Quote stuffing is a trading tactic used by high-frequency traders to acquire a price edge over rival market participants.

 

 

 

 

Thanks to the sheer speed of trading enabled by high-frequency trading (HFT) algorithms, they have an edge in being able to respond to changes in prices before other traders.

 

This speed advantage also be used for illicit gains. Let’s explore how that works in this short article. 

 

 

 

 

A Brief Intro into HFTs

High-frequency trading is a method of trading that uses speedy computer algorithms to process and transact large amounts of trades at breakneck speed. They have a high turnover rate and tend to be market makers (looking to earn the spread), but not always—some HFTs take directional risk when conditions allow.

 

You can read more about HFTs in Bookmap’s document about high-frequency trading.

 

 

 

What is Quote Stuffing?

Quote stuffing is meant to create uncertainty for other participants by sending, updating, and canceling large numbers of orders in the order book. This is a time-wasting strategy that forces other traders to analyze large amounts of irrelevant information. It is also used to conceal their intentions.

 

 

 

Is Quote Stuffing Legal?

Stuffing is an unlawful trading practice that seeks to manipulate market movements and may cause greater volatility in markets and even decrease liquidity. 

 

The NYSE (New York Stock Exchange) made changes to rule 5210 (Publication of Transactions and Quotations) to prohibit “two types of quoting and trading activity that are deemed to be disruptive.”

 

Quote stuffing was also originally thought to be the ultimate factor that led to the 2010 Flash Crash.

 

 

 

Why Do HFTs Implement Quote Stuffing?

Despite the fact that the SEC, the CFTC, as well as the FINRA regulatory bodies have all imposed fines on HFTs for violating exchange rules, such market manipulation still continues—probably because it is so effective.

 

When competing firms or traders waste time processing orders, the HFT implementing quote stuffing gains a price edge. Multiply this over dozens of transactions, and suddenly it seems profitable enough to be worth risking fines for these ill-intentioned HFTs.

 

 

 

How Common Is Quote Stuffing?

Since quote stuffing is usually executed by HFT algorithms, it will be more common in markets that are dominated by such market participants. For instance, over 50% of transactions on the Nasdaq are done algorithmically, potentially making this market more susceptible to quote stuffing. 

 

This practice may also be more common in markets that aren’t regulated, such as the cryptocurrency market.

 

 

 

Conclusion

Advances in technology have led to easier accessibility and cheaper trading for all traders, but it doesn’t come without its ill-willed use cases. Quote stuffing is a relatively recent phenomenon because it was not conceivable before the emergence of increased speed offered by computerized trading and collocation enjoyed by HFT firms.

 

Bookmap was developed by the algorithmic traders with positive intentions. By offering the same kind of sophisticated software that is enjoyed by HFTs to retail traders, it gives everyone a chance to win in the market. 

 

Bookmap’s Quotes Counter can be used to specifically identify quote stuffing practices in the order book. You can try it out today for free. Click here to get started.