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| {{short description|Form of market manipulation}} | |||
| {{Financial markets}} | {{Financial markets}} | ||
| In finance, '''quote stuffing''' refers to a form of ]<ref> |
In finance, '''quote stuffing''' refers to a form of ]<ref>{{cite web | title=Quote Stuffing Definition & Example | website=InvestingAnswers | url=http://www.investinganswers.com/financial-dictionary/stock-market/quote-stuffing-6320 | access-date=2019-08-27 | quote=Quote stuffing occurs when traders place a lot of buy or sell orders on a security and then cancel them immediately afterward, thereby manipulating the market price of the security. Manipulating the price of shares in order to benefit from the distortions in price is illegal.}}</ref> employed by ] (HFT) that involves quickly entering and withdrawing a large number of orders in an attempt to flood the market.<ref>{{cite web |url=http://www.investopedia.com/terms/q/quote-stuffing.asp |title=Quote Stuffing Definition |publisher=Investopedia |access-date=2014-08-22}}</ref> This can create confusion in the market and trading opportunities for high-speed algorithmic traders.<ref>{{cite web|title=Quote Stuffing|url=http://www.nasdaq.com/investing/glossary/q/quote-stuffing|website=nasdaq.com|publisher=NASDAQ|access-date=10 September 2014}}</ref> The term is relatively new to the financial market lexicon and was coined by ] in studies on HFT behavior during the ].<ref>{{cite news |last1=Spicer |first1=Jonathan |last2=Lash |first2=Herbert |date=September 7, 2010 |title=SEC probes "quote stuffing" practices: Schapiro |url=https://www.reuters.com/article/us-sec-trades-idUSTRE6863QL20100907 |newspaper=Reuters |access-date=November 7, 2014}}</ref> | ||
| By quote stuffing, trading systems delay price quotes while the stuffing is occurring, simply by placing and canceling orders at a rate that substantially surpasses the bandwidth of market data feed lines. The orders pile up in buffers, and the delay (increased ]) lasts until the buffer drains. Trading systems slow down a direct exchange feed whenever they want, and the phantom orders do not need to be in a particular stock; they can be in any of the securities that cohabit the particular price (market data) feed. For example, phantom orders at the rate of over about 10,000 messages/second, even for fractions of a second, delay the NYSE's CQS feeds.<ref>{{cite web |publisher=Nanex |url=http://www.nanex.net/FlashCrash/FlashCrashAnalysis_LOD.html |title=Latency On Demand? |date=August 23, 2010}}</ref> | By quote stuffing, trading systems delay price quotes while the stuffing is occurring, simply by placing and canceling orders at a rate that substantially surpasses the bandwidth of market data feed lines. The orders pile up in buffers, and the delay (increased ]) lasts until the buffer drains. Trading systems slow down a direct exchange feed whenever they want, and the phantom orders do not need to be in a particular stock; they can be in any of the securities that cohabit the particular price (market data) feed. For example, phantom orders at the rate of over about 10,000 messages/second, even for fractions of a second, delay the ]'s CQS feeds.<ref>{{cite web |publisher=Nanex |url=http://www.nanex.net/FlashCrash/FlashCrashAnalysis_LOD.html |title=Latency On Demand? |date=August 23, 2010}}</ref> | ||
| Exchanges profit by selling higher-capacity feeds to HFT traders, which |
Exchanges profit by selling higher-capacity feeds to HFT traders, which disincentivizes self-regulation that could prevent the quote stuffing.<ref>{{cite web |publisher=Themis Trading |url=http://blog.themistrading.com/quote-stuffing-the-gateway-how-exchanges-are-profiting-from-manipulative-acts/ |title=Quote Stuffing The Gateway – How Exchanges Are Profiting From Manipulative Acts |date=November 12, 2014}}</ref> | ||
| Quote stuffing happens frequently – when 6,000 replacement orders for one stock are crammed into a second, each order is valid for less time than it takes for the news of the order (traveling at close to the speed of light) to reach anyone not at the exchange; no normal person can execute a trade against the phantom order.<ref name="QSTS">{{cite web |publisher=Nanex |url=http://www.nanex.net/aqck2/4670.html |title=The Quote Stuffing Trading Strategy |date=August 15, 2014}}</ref> | |||
| ==Debate== | |||
| ⚫ | |||
| == Regulatory changes and enforcement == | |||
| ===HFT-associated voices=== | |||
| Zachary David, who works at a trading firm that uses “automated, algorithmic, quantitative” strategies,<ref>{{cite web |url=http://zacharydavid.com/about/ |title=About Zachary David |publisher=Zachary David |accessdate=October 28, 2014}}</ref> writes that when a person or an ] rapidly places and cancels an order, it is often called “flickering”, and that flickering is largely caused by ]. Without safeguards in place, unwanted behavior can occur.<ref>{{cite web |url=http://zacharydavid.com/2014/04/on-hft-part-ii-bugs-features-and-aggressive-incompetence/ |title=On HFT (Part II): Bugs, Features, and Aggressive Incompetence |publisher=Zachary David Blog |accessdate=August 22, 2014}}</ref> | |||
| ⚫ | In 2010, the ] (SEC) began looking at the practice of quote stuffing in relation to the Flash Crash. The agency started assessing whether the practice violated "existing rules against fraudulent or other improper behavior" or caused a disadvantage through distorted stock prices. SEC chairman Mary Schapiro said the agency would assess whether traders must hold orders open for minimum periods of time and other changes to financial trading.<ref name=wsj>{{cite news|last1=Holzer|first1=Jessica|last2=Philbin|first2=Brett|title=SEC Is Looking at 'Quote Stuffing'|url=https://online.wsj.com/articles/SB10001424052748704358904575477921338633984|access-date=10 September 2014|newspaper=Wall Street Journal|date=7 September 2010}}</ref> No such regulations have been enacted (except in Italy<ref name=Italy>{{cite news | ||
| Chris Stucchio, who worked for Mesh Capital where he “devised and implemented strategies for high-frequency trading”,<ref>{{cite web |url=http://www.chrisstucchio.com/work/resume.pdf |title=Chris Stucchio's resume |publisher=Chris Stucchio |accessdate=October 28, 2014}}</ref> wrote in April 2014 on the topic. He argued on his blog that the practice known as quote stuffing may be an accidental “software bug” and a “buy high, sell low” trading strategy.<ref>{{cite web |url=http://www.chrisstucchio.com/blog/2014/quote_stuffing_is_a_software_bug.html |title=High Frequency Trader’s ‘Quote Stuffing’ is a Software Bug |publisher=Chris Stucchio Blog |accessdate=August 22, 2014}}</ref> Stucchio suggested that a ] who engages in quote stuffing “puts his own capital at risk” and increases “liquidity” for buy side ]. | |||
| |url= http://www.dw.de/italy-first-to-slap-tax-on-high-speed-stock-trading/a-17060424 | |||
| |title= Italy first to slap tax on high speed stock trading | |||
| |publisher= ] | |||
| |author= AFP, Reuters | |||
| |date = 2013-09-02 | |||
| |access-date=2013-09-03 | |||
| }}</ref><ref name=Italia>{{cite news | |||
| |url= http://www.ft.com/cms/s/0/378dcace-117e-11e3-8321-00144feabdc0.html | |||
| |title= Italy introduces tax on high-speed trade and equity derivatives | |||
| |newspaper= ] | |||
| |first= Philip |last= Stafford | |||
| |date = 2013-09-01 | |||
| |access-date=2013-09-03 | |||
| |url-access=registration}}</ref>). | |||
| == Reception == | |||
| ===Independent voices=== | |||
| Due to its potential effect on the 2010 Flash Crash, quote stuffing has been debated by financial researchers, industry advocates and media outlets, including in '']'', ''Wall Street Journal'', '']'', '']'', and '']''.<ref name=foxbusiness>{{cite web | url=http://video.foxbusiness.com/v/4327881/what-is-quote-stuffing/?#sp=show-clips | title=What is 'Quote Stuffing?' | publisher=Fox Business | date=2 September 2010 | access-date=1 September 2015}}</ref><ref name=wsj /><ref name=cbsnews>{{cite web | url=http://www.cbsnews.com/news/market-rigging-is-nothing-new/ | title=Market rigging is nothing new | publisher=CBS Money Watch | date=31 March 2014 | access-date=1 September 2015 | author=Mirhaydari, Anthony}}</ref><ref>{{cite web | url=http://www.risk.net/risk-magazine/news/1811246/quote-stuffing-blame-flash-crash-berman-insists | title=Quote stuffing not to blame for flash crash, Berman insists | publisher=Risk.net | date=27 October 2010 | access-date=1 September 2015 | author=Pengelly, Mark}}</ref><ref>{{cite web | url=https://dealbook.nytimes.com/2010/09/02/s-e-c-said-to-look-at-quote-stuffings-role-in-crash/?_r=0 | title=S.E.C. Said to Look at Effects of Quote Stuffing | publisher=DealBook | date=2 September 2010 | access-date=1 September 2015}}</ref> Some have noted that the release of the ] book '']'' has helped to initiate the debate on high-frequency trading, including the tactics of ], ] and quote stuffing.<ref>{{cite web | url=http://www.bloombergview.com/articles/2014-04-01/weil-on-finance-fbi-hops-on-michael-lewis-bandwagon | title=Weil on Finance: FBI Hops on Michael Lewis Bandwagon | publisher=Bloomberg View | date=1 April 2014 | access-date=27 August 2015 | author=Weil, Jonathan}}</ref> The book details the rise of high-frequency trading in the US market, which has caused financial regulators to clamp down on issues related to quote stuffing.<ref>{{cite news | url=http://www.huffingtonpost.com/2014/03/31/fbi-high-speed-trading_n_5065622.html | title=FBI Investigating High-Frequency Traders: WSJ | work=Huffington Post | date=31 March 2014 | access-date=27 August 2015 | author=Bradford, Harry}}</ref><ref>{{cite news | url=https://www.theguardian.com/business/2014/jun/07/inside-murky-world-high-frequency-trading | title=Fast money: the battle against the high frequency traders | newspaper=The Guardian | date=7 June 2014 | access-date=27 August 2015 | author=Smith, Andrew}}</ref> | |||
| Investor and Dallas Mavericks owner ] addressed quote stuffing on his blog as a deliberate practice intended to deceive other participants. “There is a problem in the markets known as quote stuffing. This is where HFT create quotes that are supposed to trick other algorithms, traders, investors into believing there is a true order available to be hit. In reality those are not real orders. They are decoys. (...) And not only that, it creates such a huge volume of information flow that it makes it more expensive for everyone else to process that information, which in turn slows them down and puts them further at a disadvantage.”<ref>{{cite web |url=http://blogmaverick.com/2014/04/03/the-idiots-guide-to-high-frequency-trading/ |title=The Idiot's Guide to High-Frequency Trading |last=Cuban |first=Mark |date=April 3, 2014 |website=blogmaverick.com |publisher=Mark Cuban |accessdate=October 28, 2014}}</ref> | |||
| In September 2010, '']'' reported that Trillium Capital had received a $1 million fine by the ] for trading strategies that were considered quote stuffing and market manipulation.<ref>{{cite web | url=https://blogs.wsj.com/marketbeat/2010/09/13/high-frequency-trader-fined-quote-stuffing-crackdown-afoot/ | title=High Frequency Trader Fined: 'Quote-Stuffing' Crackdown Afoot? | publisher=Wall Street Journal | work=MarketBeat | date=13 September 2010 | access-date=1 September 2015}}</ref><ref>{{cite web | url=http://www.businessinsider.com/huge-first-high-frequency-trading-firm-is-charged-with-quote-stuffing-and-manipulation-2010-9 | title=HUGE: First High Frequency Trading Firm Is Fined For Quote Stuffing And Manipulation | website=Business Insider | date=13 September 2010 | access-date=1 September 2015 | author=Comstock, Courtney}}</ref> The Financial Industry Regulatory Authority later clarified that the fine was for layering and market manipulation.<ref>{{cite news | url=http://blogs.reuters.com/felix-salmon/2010/09/14/trillium-wasnt-quote-stuffing/ | archive-url=https://web.archive.org/web/20100917080831/http://blogs.reuters.com/felix-salmon/2010/09/14/trillium-wasnt-quote-stuffing/ | url-status=dead | archive-date=17 September 2010 | title=Trillium wasn't quote-stuffing | work=Reuters | date=14 September 2010 | access-date=1 September 2015 | author=Salmon, Felix}}</ref> | |||
| ===Academic research=== | |||
| ⚫ | Diaz and Theodoulidis presented analysis contrary to the claim that HFT firms use the tactic to provide liquidity. It was rather shown that the potentially abusive and manipulative behavior known as quote stuffing is able to increase the gap of best bid and ask prices, thereby increasing costs for ordinary investors. The researchers concluded that “it is possible for a trader to profit by artificially creating latencies in trading data feeds that would make arbitrage possible by taking advantage of the HFT induced price differences between markets.”<ref>{{cite journal |last=Diaz |first=David |last2=Theodoulidis |first2=Babis |date=January 10, 2012 |title=Financial Markets Monitoring and Surveillance: A Quote Stuffing Case Study | |
||
| ⚫ | Quote stuffing is often described as a deliberate tactic to gain an unfair advantage over slower participants by flooding the market with large quantities of non-bona fide orders. HFT industry people argue that the phenomenon could be a software error. HFT insiders refer to quote stuffing as “flickering”, which is caused by ]. It is suggested that investors who engage in quote stuffing "put their own capital at risk" and increases "liquidity" for buy side ]. | ||
| ==Regulatory action== | |||
| ⚫ | In 2010, the ] (SEC) began looking at the practice to |
||
| ⚫ | Diaz and Theodoulidis presented analysis contrary to the claim that HFT firms use the tactic to provide liquidity. It was rather shown that the potentially abusive and manipulative behavior known as quote stuffing is able to increase the gap of best bid and ask prices, thereby increasing costs for ordinary investors. The researchers concluded that “it is possible for a trader to profit by artificially creating latencies in trading data feeds that would make arbitrage possible by taking advantage of the HFT induced price differences between markets.”<ref>{{cite journal |last=Diaz |first=David |last2=Theodoulidis |first2=Babis |date=January 10, 2012 |title=Financial Markets Monitoring and Surveillance: A Quote Stuffing Case Study |ssrn=2193636 }}</ref> Researchers also found that more than 74% of U.S. listed equity securities received at least one quote stuffing event during the 2010 Flash Crash.<ref>{{cite journal | ssrn=1958281 | title=Quote Stuffing | date=22 March 2014 | author1=Egginton, Jared F. | author2=Van Ness, Bonnie F. | author3=Van Ness, Robert A.}}</ref> | ||
| On June 16, 2014, Nasdaq posted a disciplinary action against the high-frequency trading firm ] due to several rule violations that included quote stuffing. Citadel was found to have “failed to prevent the strategy from sending millions of orders to the exchanges with few or no executions.”<ref name="nasdaq">{{cite web |url=https://www.nasdaqtrader.com/content/marketregulation/NASDAQ/DisciplinaryActions/CDRG_NQ_2014.pdf |date=June 16, 2014 |title=Notice of Acceptance of Letter of Acceptance, Waiver and Consent |publisher=NASDAQ Stock Market LLC |accessdate=October 27, 2014 }}</ref> It was further pointed out that Citadel “sent multiple, periodic bursts of order messages, at 10,000 orders per second, to the exchanges. This excessive messaging activity, which involved hundreds of thousands of orders for more than 19 million shares, occurred two to three times per day.”<ref name="nasdaq" /> | |||
| ⚫ | == See also == | ||
| While Citadel did not admit or deny wrongdoing, it accepted the fine of $800,000 imposed by U.S. regulators for trading violations. The ] was ordered to pay $420,000 of the fine to Nasdaq, $160,000 to NYSE, $170,000 to BATS, and $50,000 to FINRA. According to John McCrank of Reuters, the sanctions came as regulators clamp down on issues related to high-frequency trading that had received greater scrutiny since the release of the ] book '']''.<ref>{{cite news |last=McCrank |first=John |date=August 5, 2014 |title=Citadel fined $800,000 by U.S. regulators for trading violations |url=http://www.reuters.com/article/2014/08/05/citadel-fine-finra-idUSL2N0QB2SE20140805 |newspaper=Reuters |accessdate=October 27, 2014 }}</ref> | |||
| ⚫ | ==See also== | ||
| *] | *] | ||
| *] | *] | ||
| Line 33: | Line 42: | ||
| *] | *] | ||
| *] | *] | ||
| *], a similar concept in network security | |||
| ==References== | == References == | ||
| {{reflist}} | |||
| <references/> | |||
| ==External links== | == External links == | ||
| * {{cite web | title=Quote Stuffing Definition | website=Financial Times Lexicon | date=2015-10-06 | url=http://lexicon.ft.com/Term?term=quote-stuffing | archive-url=https://web.archive.org/web/20151006182730/http://lexicon.ft.com/Term?term=quote-stuffing | archive-date=2015-10-06 | url-status=unfit | access-date=2019-08-27}} | |||
| *http://lexicon.ft.com/Term?term=quote-stuffing “Quote Stuffing” | |||
| {{stock market}} | {{stock market}} | ||
Latest revision as of 22:07, 4 June 2024
Form of market manipulation
In finance, quote stuffing refers to a form of market manipulation employed by high-frequency traders (HFT) that involves quickly entering and withdrawing a large number of orders in an attempt to flood the market. This can create confusion in the market and trading opportunities for high-speed algorithmic traders. The term is relatively new to the financial market lexicon and was coined by Nanex in studies on HFT behavior during the 2010 Flash Crash.
By quote stuffing, trading systems delay price quotes while the stuffing is occurring, simply by placing and canceling orders at a rate that substantially surpasses the bandwidth of market data feed lines. The orders pile up in buffers, and the delay (increased latency) lasts until the buffer drains. Trading systems slow down a direct exchange feed whenever they want, and the phantom orders do not need to be in a particular stock; they can be in any of the securities that cohabit the particular price (market data) feed. For example, phantom orders at the rate of over about 10,000 messages/second, even for fractions of a second, delay the NYSE's CQS feeds. Exchanges profit by selling higher-capacity feeds to HFT traders, which disincentivizes self-regulation that could prevent the quote stuffing.
Quote stuffing happens frequently – when 6,000 replacement orders for one stock are crammed into a second, each order is valid for less time than it takes for the news of the order (traveling at close to the speed of light) to reach anyone not at the exchange; no normal person can execute a trade against the phantom order.
Regulatory changes and enforcement
In 2010, the Securities and Exchange Commission (SEC) began looking at the practice of quote stuffing in relation to the Flash Crash. The agency started assessing whether the practice violated "existing rules against fraudulent or other improper behavior" or caused a disadvantage through distorted stock prices. SEC chairman Mary Schapiro said the agency would assess whether traders must hold orders open for minimum periods of time and other changes to financial trading. No such regulations have been enacted (except in Italy).
Reception
Due to its potential effect on the 2010 Flash Crash, quote stuffing has been debated by financial researchers, industry advocates and media outlets, including in Fox Business, Wall Street Journal, CBS Money Watch, RISK, and The New York Times. Some have noted that the release of the Michael Lewis book Flash Boys: A Wall Street Revolt has helped to initiate the debate on high-frequency trading, including the tactics of spoofing, layering and quote stuffing. The book details the rise of high-frequency trading in the US market, which has caused financial regulators to clamp down on issues related to quote stuffing.
In September 2010, Business Insider reported that Trillium Capital had received a $1 million fine by the Financial Industry Regulatory Authority for trading strategies that were considered quote stuffing and market manipulation. The Financial Industry Regulatory Authority later clarified that the fine was for layering and market manipulation.
Quote stuffing is often described as a deliberate tactic to gain an unfair advantage over slower participants by flooding the market with large quantities of non-bona fide orders. HFT industry people argue that the phenomenon could be a software error. HFT insiders refer to quote stuffing as “flickering”, which is caused by feedback loops. It is suggested that investors who engage in quote stuffing "put their own capital at risk" and increases "liquidity" for buy side investors.
Diaz and Theodoulidis presented analysis contrary to the claim that HFT firms use the tactic to provide liquidity. It was rather shown that the potentially abusive and manipulative behavior known as quote stuffing is able to increase the gap of best bid and ask prices, thereby increasing costs for ordinary investors. The researchers concluded that “it is possible for a trader to profit by artificially creating latencies in trading data feeds that would make arbitrage possible by taking advantage of the HFT induced price differences between markets.” Researchers also found that more than 74% of U.S. listed equity securities received at least one quote stuffing event during the 2010 Flash Crash.
See also
- Algorithmic trading
- Feedback loop
- High-frequency trading
- Market manipulation
- Software bug
- Flash crash
- Denial of service, a similar concept in network security
References
- "Quote Stuffing Definition & Example". InvestingAnswers. Retrieved 2019-08-27.
Quote stuffing occurs when traders place a lot of buy or sell orders on a security and then cancel them immediately afterward, thereby manipulating the market price of the security. Manipulating the price of shares in order to benefit from the distortions in price is illegal.
- "Quote Stuffing Definition". Investopedia. Retrieved 2014-08-22.
- "Quote Stuffing". nasdaq.com. NASDAQ. Retrieved 10 September 2014.
- Spicer, Jonathan; Lash, Herbert (September 7, 2010). "SEC probes "quote stuffing" practices: Schapiro". Reuters. Retrieved November 7, 2014.
- "Latency On Demand?". Nanex. August 23, 2010.
- "Quote Stuffing The Gateway – How Exchanges Are Profiting From Manipulative Acts". Themis Trading. November 12, 2014.
- "The Quote Stuffing Trading Strategy". Nanex. August 15, 2014.
- ^ Holzer, Jessica; Philbin, Brett (7 September 2010). "SEC Is Looking at 'Quote Stuffing'". Wall Street Journal. Retrieved 10 September 2014.
- AFP, Reuters (2013-09-02). "Italy first to slap tax on high speed stock trading". Deutsche Welle. Retrieved 2013-09-03.
{{cite news}}:|author=has generic name (help) - Stafford, Philip (2013-09-01). "Italy introduces tax on high-speed trade and equity derivatives". The Financial Times. Retrieved 2013-09-03.
- "What is 'Quote Stuffing?'". Fox Business. 2 September 2010. Retrieved 1 September 2015.
- Mirhaydari, Anthony (31 March 2014). "Market rigging is nothing new". CBS Money Watch. Retrieved 1 September 2015.
- Pengelly, Mark (27 October 2010). "Quote stuffing not to blame for flash crash, Berman insists". Risk.net. Retrieved 1 September 2015.
- "S.E.C. Said to Look at Effects of Quote Stuffing". DealBook. 2 September 2010. Retrieved 1 September 2015.
- Weil, Jonathan (1 April 2014). "Weil on Finance: FBI Hops on Michael Lewis Bandwagon". Bloomberg View. Retrieved 27 August 2015.
- Bradford, Harry (31 March 2014). "FBI Investigating High-Frequency Traders: WSJ". Huffington Post. Retrieved 27 August 2015.
- Smith, Andrew (7 June 2014). "Fast money: the battle against the high frequency traders". The Guardian. Retrieved 27 August 2015.
- "High Frequency Trader Fined: 'Quote-Stuffing' Crackdown Afoot?". MarketBeat. Wall Street Journal. 13 September 2010. Retrieved 1 September 2015.
- Comstock, Courtney (13 September 2010). "HUGE: First High Frequency Trading Firm Is Fined For Quote Stuffing And Manipulation". Business Insider. Retrieved 1 September 2015.
- Salmon, Felix (14 September 2010). "Trillium wasn't quote-stuffing". Reuters. Archived from the original on 17 September 2010. Retrieved 1 September 2015.
- Diaz, David; Theodoulidis, Babis (January 10, 2012). "Financial Markets Monitoring and Surveillance: A Quote Stuffing Case Study". SSRN 2193636.
{{cite journal}}: Cite journal requires|journal=(help) - Egginton, Jared F.; Van Ness, Bonnie F.; Van Ness, Robert A. (22 March 2014). "Quote Stuffing". SSRN 1958281.
{{cite journal}}: Cite journal requires|journal=(help)
External links
- "Quote Stuffing Definition". Financial Times Lexicon. 2015-10-06. Archived from the original on 2015-10-06. Retrieved 2019-08-27.