Strange things are happening in the markets! As you know if
you’ve been following this blog, quite a few scares, horrors and apparitions
have been sighted in equities, futures, FX and oil markets over the last few
months. But fortunately the Mystery Machine has rolled into town and Scooby,
Shaggy and the gang are investigating…
The latest spooky mystery is “phantom orders” that appeared
to scare participants on the CME (read
more about it here). For 6 minutes on Tuesday unexplained orders, that
could have been caused by a “fat finger” error or an “algo gone wild”, caused
CME to use Rule 587 which gives them powers “including without limitation,
closing the market, deleting bids and offers, and/or suspending new bids and
offers”. So although they weren’t sure what was going on – the CME were at
least able to respond.
Another report this week shows how those involved in alleged
market abuse are starting to be unmasked. Last week I wrote a blog posting
called “Algos Can Get Stuffed” which was also featured on the Tabb Forum. In it
I talked about the possibility of firing orders into the market with the
intention of misleading the market or slowing the market down – and even how
some link this phenomenon with the flash crash. This week a trading firm called
Trillium was fined by FINRA for using illegal trading practices (read
more about it here). Trillium
was fined $1m for sending orders aimed at deceiving investors. Nine traders
entered buy and sell orders in patterns that aimed to manipulate the prices of
instruments. And they did this 46,000 times! This “layering” enabled Trillium
to trade at a profit once they’d manipulated the price.
These 2 incidents show that awareness of the problems we’ve
been writing about on this blog have increased radically. Trading venues are
more aware that algos gone wild and fat fingers can cause market panics and
manipulate prices. Regulators are more aware that high frequency trading can be
used as a weapon for market manipulation.
But we can’t rest on our laurels. Maybe we got lucky this
time. As market data volumes continue to increase we need to have more advanced
capabilities to detect problems and abuse as it’s happening, and recommend
actions to take in response. Let’s ensure the Mystery Machine is fitted with
the latest real-time surveillance equipment. Let’s enable the gang to unmask
more villains at the haunted “high frequency manor” inspiring the legendary
outburst of “I would’ve got away with it if it wasn’t for you pesky kids….”
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