Quote Stuffing Disrupting Markets

Is the price you are seeing on your investment screen the current price? How do you really know? What if you are an algorithmic trader? Is that price and size really there?

Quote stuffing is a messaging pattern designed to disrupt normal market operations by introducing latency and increasing bids and asks into an exchange. This method of market manipulation is intended to give other market participants a deceptive view of the market depth, liquidity, and range. Quote stuffing may result in trading by other participants in ways not intended.

If quote stuffing disrupts the fair and orderly market, then there is the possibility that a clever programmer and trader may be able to take advantage of other market participants.

Reuters stated in 2012 “A big fear for traditional traders is that they are “gamed” by HFTs, including by methods such as bombarding an exchange or ‘dark pool’ with thousands of quotes in a matter of milliseconds and then cancelling orders after real investors are drawn out.”

Exchanges, in an attempt to thwart quote stuffing, have introduced rules that prevent a predefined number of transactions per second from being submitted. This is a good standard. Yet a compliance officer shouldn’t rely on the strict adherence to the exchange rules to protect the firm.

A car driving on the highway under the speed limit can be disruptive by quick and frequent changing of lanes, and erratically decreasing and increasing speeds. Another car driving the speed limit, and staying consistent isn’t disruptive. The same is true in electronic trading.   

If the transactions per second rate is set by the exchange at 100 which trader would be more disruptive?

Trader One: Submits 98 orders to the exchange over a 1 second interval.

Trader Two: Submits 49 orders and 49 cancels to the exchange over a 1/100 second interval.

Neither trader violated the exchange speed limit. Trader Two with the high speed “burst” of activity does raise the question of the trader’s intent. Did the trader really intend for any of those trades to ever be filled?

If Trader Two’s activity is repeated multiple times over the day a compliance officer should take note.

Additional Information on Quote Stuffing:

• CME Group CME Group RA1405-5
• Quote Stuffing by Jared Egginton of Louisiana Tech University, Bonnie F. Van Ness of the University of Mississippi, and Robert A. Van Ness of the University of Mississippi
• Asia brokers in balancing act to bypass stalled HFT debate
• High-speed FX trading provokes backlash from banks
• IIROC’s Summary of Comments Received Respecting Proposed Guidance
  on Certain Manipulative and Deceptive Trading Practices
• Fast money: the battle against the high frequency traders