How the Stock Market Is Rigged, According to a Robo-Trading Whistleblower [ #Quant ]

Source: Motherboard via BlackListedNews
Date: 11/13/2013
By Alec Liu

“If you’re on Wall Street, you would just assume that you’re being ripped off, unless you were the one doing the ripping off,” says Dave Lauer, who has helped build robotic systems at top firms like Citadel.

This is the opening of The Wall Street Code, a new documentary on the mysterious and sometimes incomprehensible world of high frequency trading produced by Backlight, a Dutch public broadcasting company. The focus of the documentary isn’t on Lauer, who has testified as an expert at a Senate Committee Hearing on HFT, but on Haim Bodek, a "genius" algorithm architect who dared to break Wall Street’s notorious omerta, the industry’s unwritten rule of silence and secrecy.
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How Quote Stuffing Stuffs the Retail Investor

On July 5, 2011 the capacity of the CQS (consolidated quote system used by U.S. stock exchanges) was increased by 33 percent to 1 million quotes a second, which was immediately filled by high frequency trading systems. According to Nanex, a company which provides the NxCore data feed and has done forensic analysis of exchange data for such events as the May 6, 2010 "flash crash", the practice of "quote stuffing", or placing a large volume of orders and then immediately cancelling them, is used by high frequency trading systems to slow down the quotes which human traders (or even some algorithmic trading systems) see on their computer screens/data feeds while the high frequency trading systems with their co-location advantage have access to the actual real time data. This disadvantages the "screen traders", investors or non-HFT algorithmic traders.

In the following video segment, Melissa Lee interviews Eric Hunsader of Nanex on the issue:

One possible solution to this problem of quote stuffing is actually presented by one of the floor traders in the interview segment: simply place a fee on quotes placed over a certain limit each day as the European exchanges do.  Hunsader of Nanex agrees that this would immediately fix the quote stuffing problem.

Read more from CNBC

Wall Street: The Speed Traders by 60 minutes, which first aired in October of 2010, is a great overview of high frequency trading. They also cover the flash crash.



How Speed Traders are Changing Wall Street