets are just liquidity seeking algorithms looking to put on large positions over time without market impact. They're trying to avoid signaling risk.
  3. 1245


    These trades have nothing to do with HFT. They have nothing to do with money laundering. HFT is normally very small trades, 100, 200, 300 shares many, many times. The trades your seeing are crosses of stock trades either from an equity trade or paired with options. These broker trades go on all day above and below the market. You'd be better off ignoring them.

  4. The poster above has this correct. These are transactions that I believe happen in large blocks that are predetermined trades. Something like 2 big players that would rather trade between themselves w/o impacting the market. I haven't seen any evidence that these trades impact the future of upcoming trades.
  5. vinc


    main problem with money laundering is to put money in the bank imo, once it's there all transfers are possible , but how to deposit large amounts without arousing suspicion - that's what they have to face..
  6. Dustin


    You can read about these types of trades in the book Street Freak. It's mainly hedge funds making large directional or arb plays via a big broker who provides the shares.
  7. ammo


    large bank customers will often cross trades ,one bank to one bank, different customers,house to house, this has gone on for decades,they shop around a large chunk and find another side ,as opposed to selling a large chunk at different falling prices or the opposite,it's when you see the large spikes and the falling prices or rising prices that you know a fund is in trouble and liquidating,major s/r usually don't hold on these moves
  8. Now we have ppl claiming money laundering via HFT ? LOL, tell me , how much meth do you smoke daily?

    This proves my point, over 90% of ET members are dumber than a box of nails. And sadly it will stay that way for a very long time......
  9. I read about those, but they also say that these happen behind the secondary markets where they wouldn't normally show up on our tickers. I find it strange, but believable that they'd do it in the secondary market. I guess i'm just not sure how trades are reported, and when they are required to. Unreported trades are no conspiracy theory, in terms of live tick data you cannot get from most feeds and exchanges, such as from dark pools.

    Thanks for the contribution. I'm glad you find my sunday afternoon conspiracy theory sessions so amusing. Like I said, I read about the multitude of explanations on how these block trades happen, but there's a big difference when they are reported and official vs when they are not. I really doubt anyone would do anything like that in such an obvious way, so I'll say again I don't really buy my own theory.

    My post was more about the possible "sinister" consequences of HFT (as we all on ET like to demonize them, heh), since you can't deny that two HFTs working in tandem can easily circumvent the market and trade directly between eachother. There's nothing crazy or stupid about that. In fact if you were imaginative and had some brains of your own you'd know what that means in terms of cheating the market in so many other ways than my silly conspiracy theory. Imagine being able to simply "cancel" loosing trades. Does that sound stupid to you? Oh wait, I guess you'll need a few days to figure out how you can "cancel" loosing trades if you're an HFT, so let me know when you do.
  10. This would be very difficult to achieve in practice; getting to the front of either order queue is difficult (if it's a new level, you get there by being fast; if it's an old level, you got there by placing your order way before it executed). Both sides as market orders? One of the sides will still be in a queue of maketable limit orders that have converted to market orders. Getting yourself to the front of both order queues at the same time, while also knowing it's you there at the front on both sides, doesn't happen other than by luck IMO...
    #10     Sep 3, 2012