Showing posts with label Trading Tactic. Show all posts
Showing posts with label Trading Tactic. Show all posts
Sunday, May 6, 2018
Wednesday, May 2, 2018
Market Manipulation : Spoofing & Layering, Momentum Ignition, Pump & Dump
Market manipulation is nothing new and has been around for as long as markets have existed. Most methods rely on shifting perceptions about the marketplace, such as trade volumes, demand and supply on the order books, and other key determinants. Nevertheless, today’s increasingly complex computerized markets allow for new and innovative methods of market manipulation. Because of the fast pace of innovation and sometimes overwhelming complexity behind trading activity, regulation has at time lagged behind.
Below are some explanations of different forms of market manipulation, and what has been done to address these behaviors.
Below are some explanations of different forms of market manipulation, and what has been done to address these behaviors.
Spoofing & Layering
Spoofing is a strategy whereby one places limit orders, and removes them before they are executed. By spoofing limit orders, perpetrators hope to distort other trader’s perceptions of market demand and supply. As an example, a large bid limit order could be placed with the intention of being canceled before it is executed. The spoofer would then seek to benefit from prices rising as the result of false optimism others would see in the market structure.
More controversial has been the act of layering which carries many similarities to outright spoofing, but differs in that orders are placed evenly across prices with the goal of reserving an early execution priority at each given price level. If the person has no trade to execute at that price point the orders are simply removed. Despite being more benign in nature, the act of layering also distorts market demand and supply perception.
Spoofing and layering has been made expressly illegal in the United States under the Dodd–Frank Wall Street Reform and Consumer Protection Act, and has been actively prosecuted. Perhaps the most famous case of spoofing to date has been the recent arrest of Navinder Singh Sarao, in direct connection to the 2010 Flash Crash.
On April 21, 2015, five years after the incident, the U.S. Department of Justice charged Navinder. He was found to have used a lightly modified version of commercially available trading software to place orders and cancel them in rapid succession from his suburban London house. The orders were worth $200 million and were replaced or modified 19000 times before being canceled. These actions largely contributed to the “Flash Crash”, where the Dow Jones industrial average lost 9% within minutes, before gaining back it’s losses.
On April 21, 2015, five years after the incident, the U.S. Department of Justice charged Navinder. He was found to have used a lightly modified version of commercially available trading software to place orders and cancel them in rapid succession from his suburban London house. The orders were worth $200 million and were replaced or modified 19000 times before being canceled. These actions largely contributed to the “Flash Crash”, where the Dow Jones industrial average lost 9% within minutes, before gaining back it’s losses.
Quote Stuffing
Unlike layering, where the high-frequency trader is seeking to ensure execution priority in the order book queues, quote-stuffing traders are thought to send in rapid orders and cancellations with the expressed purpose of slowing down. Indeed in research conducted by Nanex, it was found that by placing a large number of quotes in any one stock, it is possible to create latency across all stocks of the NYSE. This would allow a party the power to generate latency on demand. 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, because it simply is not valid long enough.
The confusion arises when one begins to consider who would benefit from such actions. Those equipped with the high speed technology to engage in quote stuffing only stand to suffer, as they would also see their trades slowed. If anyone can be suspected of intentionally clogging up the lines (a market manipulation), the natural trail leads to low-frequency culprits unequipped with fast technology, for whom such manipulation may indeed result in increased profitability.
Unfortunately, some exchanges also profit by selling higher-capacity feeds to HFT traders, which disincents self-regulation that could prevent the quote stuffing.
Although it was found that 74% of U.S. listed equity securities received at least one quote stuffing event during the 2010 Flash Crash, so far persecution of this type of market manipulation has not taken place
Momentum ignition
Momentum ignition is a strategy in which a trader aims to cause a sharp movement in the price of a stock by using a series of trades, which indicate patterns for high frequency traders, with the motive of attracting other algorithm traders to also trade that stock. The instigator of the whole process knows that after the somewhat “artificially created” rapid price movement, the price reverts to normal and thus the trader profits by taking a position early on and eventually trading out before it fizzles out.
To detect momentum ignition, it is important to focus on the following three main characteristics as shown in the chart below:
1. Stable prices and a spike in volume
2. A large price movement compared to the intraday volatility
3. Reversion to the starting price under a lower volume
Credit Suisse estimated in a study that momentum ignition occurred on average 1.6 times per day for stocks in the STOXX 600 during the third Quarter 2012, with almost every stock in the STOXX600 exhibiting this pattern on average once a day or more. Moreover, the average price move is about 38 basis points but over 5% are more than 75 basis points, with some significantly higher, and the time it takes for that move to occur is approximately 1.5 minutes. While 38 basis points may not sound like a big move, it is a bit more significant when compared to the average duration of about 1.5 minutes and the average spread on the STOXX600 which is approximately 8 basis points.
Pump & Dump
Traditionally, a Pump and Dump scheme is implemented by fraudsters who try to inflate the price of a security by making false or misleading statements with regard to its value, usually via cold calling or by spreading fake press releases. These traders, who had accumulated a large holding in the security before initiating the “pump” phase, liquidate their position as prices rise, giving birth to the “dump” phase, in which the security usually ends up erasing its previous gains, inflicting massive losses on the late joiners of the “pump” phase. More recently, Pump and Dump strategies have often been adopted by high frequency traders, who create algorithms to momentarily drive up the price of a security, only to promptly reverse their position and capitalize on false momentum at the expense of other traders.
The most frequent victims of pump and dump manipulations are micro and small cap stocks, which due to their small trading volumes tend to be the easiest to manipulate. Moreover, it’s harder for most investors to assess the real value of these companies since they are relatively unknown to the public and not covered by research analysts, and thus information concerning their fundamental value is hard to find.
The flip side of the Pump and Dump is known as the Bear Raid, whereby a trader artificially depresses the price of a security, only to close his position at a profit at the first opportunity, all while leaving other investors in the dust. To put downward pressure on the share price the fraudster would usually spread negative rumors about the target firm, and this process has been made easier by the advent of the internet which helps spreading the rumors faster and wider. Both the Pump and Dump and the Bear Raid are typically considered a form of securities fraud.
Conclusion
Although the examples above only provide a glimpse of the many forms of market manipulation, it is clear to see that these are real all world phenomenon that take place actively on markets. Even more troubling perhaps is that the most innovative forms of manipulation are yet to be properly understood or regulated. Furthermore, although high frequency hedge funds are often the subject of much criticism when it comes to market manipulation, many methods stated have already been deemed illegal long ago by regulators, well before the advent of high frequency trading. Nevertheless understanding when market manipulation is taking place, and being able to avoid it is a skill any successful modern trader should possess.
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Manipulation : Spoofing example
On the morning of May 6, 2010, the Dow Jones collapsed almost 1,000 points in a matter of minutes before bouncing back. Navinder Singh Sarao went to jail for the part he played in it. He used to be hailed as a legend by his peers after he made $50 million trading from his bedroom, till he caused the May 6 fiasco. The illustration below shows how the flash crash panned out.
Spoofing is also called dynamic layering. It’s a form of market manipulation where you pretend you want to sell a lot of stock, and everyone's all, "Oh in that case I want to sell a lot of stock too," and the stock goes down, and then you actually buy a some stock, and you wait for a second or two and then pretend you now want to buy a lot of stock, and everyone's all, "Oh well now I want to buy a lot of stock too," and the stock goes up, and you actually sell back the stock you bought.
Here’s a simple illustration of how it works:
- You select a stock that has enough liquidity but not too much.
- Britannia’s future contracts seems appropriate for this. The futures contracts are trading at Rs 3000.00 on the NSE. You’ve got a co-location server with a broker who’ll allow your spoofy trades, which means that your trading speed is now in microseconds (1/1000000th of a second).
- You place a IOC (immediate or cancel) sell order for 187 lots at Rs 3020.00 (Layer 1), comfortably above the market price so your orders don’t get filled. This order does not fill immediately because you’re selling way above the current market price.
- The daily trading volume in the contract is around a thousand lots, so your trade gets noticed by 20 other HFT/algo trading firms. Their algorithm’s think, “Hmm, looks like some large institution is selling their stock, prices will fall, I better go short too.”
- Their selling pushes the price down to Rs 2970.00. You now cancel your Layer 1 sell order and replace it with 20 lots of buy orders at Rs 2972.00 (Layer 2). Now these buy orders are legitimate. You now own 20 lots of Britannia stocks at Rs 2972. This buy order fills immediately because you’re buying at a price > the current market price.
- Now you have to be extra careful, and fast because now you have exposure to 20 lots and hence have downside risk.
- You now place buy orders of 150 lots each at Rs 2980, 2990 and 3010 and you immediately cancel them. You got to make sure the orders are canceled immediately so that they don’t fill. Most spoofers use algorithms to do this but then there are people like Aleksander Milrud who hired armies of Chinese and Korean humans traders and equipped them with special gaming keyboards with hot keys to place orders unbelievably fast [1]
- Buy orders that have been cancelled remains on the order book of the NSE (can be viewed on any NEAT, ODIN terminal) but is not longer floating in the market to be filled.
- The entire process is now reversed. The same 20 HFT firms now think, “Oooo, looks like someones buying a lot of Britannia futures, maybe its Mr. Jhunjhunwala, I better get in before price rises too much.”
- In a few minutes, prices rises to Rs 3010 and you exit your 20 futures lots.
Manipulation : Spoofing & Layering
“Spoofing” and “layering” are both forms of market manipulation whereby a trader uses visible non-bona fide orders to deceive other traders as to the true levels of supply or demand in the market.
Some regulators use the terms “spoofing” and “layering” interchangeably, while others, including FINRA, use “layering” to describe entering multiple non-bona fide orders at multiple price tiers, and “spoofing” to describe entering one or more non-bona fide orders at the top of the order book only.
In spoofing patterns, a trader enters a single visible order, or a series of visible orders, that either creates a new best bid or offer or adds significantly to the liquidity displayed at the existing best bid or offer. During the lifespan of that first order(s), or within a short time after it is cancelled, the same trader executes a trade on the opposite side of the market. The pattern is manipulative because the execution occurs at a more favorable price than the trader was likely to obtain in the absence of the first order(s). This is true regardless of whether the buy (sell) execution occurs at the pre-sequence best bid (offer) price, at the midpoint, or at the new best offer (bid) price set by the spoof order. In any of those scenarios, the trader is executed at price better than if he had hit the pre-spoof bid or had taken the pre-spoof offer.
Layering is a variant of spoofing where the trader enters multiple visible orders on one side of the market at multiple price tiers, which cause the midpoint of the spread to move away from those multiple orders, and the same trader executes a trade on the opposite side of the market. Again, the pattern is manipulative because the execution occurs at a more favorable price than the trader was likely to obtain in the absence of the first orders.
If the trader enters orders at multiple price tiers that successively set the new best bid or offer as they are entered and remain live after the newer orders are entered, as in the figure above, the same pattern could be described either as spoofing or layering.
For more on the differences of layering versus spoofing, you can learn more about spoofing here, and learn more about layering here.
Further Analysis on Layering and Spoofing
Articles from Trillium experts analyzing and exploring different facets of layering and spoofing:
Leading Layering and Spoofing Enforcement Actions
Monday, January 22, 2018
Penny Stock - The Nude Investor
Anatomy of a Pump and Dump (And How To Profit From Them)
Below is a weekly chart for all five of the companies. You’ll note that all charts are showing:
- A long (multi-year) basing pattern after a big down trend.
- Bullish divergence between between price and my favorite accumulation indicator, Twiggs Money Flow (TMF).
- A recent cross above the 0% line on TMF – experience has shown me this is often hints a move is imminent (and divergence that occurs without a cross above zero often amounts to nothing).
- Very little interest in the stocks – typical weekly volume levels are very low.
Before buying stock in any of these companies, I would usually conduct at least a good five to ten hours of due diligence research looking into factors such as:
- Management credentials and past performance
- Percentage of the company owned by management
- Recent broker vs retail investor buying activity
- The companies cash position and near term expenditure estimates
- Near term relevant market sector forecasts
- Product reviews and customer feedback (if applicable)
- Review of the geology and/or nearby mines or discoveries (if applicable)
- Etc. etc.
www.atradernotes.com
www.thenudeinvestor.com
Sunday, January 21, 2018
Penny Stock ; Study Guide from lowtrade
here
III. Due Dilligence And General Market Information
“Welcome To My Mind”
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Welcome To Lowtrade’s Study Guide. This is a compilation of post and study material collaborated into one form. We hope you enjoy the years of studying technical analyses and market trends and use the information to your benefit. The purpose of study material is to teach people how to become better traders. Enjoy and best of success to you all! Always remember this: “Play what you want, not what is in front of you!” ~LT.
I. Creating Your Trading Plans...
II. What is the darkside and how does the game work? (Micropenny Stock)
Understanding the Pond Play, Temp Jobs, Pump and Dumps, The OTC in general... (Micropenny stocks)
III. Due Dilligence And General Market Information
What are T Trades?
How to scan for penny stocks..
How Trading Groups Work...
What Is Naked Shorting And How It Happens...
Understanding How Market Makers, Make the Market...
Understanding Short Volume and Short Interest In Penny Stocks
How And When To Properly “Avg Down” Capital Preservation Study
Understanding Daytrader Timing Patterns
How To Properly Evaluation Filings and Due Diligence In General...
Understanding Dilution...
IV. Chart Indicators And Overlays Explained:
Understanding the ADX and DI Indicators
The CMF Indicator
The Relative Strength Index or RSI
OBV, Accumulation, and CMF
Chart Indicator Groups
Fib Retrace Overlay..
Understanding Log Scale Settings..
Annotated Chart Patterns To Study:
Bump And Run Patterns..
Lowtrades’ Youtube Channel and Video Chart Studies...
Wednesday, December 6, 2017
Traded Volume Secret
Let me share a bit on volume. I didn't go for si mi VSA course or read book on this. I shared what I learned from my past losing journey.
Traded Volume is an important indicator that every trader must have below their chart. Volume can reveal some story about the counter. A counter that moved from low price to high price also starts from low traded volume to high traded volume. So if you want to see whether a dead counter have any chance of moving up you should look at the traded volume. When traded volume SUDDENLY increased, this tells us that something is going on with the counter & high chance got BBs come in liao. If no BBs, who generate those volume?. Cannot be retailers because cannot be suddenly so many retailers interested in a dead counter. So, a sudden increased in traded volume means there's a chance the counter may start to be alive & price may move up. But we cannot only take a sudden 1 day surge in volume as confirmation because there are times where the counter only have 1 day big traded volume & after that go into dead mode again. We need to see a few days of good traded volume.
Below are 4 charts I posted as reference and look at the volume bars. You will notice the similarity.
Before the sudden surge in traded volume (shaded blue), the volume were very low for long period of time(see left side of the blue shaded area). You will noticed I shaded 2 areas blue. 1st shaded blue showed volume suddenly come in. 2nd shaded blue give me sort of a confirmation that the volume for the 1st shaded blue are "real" volume. Meaning, it sort of give me a confirmation that BBs are in for real stuff.....they going to push the counter. I drew a diagonal line up to show that price started to trend up as volume comes in. Once we see the 2nd shaded blue volume with price started to move up, we can start to pick up some to keep for a while. If there's no price spread, we can also play contra.
So after buy & pick up liao when to sell leh?. When to sell also look at the traded volume & price. When you see price at high with extreme traded volume(see red shaded area) especially with bearish candlestick or candlestick pattern, it's time to sell. Normally you will see 5-6 digit traded volume with more pips intraday movement. Traded volume from start of hundreds lots to tenths of thousands not extreme meh. Extreme traded volume at high price usually mean distribution is going on.
You can also see the change in buy sell queue during the process of small to extreme traded volume or low to high price. The buy sell queue starts from less than 100lots or 100-200lots(sometimes with price spread) to few hundred lots & then 1-2k lots & finally we see 4-5k or even have 10k lots at a certain price. As price goes higher, the buy sell queue get bigger. Bigger buy sell queue is also for distribution purpose.
Many reasons for a dead counter to suddenly come alive. There must be good reasons to support price to move up....e.g. FA improved. If no reason come alive one, maybe just pump for directors to unload, or for share placement, or pump for someone to run road before company close down etc. So no good reason chiong one don't hold tight tight else you may have to pass this counter to your grandchildren.
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