John Bates
09-15-2010 05:41 PM
Strange things are happening in the markets! As you know ifyou've been following this blog, quite a few scares, horrors and apparitionshave been sighted in equities, futures, FX and oil markets over the last fewmonths. 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 appearedto scare participants on the CME (readmore about it here). For 6 minutes on Tuesday unexplained orders, thatcould have been caused by a �fat finger� error or an �algo gone wild�, causedCME to use Rule 587 which gives them powers �including without limitation,closing the market, deleting bids and offers, and/or suspending new bids andoffers�. So although they weren't sure what was going on - the CME were atleast able to respond.
�
Another report this week shows how those involved in allegedmarket abuse are starting to be unmasked. Last week I wrote a blog postingcalled �Algos Can Get Stuffed� which was also featured on the Tabb Forum. In itI talked about the possibility of firing orders into the market with theintention of misleading the market or slowing the market down - and even howsome link this phenomenon with the flash crash. This week a trading firm calledTrillium was fined by FINRA for using illegal trading practices (readmore about it here). �Trilliumwas fined $1m for sending orders aimed at deceiving investors. Nine tradersentered buy and sell orders in patterns that aimed to manipulate the prices ofinstruments. And they did this 46,000 times! This �layering� enabled Trilliumto trade at a profit once they'd manipulated the price.
�
These 2 incidents show that awareness of the problems we'vebeen writing about on this blog have increased radically. Trading venues aremore aware that algos gone wild and fat fingers can cause market panics andmanipulate prices. Regulators are more aware that high frequency trading can beused as a weapon for market manipulation.
�
But we can't rest on our laurels. Maybe we got lucky thistime. As market data volumes continue to increase we need to have more advancedcapabilities to detect problems and abuse as it's happening, and recommendactions to take in response. Let's ensure the Mystery Machine is fitted withthe latest real-time surveillance equipment. Let's enable the gang to unmaskmore villains at the haunted �high frequency manor� inspiring the legendaryoutburst of �I would've got away with it if it wasn't for you pesky kids....�