[throwaway13qf85]

The second kind of quote-stuffing you mention, where you place larger orders outside the best bid/offer with the intention of distorting the order book (aka spoofing, see comment below) is certainly nefarious. But it's a special kind of nefarious behaviour that really only affects other market participants who can react quickly enough to the information - i.e. it's mostly HFTs taking money from other HFTs.

[hft_throwaway]

I think it is more short-term day traders taking money from naive HFTs. I'm sure some people automate this type of manipulation, but I seriously doubt that any of the "big name" market making firms do it. They are under a lot of regulatory scrutiny, make more than enough through legitimate trading, and have the technology & data to enable their internal compliance auditors to detect it.

I also don't think it can make that much. It may work for a little while, but no algo is going to sit there bleeding money to you forever without hitting a risk limit or being reviewed/adjusted. If your business model depends on somebody else doing something dumb, it's not going to work for the long-haul.

[lrm242]

The cases I know of where the SEC has cracked down were all manual traders leaning the book and essentially taking advantage of naive MM algos. Proceeds < $5mm each time I believe.

[001sky]

But it's a special kind of nefarious behaviour that really only affects other market participants who can react quickly enough to the information - i.e. it's mostly HFTs taking money from other HFTs.

This kind of behaviour that undermines the integrity of markets should not get a pass based on who it does or does not hurt, tho. If nothing else its bad PR that keeps people out of the markets or creates other "absences" or dark patterns from people not showing up to trade, fro whatever reason.

[lrm242]

Using large non-bonafide orders to lean the book in the direction you want to trade is called 'Spoofing', not quote stuffing. It's been illegal for a long time.

[kasey_junk]

I agree that some people call it spoofing and that is a better name for it, but other people do call it quote stuffing.

It's one of my pet peeves that when it comes to this industry there is very little standardization of the language.

[hft_throwaway]

Misuse of language by opponents of automated trading is intentional. When presented with examples of beneficial computerized trading like automated market making, they throw their hands in the air and say, "oh no, when I say 'HFT' I only mean these bad kinds":

"The practice of spoofing, or sending in fake orders in order to gain information about what other investors, traders and other algorithms are doing, is the corner stone of most High Frequency Trading strategies (HFT)."

http://www.nanex.net/aqck2/4371.html