How can you 'avoid' the hits. Sure you can reduce the odds but it's still a real order. If you have 2000 eminis 2 ticks back in the book and it gets swept on an unscheduled news event you are carrying those 2000. Algos can have things built in like 'pull if that price trades more than X' but if your order is in the market and it gets clipped in one go you are filled
I think that most of these issues could be eliminated just by having a minimum lifespan of say 1 second for resting orders (i.e. ones that publish a best bid/offer). Then spoofers would really be at risk, and a lot of other types of manipulation dependent on rapid placement/cancels of orders would be far more difficult to pull off.
Spoofing is the only way to combat HFTs in a manner that can really hurt them. Spoofing should not be illegal. You cannot ever prove that someone is spoofing since there is a paper trail showing they submitted orders that could have been filled. The only reason people are getting busted is because of jurors who have no clue. If I were a juror, I would rule in favor of anyone accused of spoofing because it is impossible to prove. http://www.zerohedge.com/news/2015-...hfts-issue-warning-outsmart-us-and-you-go-jai
Coscia is accused of designing an algorithm that would enter two types of orders: a “buy” order for a small volume slightly lower than the best offer and then several “sell” orders for large volume higher than the market price. The front-running algorithms are designed to look for any sizable interest in trading and front-run that order. In this case, once the HFT algorithm detected the large volume on offer, it sent sell orders to the exchange, fulfilling Coscia’s buy order. Coscia’s sell order was then terminated and the process reversed, with the newly purchased lots offered for sale at a slightly higher price, intending to trick the front-running algorithms into buying them. Source: http://www.bloombergview.com/articles/2015-01-23/high-frequency-trading-spoofers-and-front-running I don't quite understand the explanation of what Coscia did. What I get from the explanation is that...he would put in a bid just one tick off the inside market for a small volume and a large volume of offers many ticks off the inside market. The HFT algos would then hit Coscia's small bid (when that happened, Coscia's algo would cancel the large volume of offers). So the HFT would be net short and Coscia would be net long. Assuming the large volume of offers are not cancelled, why would the HFT want to be net short? Shouldn't they want to lift the offer so that they can then sell it to the larger, higher offers?
Terminator8 Spoofing is actually very basic and not at all as high tech and advanced as people make out. Spoofer will put small offers in (usually iceberg orders) then put big bids in below the market. The uneducated traders and front running HFT's will think the market is going up because of the big bids and start buying up the market filling the spoofers offers. When the spoofer is sufficiently short he will pull his bids and the market drops a quick 5 or 6 ticks and the spoofer makes money on his shorts.
Ah yeah, that makes more sense! Thanks for that. I thought that would be the case as you described but was trying to be think more creatively and outside the box... There must be some really dumb HFT algos if they just go long/short based on size of bids/offers...
That's a great explanation. However, remember there are many, many details on how this is done especially where the orders are placed relative to the current "print" or market price. Great spoofers implement a "layering" algo that places the orders at different levels in the DOM. This is really effective in getting other algos "fooled" into taking actions based on those numbers....which are really "fake" because they are just orders, not trades. Algos whose logic is based on trades and not orders are unaffected.
are there any markets where we can currently see spoofing in play? 12 months calendars in oil perhaps? understand if you cant share here. thanks