As if the Oligarchs and their economic minions were not getting rich enough the Hedge Fund Global Piracy of the Markets continues to manipulate stocks to steal as much as they can using high-speed trading. Neil Gough reports on the suspension of Citadel, a U.S. Hedge Fund whose account was suspended among others that were not released as public information. NY Time’s article by Neil Gough on a crackdown on U.S. Hedge Fund’s Accounts being Suspended in China we discover corruption and manipulation due to high-speed trading algorithms using a criminal form known as spoofing part of the Dodd-Frank reforms after 2014:
The China Securities Regulatory Commission, which has in recent weeks pledged to crack down on “malicious” short-sellers and market manipulators, appears to be expanding its scrutiny to other types of trading.
By the time markets closed on Monday, the Shanghai and Shenzhen exchanges had announced suspensions for more than 10 additional accounts, bringing the total number of targeted accounts to more than 30.
Spoofing “has the effect of boosting or pushing down the market, and during the recent period of market volatility the impact of this has been amplified,” Zhang Xiaojun, a spokesman for the regulator, said Friday in a statement on the agency’s website. Mr. Zhang was speaking generally about program trading and did not identify the accounts that had been suspended.
Of course algorithmic trading has been around for a long while now. Algorithmic trading, also called algo trading, encompasses trading systems that are heavily reliant on mathematical and computer programs to determine trading strategies. These strategies use electronic platforms to enter trading orders with an algorithm which executes pre-programmed trading instructions accounting for a variety of variables such as timing, price, and volume. Algorithmic trading is widely used by investment banks, pension funds, mutual funds, and other buy-side (investor-driven) institutional traders, to divide large trades into several smaller trades to manage market impact and risk.
Algorithmic trading may be used in any investment strategy or trading strategy, including market making, inter-market spreading, arbitrage, or pure speculation (including trend following). The investment decision and implementation may be augmented at any stage with algorithmic support or may operate completely automatically.
What is spoofing?
One strategy that some traders have employed, which has been proscribed yet likely continues, is called spoofing. It is the act of placing orders to give the impression of wanting to buy or sell shares, without ever having the intention of letting the order execute to temporarily manipulate the market to buy or sell shares at a more favorable price. This is done by creating limit orders outside the current bid or ask price to change the reported price to other market participants. The trader can subsequently place trades based on the artificial change in price, then canceling the limit orders before they are executed.
Suppose a trader desires to sell shares of a company with a current bid of $20 and a current ask of $20.20. The trader would place a buy order at $20.10, still some distance from the ask so it will not be executed, and the $20.10 bid is reported as the National Best Bid and Offer best bid price. The trader then executes a market order for the sale of the shares they wished to sell. Because the best bid price is the investor’s artificial bid, a market maker fills the sale order at $20.10, allowing for a $.10 higher sale price per share. The trader subsequently cancels their limit order on the purchase he never had the intention of completing.
Recently, HFT (High-frequency trading), which comprises a broad set of buy-side as well as market making sell side traders, has become more prominent and controversial. These algorithms or techniques are commonly given names such as “Stealth” (developed by the Deutsche Bank), “Iceberg”, “Dagger”, “Guerrilla”, “Sniper”, “BASOR” (developed by Quod Financial) and “Sniffer”. Dark pools are alternative trading systems that are private in nature–and thus do not interact with public order flow–and seek instead to provide undisplayed liquidity to large blocks of securities. In dark pools trading takes place anonymously, with most orders hidden or “iceberged.” Gamers or “sharks” sniff out large orders by “pinging” small market orders to buy and sell. When several small orders are filled the sharks may have discovered the presence of a large iceberged order.
“Now it’s an arms race,” said Andrew Lo, director of the Massachusetts Institute of Technology’s Laboratory for Financial Engineering. “Everyone is building more sophisticated algorithms, and the more competition exists, the smaller the profits.”
AI and the Hedge Fund Wars?
One wonders if this is after all a private capitalist initiative to bankrupt China by rogue Hedge Fund enterprises, or is it rather Economic War of the first order: a Western Bloc Economic War against the Chinese Markets? Is this the form WWIII will take? A cyberwar against all competitors the West deems worth reigning in and controlling through code? As author Scott Patterson, speaking of the speed-trade debacle a few years back tells us the “Flash Crash was a clarion call about the dangerously fragile plumbing of the market. With trading spread out among more than fifty venues, a third of it taking place in the dark, all maintained by twitchy phantom liquidity providers and cheetah-fast scalpers turbocharged on AI, the market many once believed was the most sophisticated in the world had crumpled in minutes like a house of straw”.1