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Monday, September 13, 2010

FINRA:Trillium HFT Fine

FINRA has fined Trillium for "using an illicit high frequency trading strategy."

"WASHINGTON — The Financial Industry Regulatory Authority (FINRA) today announced that it has censured and fined New York-based Trillium Brokerage Services, LLC, $1 million for using an illicit high frequency trading strategy and related supervisory failures. Trillium, through nine proprietary traders, entered numerous layered, non-bona fide market moving orders to generate selling or buying interest in specific stocks. By entering the non-bona fide orders, often in substantial size relative to a stock's overall legitimate pending order volume, Trillium traders created a false appearance of buy- or sell-side pressure.

This trading strategy induced other market participants to enter orders to execute against limit orders previously entered by the Trillium traders. Once their orders were filled, the Trillium traders would then immediately cancel orders that had only been designed to create the false appearance of market activity. As a result of this improper high frequency trading strategy, Trillium's traders obtained advantageous prices that otherwise would not have been available to them on 46,000 occasions. Other market participants were unaware that they were acting on the layered, illegitimate orders entered by Trillium traders."

In case this isn't clear, it seems that what Trillium was doing was trying to induce other market participants to react to their orders.  In other words, Trillium might submit a bid a few cents below the current best bid for a large number of shares, expecting that other market participants (probably other HFT algos) would see this bid and either lift the current offer, or improve the current best bid.  Trillium would be waiting on the other side of the market with a sell order - which is the one they really wanted to execute all along.  The buy orders, although it's possible they could have been executed, were never intended to be executed, and are referred to by FINRA as "non-bona fide."

There's a big problem with Trillium's strategy:  it's illegal.  It's called market manipulation, and they got bagged for it.    Ironically, most of the same people who are/will be happy that Trillium is getting punished for this behavior would also be happy that the participants who Trillium was trying to fool got fooled.  In other words, it's been made quite clear that the Populace At Large does not like the trend of traders, be they high frequency (moreso, lately, obviously) or low frequency, reacting to publicly displayed quotations by changing their own quotes. or lifting bids / hitting offers in response to publicly displayed quotes.  Those are the very traders Trillium was trying to (illegally) take advantage of.

-KD

6 comments:

Cetamua said...

Yup! I believe the technical term describing Trillium's behavior is "quote stuffing".

http://www.zerohedge.com/article/revisiting-may-6-how-quote-stuffing-made-flash-crash-far-more-severe-it-should-have-been

http://www.zerohedge.com/article/do-it-yourself-latency-arbitrage-how-hfts-can-manipulate-nbbo-whim-courtesy-nyse-quote-stuff

Kid Dynamite said...

no - it's very much NOT quote stuffing. This is an important point, because I know that so many people learned everything they know about HFT from Zero Hedge.

quote stuffing is the repeated entering and canceling of tens of thousands of orders, which according to ZH is intended to slow down the system.

Trillium's activity is also known as "spoofing."

trom said...

This happens every day in hundreds and hundreds of stocks (and other markets). And its been around for years. I'm kind of torn on it. This isn't really much like quote stuffing at all. Yes, a spoofer is altering the order book, but his orders ARE real orders.

To go further down the rabbit hole, I know guys who will actively look for spoofers, wait for them to get too big/close to the market, and hit them for all their size. The other trader will then attempt to "spoof the spoofer" via a held bid/offer or filling in the limit book, and get him to puke. Who's the bad guy there?

As recently as a couple months ago there was a program that would come in and spoof absolutely enormous size 2-3 cents away from the market on the bid on a specific ECN. Somewhere else in the ether there was an algo programmed to take the offer on another ECN (on which the spoofer was providing liquidity) when the size flashed in. The spoofer would then pull the bid and repeat the process on the other side. This program would generally show up in range bound stocks in the middle of the day. Whoever it was, they were not some tiny firm. Their orders would regularly be for 100,000s of shares, in dozens of different stocks at the same time. I haven't seen them for awhile, as I assume the liquidity taking algo guys realized what was happening and shut theirs down.

This isn't necessarily something that is unique to electronic markets. Even today you can listen to a squawk of the CME floor and hear some local or broker flashing gigantic size off the market without actually wanting the fill. However, his order is real and someone could fill him.

I'd also be curious to see what time period this particular case is from.

KD - awesome blog. keep up the good work!

Kid Dynamite said...

Trom - good comment. Although I want to be sympathetic to the "they are real orders" argument, I think that the opponents have a good case this time - the orders can be entered and canceled so quickly that they stand virtually no chance of being filled. But I get your point.

brian said...

But if they only stand for that short amount of time who is getting hurt, only other people trading on that time horizon looking to front run the order.

To my mind the front running costs me more money then the spoofing, yet the front running is legal. Basically, the spoofing is an effective tactic to stop HFT from front running orders, how is this a bad thing?

Kid Dynamite said...

Brian, with the exception of your use of the term "front running " (although I know what you mean), that was kinda my point.

although, people are already complaining that the market is turning into a game. if the entire point becomes fooling other market participants with false information, I don't think that's a good step.