Money laundering via HFT

tripledtrader · Sep 3, 2012

Yep...these are institutional crosses. If you check the exchange on the consolidated tape, they are usually designated "FINRA TRF", which stand for FINRA trade reporting facility. All trades transacted off-exchange are reported to the TRF.

SUPERIOR1 · Sep 3, 2012

Quote from southbeach4me:

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......
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I agree with your view that ET is a sack of shit however the concept of money laundering by the exchange is true. I think the poster didn't mean to throw hft in the mix, only to point out that the trades were happening at the same period.

braincell · Sep 4, 2012

Quote from abattia:

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...
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You're probably right. Good point. Maybe on lower liquidty stocks or options though? The spreads on some of those are so huge and slow you can HFT them with a retail connection, or so it seems (probably not true in practice).

OK so my theory sucks. Any takers for a hollywood movie script tho? (my real intention all along...)

Quote from tripledtrader:

Yep...these are institutional crosses. If you check the exchange on the consolidated tape, they are usually designated "FINRA TRF", which stand for FINRA trade reporting facility. All trades transacted off-exchange are reported to the TRF.
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Yeah i saw those tickers but they don't always align with the volume, hence the idea.

JuniorCTA · Sep 4, 2012

How was the open markets avoided if the the transaction occured in the open market for everyone to see?

lol "What I don't like about my theory is that they still have to speculate which way the market will move"

so now theres no money laundering going on, its trading...

There are lots of volume and minimal price impact when there is an icerberg on a bid/offer. HFTs then try to probe the price with volume to see if it is or is not an icerberg. There's a displayed 1 lot but 100s of lots have traded there.. so algos try to see what that limit is before quickly cancelling, reversing position, and leaning on the icerberg.

Quote from braincell:

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.
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Daal · Sep 4, 2012

This can be done in PK or OTCBB stocks not SPY

braincell · Sep 4, 2012

Quote from JuniorCTA:

How was the open markets avoided if the the transaction occured in the open market for everyone to see?

lol "What I don't like about my theory is that they still have to speculate which way the market will move"

so now theres no money laundering going on, its trading...

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The open market is avoided because in my example value was exchanged from one account to another without giving a chance to other market participants to participate.

It's not trading since in case of loss the same entity (real account holder) holds the same value, it's just that one account lost cash and gained equities, while the intended purpose was the other way around.

I really shouldn't post conspiracy theories... Everyone took me so seriously! I was just having a laugh really.

JuniorCTA · Sep 4, 2012

Quote from braincell:

The open market is avoided because in my example value was exchanged from one account to another without giving a chance to other market participants to participate.

It's not trading since in case of loss the same entity (real account holder) holds the same value, it's just that one account lost cash and gained equities, while the intended purpose was the other way around.

I really shouldn't post conspiracy theories... Everyone took me so seriously! I was just having a laugh really.
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Your talking about wash trading.

It happens a lot when you have multi time frame algos that are buying on one tf and selling in another.. you end up doing business with yourself.