Regulators Question If Market Manipulation Caused ‘Flash Crash’
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The Securities and Exchange Commission is keeping a close eye on a stock market practice that may violate rules against market manipulation, the Wall Street Journal reported yesterday. The practice, called “quote stuffing,” happens when stock exchanges are flooded and, at times, clogged by huge numbers of buy and sell orders—orders that are ultimately cancelled.
Regulators are trying to determine if traders are using rapid-fire computerized trading systems to cause the inundation by design, purposefully gumming up the exchanges and giving traders an information advantage on small price movements in stocks.
The Journal reported that the SEC is investigating whether quote stuffing may have been one of the causes of the May 6 “flash crash,” when the Dow briefly plunged 1,000 points in a matter of minutes.
To get an idea of the volume of quotes produced by high-speed, computerized trading, consider this: During the day of the flash crash, “there were hundreds of times that a single stock had over 1,000 quotes from one exchange in a single second,” according to Nanex, a ticker of quotes and trades.
Or, for the visual learners out there, take a look at Nanex’s mesmerizing, time-delayed video clip that flashes all of the quotes for one stock, in this case Public Storage, in just one second.
If quotes from various exchanges clog the system, as the New York Stock Exchange admitted happened during the flash crash, some traders could profit. Nanex’s report explains why quote-stuffing could represent market manipulation:
“Competition between [high frequency trading] systems today has reached the point where microseconds matter. Any edge one has to process information faster than a competitor makes all the difference in this game. If you could generate a large number of quotes that your competitors have to process, but you can ignore since you generated them, you gain valuable processing time.”
But saying there could have been manipulation isn’t the same as proving there was. The factors that caused the crash are up for debate. The Journal reported that not everyone agrees with Nanex’s conclusions:
“Others say the canceled orders are above board, reflecting either legitimate behavior by traders in search of profitable trades, basic market-making, where broker-dealers constantly provide quotes for potential trades and then cancel, or computer programs gone awry.”
The SEC and Commodity Futures Trading Commission are expected to issue a report later this month.
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10 comments
Carl
Sept. 3, 2010, 12:47 p.m.
No one has yet convinced me that High Frequency Trading (HFT) is anything more than “computerized front-running.” Any trading system that is based on ORDER FLOW and not EXECUTIONS seems to me to be a system that tries to front-run orders.
The only reason HFT remains legal is that only the largest financial/trading firms can afford to build HFT systems. With all the lobbying money that the largest financial/trading firms throw around, the SEC and CFTC will never stop HFT as today’s regulator is tomorrow’s employee at these large financial/trading firms.
This is why industry regulators never regulate anything…
Helen
Sept. 3, 2010, 1:18 p.m.
Similar to the bidding bots that ebay buyers can use for a slightly - but not entirely - different purpose.
sierra
Sept. 3, 2010, 5:02 p.m.
There are many stories since the market crash of 08-09 about “hi speed” computer trading…..Distance from the exact geographic location of trades is also important; the closer to the exchange of trades by the computer traders physically adds to the supposed advantage in microseconds..(nanoseconds, also?) Those that have the most sophisticated, speediest, closest systems win the game….in this new world…....We should call it what it is….”....an unfair advantage.” (But, who said the world has to be fair)
Brian
Sept. 3, 2010, 9:32 p.m.
Amazing
Bob Dylan
Sept. 4, 2010, 6:53 p.m.
time to go back to ticker tape ...the public has no faith in above board trading ...outlaw hft , and actually prosecute somebody rather than bail them out….prepar for the second revolution….off with their heads….
Sam
Sept. 6, 2010, 12:46 a.m.
The SEC needs to publicly crucify the culprits to set an example to the others!
Herbert Abrams
Sept. 6, 2010, 11:48 a.m.
These types of trades are not for investment in America for Americans. It is for a few players to play us for fools to make a dollar faster than we can blink.
That dollar has to come from somewhere.
Guess where?
What happened to invest for the long term. Simple solution they have to hold what they buy for 6 months.
Who is they. Everyone. And to be exact and cover everyone make that everything.
Warren Langer
Sept. 6, 2010, 4:19 p.m.
I’m not that knowledgeable about finance having recently dropped a subscription to Financial Times but this doesn’t pass the smell test.
They gave Joe Kennedy the SEC post because he was an “insider”.
Let’s appoint the biggest scoundrel we can find - lots of applicants come to mind - to run a new “Let’s keep the market honest” Department.
Jo Jo
Sept. 9, 2010, 1:31 p.m.
What role does the Federal Reserve play in Market manipulation??
Chuck S
Oct. 15, 2010, 7:48 p.m.
Light travels at 1 foot/nanosecond, or 1,000 feet per microsecond. Electical signals going through wires are somewhat slower, maybe 600 feet/microsecond.