I Would’ve Got Away With It Too - It If It Wasn’t for You Pesky Kids….

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….”