March 15th, 2015
by EconMatters, EconMatters.com
Brent Spoofing & HFT
As the European Market closes today and oil has some bearish sentiment to the trading day, one of the common techniques is to bang the European close in the Brent contract which being a much less liquid contract than WTI can be quite profitable. Usually this takes place around 10:00 to 10:30 am CST but with the time changes this week everything is pushed back an hour here in the US with the European close now being 11:00 to 11:30 am CST.
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Specific Example of Spoofing Well as this bang the close strategy is happening in Brent pushing the futures contract down $56.50 to $55.50 in 10 minutes a nice illustration of HFT Algo strategy plays out, in other words blatant market manipulation also called spoofing was conducted by some large firm. Here is the case and this isn't specific to Brent, Oil, or an unusual event this happens in all markets throughout the trading day. So as Brent is going lower some firm wants it to go lower some more so around the $55.75-80 area they park a large order around 900 futures contracts. Now this isn't a real order, the seller isn't really going to sit there and take in 900 buyers, it is meant to manipulate the other trading algos and buyers in general from stepping in and buying oil with the idea of pushing the contract lower. In essence "Scare" the market lower! This usually works and today it worked pushing the Brent contract down to $55.51, and needlessly to say this firm benefited from this technique and covered before eventually pulling the entire order once a couple of contracts hit on the price that the seller parked this large fake sell order.
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Now this kind of activity would be pretty easily to reign in, easily trackable, and easy to identify which firm utilized this spoofing manipulative strategy. Just pull up the Brent trading records on the ICE exchange for 3/13/2015, and see which firm entered an order previously to sell the Brent contract, then wanted to juice their returns or move the market in the direction of their scalp by placing an additional large order all at once as price is going down during the European Close around 11:25 am CST (900) contracts give or take, and then cancels this same large order once it is hit with a couple of offers to buy at that price. Needless to say Brent traded much higher than this original sell order once it was pulled from the market as the objective of pushing the price lower to fill their existing order was already achieved! This is spoofing, a common technique used in markets, often revolving around HFT strategies, is highly manipulative with both intent and market effect, and happens right out in the open for all to observe. This example of HFT manipulation is far more straight forward than some of Michael Lewis's HFT claims that are much harder to prove beyond a 'reasonable' doubt.
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Spoofing just one HFT Market Manipulation Strategy
This kind of spoofing strategy usually takes place with 100 order lots in the oil markets, and the 900 contract effort was just hilarious, taking overkill to an entirely new level. I have even seen several firms lined up with 100 contract fake sell or buy orders on consecutive price levels. For example, 100 at $48.51, 120 at $48.52, 150 at $48.53, 105 at $48.54 etc. all with the same intent to move prices in the opposite direction of these orders. They don't really want to get filled, in fact they will never get filled, as soon as a couple contracts hit one of these orders they are pulled from the market.
Now big orders get filled all the time but somebody with a big order doesn't just advertise to the entire world in most cases, and if legit doesn't cancel the order when it gets hit. Usually large orders are disguised in the market via various methods to maintain a lower or better cost basis on the overall position. This Spoofing Strategy works, and is highly profitable because its frequency has increased over the last three years with more and more firms adopting this HFT trading strategy. There have been a couple of small fines for this behavior, but the blatant occurrence of this strategy and the increasingly brazenness of the manipulative trading technique shows there is no regulatory force enforcing this trading impropriety by participants.
Markets are Rigged at both the Macro & Micro Level from the Fed to HFT Firms
Now this is just the tip of the iceberg when it comes to market manipulation, I thought I would just provide a concrete example of the kind of funny business that goes on every day in financial markets. The financial markets are manipulated from the macro perspective by the Federal Reserve with their outright asset purchases and various other market interferences all the way to the micro level of HFT scalping algos. There is nothing wrong with scalping per se, but utilizing manipulative techniques like fake orders to ensure the scalp works and to increase the tick size profit of the scalp is illegal, and occurs every day at the micro level of market manipulation, and is one HFT strategy that is easy to prove which firms are conducting this illegal market manipulation activity.
Accordingly, Michael Lewis is right markets are rigged, but he really is underestimating the extent of market manipulation, financial markets really are the wild west, investors should always be wary of how they are being taken advantage of in financial markets. The phrase Caveat Emptor 'Let the buyer beware' applies here.