[brownegg]

Your question is exactly correct. As long as they are real orders, with real risk of being executed, there should be nothing at all wrong with this behavior. If people are so stupid as to move their orders trivially based on others' actions, they deserve what they get.

The reason this gets prosecuted is that it's an easy target for the exchanges to make it look like they care. They are now publicly-traded companies interested in profits first and foremost--not market integrity (which maybe used to be the case--different discussion).

source: 25-year vet of futures markets, the last 10 in HFT; many many millions of orders and executions

[digler999]

> they deserve what they get.

what about buy-and-hold investors who don't do anything to deserve that ? Why should they get unnecessary volatility in their portfolios just because some get-rich-quick kids want to treat NYSE like its Mortal Kombat?

> if people are so stupid as to move their orders trivially based on others' actions

Then why show level 2 quotes at all ? Isn't your argument equivalent to "level 2 information is useless"? If not, then people wouldn't be stupid for using it, would they ? Would you trade in a market that only had level 1 quotes ?

[brownegg]

They don't get unnecessary volatility unless they're paying attention to the order book all the time. Realized equity volatility is MUCH MUCH MUCH lower in the era of HFT.

Yes, "flash crashes" exist, and normally because of liquidity disappearing. Yes, algos are basically sheep that all bail at the same time. But overall, the net effect is massively beneficial to everyone except lazy traders (which include fund managers who miss the days of getting lots of steak dinners from their favorite brokers).

[digler999]

I'm not arguing against algos or HFT, just spoofing. also I updated my comment to ask about level-2 quote information. If people are stupid for acting on perceived intention of other market participants, wouldn't that make the case that L2 quotes are entirely garbage and should just be removed from the exchange ?

[brownegg]

You're conflating two things (in my mind). L2 is very useful to people like me. If it's useful to you, you should be able to handle spoofing.

The "average investor" doesn't need L2, and doesn't care what it says, including flashing "fake" orders.

[baloneyman]

HFT doesn't really do anything for markets since they take very little risk, and that is the purpose of a market... the magic coil will kill your business anyway

I thought true HFT (not short-term momo, etc. where the intention is to actually take risk) had essentially died already, Virtu aside

[pgwhalen]

True HFT is not in any sense dead, it's just matured so only those with deeper pockets can compete.

[tedunangst]

Flash crashes have no effect on buy and hold investors. You're holding, there's a crash, you're holding, bounces back, you're still holding.

[gnaritas]

Not remotely true, many buy and hold investors have stops to limit their losses and/or exit their positions at certain levels. Flash crashes hurt them greatly.

[brownegg]

Which part of "buy and hold" includes "sell when it goes down"?

[pdpi]

It's called cutting your losses. Buy and hold isn't "buy and go down with the ship".

[brianwawok]

No in fact that is the opposite of buy and hold. If you are selling as it goes down you may as well just light your money on fire.

[tedunangst]

Also known as a make loss order. :(

[gnaritas]

Better to have a loss limiter, than lose it all. Without a stop loss, you can't limit your risk. And yes, exiting at a small loss is the point, it prevents a much bigger loss. Refusing to exit with a loss is how the market takes it all from you.

[wj]

Retirees might need to liquid a percentage of their portfolio each month to pay their bills. Getting caught in a flash crash can have an effect on them.

In a general sense though I agree that the behavior shouldn't be illegal but am fine with exchanges implementing rules about it. For a trade to occur both the buyer and the seller are getting what they want at a price they both deem acceptable. Phantom orders does not inherently change that.

[tedunangst]

Keep in mind that you're talking about getting caught in a window that was 34 minutes long. So you'd have to be pretty unlucky, not to mention oblivious, to push through a market sell order at that time.