In the past several years, TradingSchools.Org has written several articles regarding CFTC enforcement actions pertaining to illegal spoofing of the Futures markets.
Before we jump into the substance of this article — which is an interview with an actual “spoofer,” I should take a moment to explain to the audience what is spoofing.
What is spoofing?
Spoofing is illegal. In fact, spoofing is a felony. This means there are civil penalties, which are typically enforced by the SEC or the CFTC, and there are criminal penalties which are usually enforced by the US Attorney.
Spoofing is the act of placing orders into the market that you have no intention of actually filling.
The act of spoofing is to signal to the market that a large quantity and volume of orders is about to aggressively push a market higher, or lower.
Think of these orders as “bait,” where the cute little goldfish (you) is drawn towards the “bait” of high volume order entry…just outside of the current price.
The desired effect is that the cute little goldfish — looking for a meal — will chase the “bait” only to discover that the “bait” is really just a trap.
Let me give you a real-world example of how spoofing works. In this example, we will use court records where JP Morgan Chase agreed to pay $920 million in penalties and fees for spoofing the metals and treasury markets over several years.
How the scam worked…
Prop traders employed by JP Morgan Chase opened dozens of Futures trading accounts with very high balances. These high balanced accounts gave the prop traders the ability to enter extremely large orders that would sit just outside of the range of where most buying and selling activity was occurring. This is the “bait.”
Mom and pop investors, looking to buy or sell Futures for short-term speculation would see massive quantities of orders flooding into the market. This flood of orders would entice small investors to then enter market orders believing that the price would head in the direction of the “spoofers.”
Once the market orders were filled in the manipulated direction, then the “spoofers” would take the opposite position of the mom and pop investors.
The “spoofers” would then employ the scheme in the opposite direction, causing the mom and pop investors to liquidate the positions for an immediate loss.
The winner would be the “spoofer.”
Banks like JP Morgan Chase employed this strategy for years, constantly pushing and pulling markets from point A to point B, causing massive frustration and losses for small investors.
Do banks like JP Morgan Chase face criminal prosecution? Sure. But as you see from the settlements, the bank simply pays the fines by diluting shareholder equity. And what about the prop traders that work for these firms? Usually, they sign Deferred Prosecution Agreements where the trader admits to wire fraud, but as long they dont do it again, then they will not be prosecuted for the original fraud.
Imagine if you robbed a bank and then get caught. You would expect to be heading to the pokey. But what if you agreed to pay a big fine and agreed to never rob a bank again…this is a Deferred Prosecution Agreement.
Deferred Prosecution Agreement rarely work. As you will read later, in our interview with a convicted spoofer, he explains a simple workaround to not trigger the Deferred Prosecution Agreement.
Should this be a crime?
Plenty of readers will say, “this is a free market economy” and “let the free market fix this problem.” Or, “if people are stupid enough to fall for the bait, then they deserve to lose their money.”
That is a valid argument. The only problem is that the free-market approach is not working. As a matter of fact, spoofing is only getting worse.
Electronic trading has only been around for Futures markets since the mid 1990’s. As computers have become faster, and electronic trading has expanded…this has created a ripe environment for software developers to create applications that flawlessly perform the trick of spoofing.
These software applications are extremely complex, and require massive resources to maintain and manage. Effectively, they are electronic pick pockets navigated by the hand of humans.
The free market people will say, “its just part of the marketplace.” And, “the marketplace is always fair.”
But it is not really a fair market because small investors, like you or I, do not have the resources to build these complicated spoofing programs.
Additionally, even if we could theoretically build such a device, we would still need millions of dollars in capital and hundreds of trading accounts in which to create the illusory market dynamic.
In short, the game is rigged against small investors. And no “free market” approach is ever going to balance the equation to give us a fair shot.
Nobody is talking about the problem of spoofing
The mainstream financial media hardly ever publishes articles about spoofers. Its a dry topic. But I have attempted to put this issue front and center, because its likely effecting you, and you simply are not aware its happening.
For instance, you probably did not know that on September 30, 2020, the energy company Sunoco agree to pay $450k for spoofing the crude oil contracts.
Also, on September 30, 2020, ARB Trading Group agreed to pay $745k for spoofing the metals and agriculture markets.
On September 29, 2020, a Slovakian named Roman Banoczay Jr. was busted for spoofing the crude oil Futures market.
This douchebag earned $332,000 in profits in only eight trading days. And he did this by spoofing the market by fraudulently entering and canceling over 55,000 phony trades during this eight-day crime spree.
Remarkably, this isn’t the first time that Roman has pulled this stunt. In fact, just last year (2019) he was fined nearly $220k for doing the exact same thing.
On September 28, 2020, Thomas Donino of FNY Partners was ordered to pay $585k for spoofing gold and crude oil Futures contracts.
And let’s not forget that JP Morgan just got busted and agreed to pay nearly a billion dollars on September 29, 2020.
This is all within a single week.
Everyone is doing this scam. In fact, the problem is so fucked up, obnoxious, and widespread that the CFTC is now going after the software developers that design and implement these “mini pick pocket” spoofing programs.
This little fucker in Illinois just got hit with a $25k fine for making and selling one such program that was used to spoof the Emini SP500 market.
If you spend any amount of time reading the CFTC press releases, (like I do) you will see just how massive the problem has become. I could spend the next year writing hundreds of articles about individual enforcement actions, but it would waste more internet space than online pornography.
In spite of all of these complaints, why are we still having this problem? The answer is quite simple…the regulators are not criminally charging the violaters with wire fraud. Sure, they were doing it (criminal prosecutions) prior to 2016 and were actually putting people in jail for ripping off consumers. Albeit for short periods of incarceration.
But post-2016, it seems that fraudulent schemes, like spoofing, is something our government no longer considers an actual criminal financial crime. Rather, they only now consider it a means to collect penalties and fee’s from the offenders.
Now, I don’t want to be too hard on the CFTC. As many readers are aware, I file more CFTC whistleblower complaints than Bernie Sanders harpoons Donald Trump. But this spoofing problem needs to be solved. I fear it won’t actually stop until the CFTC starts once again to put pressure on the US Attorney to start prosecuting.
Interview with a spoofer
TradingSchools.Org has been attempting to get an actual spoofer interview for nearly two years.
Its a lot like interviewing a drug trafficker for a TV documentary. We have all seen these shows where the drug trafficker wears a bandana, sunglasses, and a hat, with a disguised voice. And you get to follow the drug trafficker around and see how he stuffs the drugs into a large can of jalapeno peppers, which are then smuggled over the border.
Finally, in late 2019, after desperately hassling a London based prop trading company — where several of the traders were busted for spoofing US Futures contracts — we got someone to anonymously go on the record. To explain to the audience how they are currently pulling off the scheme.
The following are the question and answers we asked the spoofer…(slightly edited)
Question:
How old are you, when did you start spoofing, were did you begin spoofing?
Answer:
I am currently 33 years old and I currently live somewhere in Europe. When I was 25 and fresh out of University, I took a job as a prop trader in London. I will not name the firm, but if you Google ‘London spoof trading’ you will see the name of the firm.
The trading firm allowed traders to pool their money into an omnibus account which gave us extremely large amounts of leverage to trade US Futures contracts. Although we knew spoofing was technically illegal, this was the UK, and so we really had little fear that US criminal authorities could possibly track us down.
The act of spoofing started with just a few traders in the office making outsized and consistent income, whereas everyone else was barely making any money. We later discovered that these individuals had figured out how to spoof by manually (click trading) entering massive quantities of trades and then just as quickly cancel the orders before they would be filled. Once cancelled, the market would usually head in the opposite direction of the cancelled orders.
Once everyone figured out the “trick” then everyone was doing it. But this required ever larger amounts of capital to get ever larger amounts of leverage.
Of course, once our office started doing in in scale, then neighboring prop companies started also doing it.
This set off an arms race to see who could bundle the largest accounts and spoof ever greater amounts of phony orders. The whole thing became comical and readily apparent as thinly traded markets like agriculture which would normally see a few hundred contracts every five minutes would see thousands of phony order entries every minute.
As more and more people did it, then simple (click) trading from a mouse became too slow. The next step was people began to hire programmers to create sophisticated order types that would layer thousands of phony orders across a wide range of prices. As the market moved in the direction of the fake orders, the program was lightning fast and would cancel the orders. Anyone that attempted to chase the orders was met with disappointment as their orders would fill and then immediately reverse in the opposite direction — as the demand was a mirage.
The game is similar to a real estate auction where people looking to buy would bid against each other to push the prices higher, but little did they know that some of the bidders were actually the person who either already owned the real estate, or had no intention of actually purchasing the real estate. The key was to stretch the small bag holder accounts into phony demand, and then gut them when they unwound the position.
You cant pull this trick on large trading institutions because they dont scalp. Only small accounts attempt to scalp, and these were are our target victims.
Question:
The CFTC has become increasing aggressive in rooting out spoofing. Is it working?
Answer:
Yes and No. The large institutions are now getting caught quite easily. I believe that in 2018 or 2019, HSBC and a few others were caught because the CFTC has some sort of special unit that took a more aggressive posture and began watching more closely.
If you are a large institution, you will have a hard time pulling it off.
But the secret is already out how easy it is to manipulate the order book, and smaller groups of traders have figured out how to work around the regulators.
Question:
Can you give me an example of how that is done?
Answer:
Sure, but its more complicated. And its sort of an open secret. There are several steps to being a “modern” spoofer.
The first step is that you must have at least $500k in order to be given access to place a large bloc of potential positions. This is the minimum amount. And this would work for more thinly markets like soybeans or silver. Don’t even attempt it on financial futures because those markets are way too deep. For crude oil, you should expect to need roughly $1 million in cash.
The second step is to find someone with a clean record, someone you can trust, like a friend, relative, etc. You need to open a smaller account in their name with a smaller amount.
Then you need to “season” the account by adding more funds slowly and then you start placing short term trades, but not attempting to manipulate the market quite yet.
After the account is “seasoned” for awhile, and the balance is high enough, and you have not raised any red flags, you then prepare for the manipulation event.
Question:
What does that mean, “prepare” for the manipulation?
Answer:
Suppose that you want to manipulate silver futures? You would want to only trade during a historically low period of volume, like one hour after the open, after prices have moved significantly and then consolidate into a tighter range.
Basically, you want to avoid trading against institutional investors and only trade in lower volume areas where small investors are likely to chase a breakout.
Question:
How often can you pull the trick before anyone notices?
Answer:
One or two days. You want to plan the event with the intention of closing the account in one or two days after you pull profits. However, sometimes it does not work, and you can lose money. But you still need to close the account immediately after attempting to manipulate because you might raise a red flag.
Question:
Is this enough time to actually make any money?
Answer:
Yes. A good one or two days can net you $50k and then you quickly close the account and have your money wired out immediately. If you attempt to manipulate the market more than a couple of days, you run the risk of being flagged and having your account frozen. In this scenario, you are essentially caught and could potentially be in a lot of trouble.
The key is to make the money fast and get your money out even faster.
Question:
Ok, so after you pull off the manipulation and win a chunk of money, and then quickly close the account, what do you do next?
Answer:
You then try and find a housekeeper in New Zealand with a clean record, that you can trust! We are always looking for someone willing to be the mule. Its risky, but a $5k payday for a poor person is worth the risk.
And beside, what does a poor person in Brazil care if they are fined by the CFTC for millions of dollars? Most people dont even know what a Futures contract is, and have never even heard of the CFTC. Nor do they ever plan on going to the states.
Question:
This sounds just like how professional card counters that get thrown out of casinos. Can you do this with stocks?
Answer:
No. Because stocks now trade on many different exchanges, whether they be the Nasdaq or an internal dark pool. You would never be able to get your order filled because the high-frequency computer traders will pick you apart because they own faster networks and have the advantage of latency.
However, you can do this very, very easily if you have a chat room. This is a scenario where people gather in a chat room and a moderator or “educator” trades and the audience attempts to follow the moderator. Most people call this a “pump and dump.” We see this with many internet chat rooms, but the problem is that in order to pull the scam, you need to spend a large amount of money on YouTube, Insta (Instragram) or Twit (Twitter) to get gullible people to attend the chat room.
Regarding your analogy of card counting. Yes, this is similar to card counting in blackjack. The player sits at the table waiting for the exact moment that the deck is stacked, and then the bets increase from $20 per to the table maximum. The casino knows what’s going on, but they cannot react fast enough.
Question:
Do you have any advice for the small investor that reads a blog like TradingSchools.Org?
Answer:
If you are going to day trade Futures, then you should know that crude oil, all the metals, and treasuries are all highly manipulated markets. Especially crude oil. What can appear to be a breakout is nothing more than someone spoofing the market.
The way to trade these thinner markets is to hold positions for longer periods of time, this negates the chance you are stepping into a spoofed market. Also, try and hold a position as long as possible as the trend usually continues to the close.
For financial futures like the Emini SP500, the market is so deep that its difficult to spoof. And when trading this market, always use a limit order to enter and exit a trade. Day traders that use market orders never survive for long as their account gets ground down to nothing. For day traders, the edge is very small.
Question:
Any final thoughts?
Answer:
Yes, please don’t try and spoof. I believe that the CFTC will only become quicker at freezing accounts and locking up money. So unless you want to become part of a collective, or get a job at a large institution where they can legally steal $100 million and only pay $1 million in fines, then it’s not worth the attempt because you might end up in jail.
For the time being, many of us are doing it quite well and profitably, but the proverbial writing is on the wall that it wont last forever.
Wrapping things up
Thanks for reading this article. Like I said, its a dry topic. But I found it interesting to see these modern day “financial pirates” attempt to circumvent the regulators with ever more clever “cat and mouse” games.
My suspicion is that spoofing will never stop. Just like drug dealing will never stop. Yes, you can lock up people for 100 years, but as long as the profit motivation remains…people will chase the money.
And, as long as the larger institutions can continue to receive “Deferred Prosecution Agreements” then these quasi-enforcement actions will be continued to be abused.
After all, when did a “slap on the wrist” ever work on a clever thief?
I know I’m late to the party with this blog entry but I learned about spoofing (and “iceberging”) boy Big Capital. It makes me wary of being a sole retain investor (fish?) in a sea of fat and greedy big sharks. I have a friend who uses 3 computers to track “market depth” so he can actually see all the bids and asks, even for substantial amounts. He states that the can read the contours of spoofing but that Big Capital is just in the process of outsmarting the retail investors by using bots to create cumulative larger orders that are then suddenly cancelled.
In the forex market 90% is spoofing..all they do is look to run stops 23 hours of the 24 hour of trading..I dont see banks closing moving around, to avoid regulars..
Hey Emmet, any updates on this jewel
https://www.sec.gov/news/press-release/2020-267
doesn’t seem to have stopped them at all.
Ha! The SEC finally came after Meir Barak. Looks like I need to immediately write a follow-up article.
That mother fucker Meir Barak hired a private investigator in Los Angeles to “intimidate” me. That stupid son of a bitch followed me around for several days and parked his shitty Ford Taurus in front of my house and just sat there acting innocent. It freaked my wife out. It only pissed me off. A hammer to his driver’s side window sent the cockroach back to LA. He never filed a police report, thankfully.
Fucking Meir is finally getting his.
Look forward for the update, it is amazing that guy would go to all those lengths to intimidate you, i am sure there is a legal process you can lean him on for that crap.
Holy moly. I had no idea people stoop so low to intimidate you.
That’s just the tip of the pis-yellow iceberg Mr. Doe. Long time readers of tradingschools have heard of much of the history of these termites and their shamshows targetting Emmett over these years. Over 15 lawsuits, email threats, more hired stalkers than just Meir. Fake mockup sites. IP address filtering on Trustpilot by Ross, etc., I’m sure this is not even the half of it. When sadly, the only site consistently calling out these frauds is tradingschools, because most all other forums and “ripoffreport” sites succumb and compromise to bribes and legal threats, or even get sponsored by these scams, which is pretty much the entire history of the traducation cesspool since the web internet age of trading began.
wow, I missed this. So Meir showed his true sordidness hiring a stalker, when before it seemed in your initial review, he was trying to be amicable and even entice you to into some promotional arrangement between tradenet and tradingschools. Props to you for getting that termite to return back to the log. Clever too, what is the stalker going to report to the police?, that he was hired to stalk and got a crack on the window pissing off the neighborhood like some vagrant? nice..
This is interesting but really you get a lot confused when it comes to technical matters like order flow.
You really think the futures markets are not manipulated in a big way? Look at last Friday if you think otherwise. I would not be surprised if both the POTUS and China were trying to manipulate markets at various points over the past year.
Also, all your articles on spoofing imply retail traders are the target but it is just as likely that HFT bots are the target too. Are retail traders active in the gold, crude, silver, etc markets? Those were the markets that the CFTC complaint talked about. I doubt they are in a big way. Also, how many of those retail traders are reading tape and book changes? Not very many. Mostly only semi-pros, pros, and HFT bots would look like at that.
I do think futures have capability for greater manipulation because the leverage and the lack of hedging. Stocks don’t offer the retail trader as much leverage and options have hedging capability.
Great response. I wanted to add a little extra.
In your response, you implied that “retail traders were less likely to be affected because they are trading in gold, crude, silver and these traders were less likely to be affected by tape and book changes.”
I disagree. The current trends in retail day trading software all place a higher emphasis on reading order flow. Some of these platforms include Jigsaw, Bookmap, Atas, Volfort, Delta, OrderFlows, etc. I have a very long list to work with, only a few named here. They all proclaim that “order flow” predicts price direction. But none of the platforms have a way to detect phony order flow. That is the problem. The phony order flow.
See you got it confused again there is no such thing as phony order flow because the order flow only refers to executed orders. The only exception is wash trading but purposeful wash trading is not common in regulated futures markets.
Order book changes are just that order book changes. It may or may not be useful but its not easy to read and I doubt most retail are reading it.
There is in my opinion very little retail trade in the scalpng context. There are ways to estimate it and it ia minimal. Now total retail trade may be more but in micro scalp not as much.
I would also add, for serious but developing traders, there’s a risk to reading your website because while you do a good job of exposing outright frauds– much more so then I knew that existed.
But for serious but developing traders, I think there’s a risk in reading this website because there’s a sloppiness when it comes to the CRAFT OF TRADING.
I think where you do your best is exposing the frauds and those who post fraudulent statements or make outlandish claims but when it comes to the craft of trading– there’s little to learn here. Your attitude goes beyond skeptical and you become a skeptic or simply try to make the most sensational journalism.
Also when you say “vendors claim that order flow predicts price direction” — again you fail to point out that without order flow most traders are relying on price alone.
Nobody said trading should be easy or that everything should come to those who don’t work for it. My point is that order flow is just data– just like price or technical analysis. Most cannot make it work but that doesn’t mean it “doesn’t work”. It doesn’t work for the masses because it cannot work for the lazy masses because if anything did then it would quit working.
Yes, I also offered one of those order flow software: none you mentioned. In my writing, I was clear that order flow was just one type of data that can help trading.
Now, I would say you were unfair to Bookmap (while I am no longer marketing– too many copycats– they are technically a competitor software) because they are just SOFTWARE vendor. However, I will agree with you that the BS they put out in their videos left me shaking my head, and I would be highly surprised if trade at all. Let me point out though, you were unfair because you did not tackle the specific ridiculous claims, which were numerous, they made but instead attacked them for not providing records– even though they were a software vendor.
The point I am making is that there may be sim traders out there who are working on trade craft or those who are developing software who are working on trade craft. One needs to distinguish that from the frauds but here everyone and everything related to trading is painted in the same negative way.
I could tell you how that one can detect retail flow. I am unsure of a way to use this an actual edge but that’s the point: you haven’t earned it. You don’t deserve it. That’s trade craft or craft of trading. Maybe one day I might find a way to use it as an edge.
But, yes I appreciate what you do in regards to exposing frauds and fraudulent records but also you cannot expect everyone to be willing to fork over their edges to a former con who is unwilling to even get basic details right.
I think you need to be careful to judge people according to their claims and also recognize some value in “trade craft”. For example, the NinjaTrader eco-system is full of creative trading ideas, tools, etc–yet you paint it with the same brush stroke.
And, if your line of reasoning is taken to the fullest extent– it goes straight to the CME because they are the ones who are producing products for traders. If a profit cannot be made then it eventually has to go back to them by your logic.
You might ask why your logic goes straight to the CME: there are several reasons.
So, really you should go straight to the CME and ask them why they have engineered and marketed defective and faulty product under the logic by which you judge everyone else or ask them for track record proof for retail trading or other trading styles. I think they will not comply.
Why bother with Ninjatrader ecosystem when you could go straight to the source?
Should futures have the additional warnings?
Warning:
Futures trading is risky.
CME offers advantaged access to select market participants through programs not generally viable for retail participants. The advantages include cost of transaction, speed of transaction, and may extend to market data.
CME Group as a public company has a fiduciary responsibility to generate as much income as possible for share holders through trading fees and other income generating activity. CME Group generates billions of dollars through these activities. These trading costs or frictions make many trading activities money losing propositions. In addition, due to intensive regulation for US participants, futures trading exchanges may not be generally competitive.
In addition, while spoofing is illegal and enforcement is aggressively pursued, CME refuses to implement simple market structural changes such as requiring posted bids and offers to be live for a minimum amount of time because CME’s advantaged customers rely on the ability to post bids and offers with minimal intention of filling them as a primary means of generating income.
CME Group has extensive marketing operations but refuses to post any data on retail trading profitability nor has it ever demonstrated its products can be profitability day traded with retail cost structure. CME Group markets aggressively to retail participants who are otherwise not able to trade other products due to specific regulations such as the PDT and the Commodity Exchange Act.
CME Group may change the rules in certain conditions with little forewarning or notice to benefit certain select market participants. These rules changes such as allowing prices to go negative may have extreme negative impact for retail traders.
While CME Group generates billions in revenue and has a fund to cover loses beyond the trading capital from certain members: retail trades may experience losses far beyond what it is in their brokerage account and are fully responsible for any losses that exceed those funds.
Participants should be highly aware of the risks of utilizing stop loss orders. Because CME products are highly leveraged and there are sophisticated participants, some participants may rely executing trade with the intention of triggering stops or large participants may pull liquidity at times and prices where stop runs are likely to occur.
—
If you aren’t willing to hold the “CME Group”, the root cause, the granddaddy of trading products to the same standards as other trading products, what does that make you?
As well, Emmett, do you really think your website has more or less value for traders then then the NinjaTrader ecosystem? Yet, you attack NinjaTrader ecosystem and for-that-matter entire trading software ecosystem.
Yes, you have exposed some big cons. Absolutely and for that we are thankful. But, 90% of the stuff you expose is bottom-of-the-barrel get-rich-quick crap that serious traders don’t even care about!
Addendum: I do structure much of trading around CME Group products and do like many aspects about those products and the access provided to retail traders. I am in no way supportive of regulation that would make trading more restrictive or less accessible for retail traders. As well, I have a generally positive opinion of CME Group products because of the transparency and fairness compared to other venues.
Of course, “reading and studying” tape requires looking at orderflow which you pooh-pooh and also technical analysis you dumped on too. As far as that goes, you would have to program your own software because you don’t believe in using software that isn’t backed by track records– none of which exist for general purpose software.
Look, being in the bottom 50% with method won’t get anyone to the top because by definition you have to get to the top tier with any method to make a profit. It does not matter what that method is. This concept is so trivial–yet many clearly don’t understand it. Because markets are efficient, you cannot make significant money being average with any method and that includes systems trading too.
But, there is a problem Emmett with your whole approach and philosophy. It is all based on “prove it to me then I will look at it”. But nobody develops edge that way and once an edge is developed nobody is going to share it with you that way– unless you write a nasty review on them or they made promises.
Now, your approach makes perfect sense when vendors are placing out claims that they make $x per day with a technique or putting out unverified track records. Yes, what you are doing makes sense and that’s where you can do some good work. I get a lot emails like that.
But, like I shared here earlier for a serious trader trying to develop an edge– your whole mindset is a huge risk and backwards because you are basically pessimistic on anything that a trader could use to develop an edge such as technical analysis or order flow while waiting for a “handout” from some vendor guru. It makes absolutely no sense.
I bet your spoofer contact used orderflow to help know when to spoof. Do you think they were just placing in huge offers without being aware of the flow? Sure, they were cheating but I would find it difficult to believe that they were not watching the order flow.
Calling me “backward” really stung. But when someone says something that stings…they are usually telling you something you internally know to be true, but are unwilling to accept the “sting” or “the truth” of the statement.
Fair enough. Perhaps there is a bit more about what I personally believe regarding what is an actual “edge.”
If you want, I can start posting some strategies (that contain an edge), and readers could perhaps use this for their own benefit. But man, I sure hate exposing what a hypocrite I truly am! Yes, I use some of the very stuff I shit on. Which is pretty funny.
You know Curtis, a true friend will never tell you what you want to hear, to make you happy. A true friend tells you what you need to hear. I am listening to you Curtis. Thank you.
If spoofing is illegal how come algos can do it?
It’s illegal for both stocks and futures, but for stocks…much more difficult to detect because of the disparate exchanges.
Stock trading in its current form, with zero commissions, is very interesting. What has happened is that “algo” companies have built their own infrastructure, which is essentially an intranet (private internet) that is able to trade stocks faster than the internet that the public is using.
So these algo trading companies have the advantage of speed. So when you enter an order for Google, they can “see” your order before it arrives to be executed. They are able to step in front of your trade to earn a tiny profit.
Yes, it sucks. And we are not getting the best prices when we trade equities, but the overall advantage is that they have eliminated commissions for us.
No free lunch.
Emmett that’s not exactly accurate either. The HFT liquidity firm is able to step in front of the resting best-market order because the broker is sending them the flow first: not because they are faster. They are selling them the flow. This goes back to the order flow which you pooh-pooh. It is safer to step in front of a small order then a large order. Market makers want to make money by flipping orders to earn the spread. They determined that it is safest to step in front of small orders like retail traders make.
So, they are willing to essentially pay for your orders.
The resting order at the exchange is really disadvantaged. Because if you can step in front of an order by minuscule fraction then they can simply hit the resting order if they are wrong. To be clear, the retail trader is theoretically always at par or advantaged in this scheme because the NBBO.
It is supposed to be kept fair by something called the NBBO– national best bid best offer. But, there is a concern the NBBO feed may be lagged. The algo firm is required to match the NBBO or better.
While some people claim the HFT broker relationship disadvantages customer orders, I do not think anyone has really proven it. I think during fast markets or where stop orders are needed then that’s more likely to disadvantage but you do get commission free trading.
Clearly there plenty of room for shenanigans and not enough transparency.
The NBBO rule is only applied to stocks. Why?
Stock trading is conducted over various venues and is highly disjointed. Whether they be dark pools, internal cross trading (WeBull), or through the traditional exchanges (NASDAQ), etc. The fragmented nature created price inefficiencies. As a result, HFT firms began exploiting these inefficiencies for profit. Prior to NBBO, brokers were under no obligation to execute at the best price (NBBO).
When the rule was enacted, HFT firms then began to develop private intranets which once again gave them an information advantage over the NBBO. This is why we have free trading…because all order flow is being sold to various execution venues that can execute at the NBBO and still eke out of a profit.
For a better discussion on the topic, I would recommend reading Flash Boys.
Now let’s talk about Futures trading through the CME Group…
With Futures trading, there is only a single trading venue, the CME Group. And since there is only a single trading venue, then the NBBO rule is not applicable.
Yes, it’s true that technically a Futures brokerage could sell order flow data. But since there is only a single trading venue, there is no advantage (at least that I am aware).
We have sort of slithered away from the original topic, which is larger players manipulating the markets by posting phony orders.
Yes, we would have to distinguish between “pay for order flow” HFT and HFT algos running on open market to be accurate.
But, look at my reply to Nadina down below because that’s I believe closer to the correct answer.
It is not illegal to pull or cancel large numbers of orders. It is only illegal if the intent is to manipulate the market.
It is would be easy for the exchanges to make a big impact on the situation by simply requiring all posted orders to remain active for a few seconds before a cancellation is processed. They could do the same for market orders which could be held, batched together, randomized, and executed together after a short micro-delay.
Basically, the whole reason spoofing exist is because the exchanges welcome one type of misinformation but draw the line at outright manipulation. The slower liquidity providers do not want to put any volume out because then market order HFT will target them.
I believe it is just as likely that manipulative spoofing was developed as a counter against aggressive HFT market-order oriented algos because if you read and study tape you can see them all the time. It is clear what is going on.
Oh, I got your email regarding Simon Jousef and the CFTC enforcement and settlement.
I was subpoenaed on this case on April 3, 2019 (view subpoena here) and provided a considerable amount of evidence to CFTC investigators. The video evidence was particularly damning. It’s funny that these trading room scammers say all manner of illegal stuff in their chat rooms and believe that nobody is recording them.
The enforcement action and settlement finally concluded on April 23, 2020. You can read the settlement here.
I have already completed my application for a whistleblower award. But my lawyers have instructed me to keep quiet about any awards. So I will heed their advice on that.
But I can tell you that the awards are 10% to 30% of the enforcement action. You can do the math.
I know that you are also one of the victims. But if my memory serves me correctly, you also provided evidence to CFTC investigators. Therefore, you SHOULD immediately file for a whistleblower award. You can file for an award through the following link: CFTC Whistleblower Award Application.
Does the CFTC pay for quality information? Absolutely. In fact, since 2014, they have awarded over $120 million.
Being a bounty hunter has its benefits. But it’s dangerous work. You get sued a lot, which is a minor hassle (and these are the nice people). But some of these characters are really nasty. I had a guy in Alabama hire two guys in New Jersey to fly to San Diego and have me done away with. The two characters had both been recently released from prison in yet another murder for hire plot. But the guy in Alabama made a fatal mistake…he paid these two characters $50k in advance payment, which of course they promptly spent, and then called me on the telephone to let me know that they had decided to not murder me.
The whole episode was actually pretty comical. Can you imagine getting a phone call, such as this? I initially didn’t believe it. And then they sent me screenshots of the airline tickets and hotel reservations. Then I said, “thanks for not murdering me.”
Please spend some time on TiKTok.
Trade room hustlers, discord traders, and indicator sharks are rampant on there . It’s an utter cesspool of carnival clowns and bearded candle stick patterns. You should have no problem finding any, use search key #fintok
The correct answer is because posting orders that do not fill does not constitute “illegal spoofing”. There has to be an intention to manipulate the market. The algos that post “phantom” orders presumably are not executing opposite side orders so they are not illegal. It is known that many of the resting orders in futures market aren’t really there.
The exchange even has order types like “peg orders” that can rest/post orders at some pre-defined offset.
It is likely why the above article references opening multiple accounts. In the order posting account, they do not execute any opposite side orders so it is not easy to prove there was an intent to spoof.
Of course, it would be very easy to get rid of spoofing by simply requiring any posted orders to be active for a minimum time for they are cancelled but all the exchanges are highly dependent on high frequency trade today which predominately use such orders.
Very interesting! Many thanks