Smoking gun : manipulation in TOM option market
A lot of words were used to describe the manipulation in the option market on TOM. This market structure issue is a piece-of-cake for insiders. However, normal people can find it hard to grasp. Luckily, we have more colour. The manipulation continued on Monday morning. It was easy to detect.
In short, the kid manipulated the option quote on Euronext. And he traded against this skewed quote on TOM. Market makers have committed themselves to have prices at least as good as on Euronext.
Bloomberg screenshots
This morning it happened in the AEX Dec 2020 600 call. You can notice the trades with the red arrow. The guy bought €8,75 and sold €9,00 – for eight contracts. That’s a profit of €200 before costs. He did three of those scalps. Earning €600, and let’s assume €120 costs. Making a net profit of €480.
That’s about the same hourly fee a lawyer will charge you. Good luck with that.
TOM Market
Here’s the TOM market in the Dec’20 600 call. The AEX on TOM is called XNL – because of trademark issues. The trades are “opt-out” trades, dependent on manipulated quotes on Euronext.
Euronext market
So let’s have a look at the Euronext market in the same option. Nothing traded at all. With the red circles I marked the bids and offers the kid has entered in the system. Maybe in an automated fashion, as the manipulated bids and offers remained in Euronext book for one second. That’s an eternity in HFT world, but for manual trading pretty fast.
It’s visible he gave a €9.00 bid for 9 contracts. And he traded with a market maker on TOM, who relied on the Euronext order book, in the same second. He pulled his bid. Then he traded the other way around in a bit more than one minute.
This happened this morning. The time in the Bloomberg screenshots is of course from another time zone.
Compliance
The market is manipulated on Euronext. But TOM’s reputation is at stake here. Market professionals understand what’s going on. Most other folks just remember there is “something wrong with TOM”.
TOM isn’t free to comment on the situation. The case is in the hands of the watchdog AFM, which means you aren’t allowed to talk about it. Compliance departments everywhere curb people talking to the press.
So, who dunnit?
With this amount of money involved and naive style of trading, it’s hard to imagine a normal person is the evil mastermind here. Given it’s summertime and the schools are out, it may be a smart kid somewhere. Still, kids don’t see this window of opportunity for fraud. You need some knowledge of the option market and market structure.
The idea to get away with something as obvious as this, is hard to imagine. It almost looks like somebody wants to be noticed.
Just a thought. All Options
Why didn’t market makers lift his offer at 8.75 on Euronext and sell against him when he goes to bid at 9.00 also on Euronext? They had all the time in the world to do so and THEY would have made a profit. Arb the poor sucker a couple of times and he’ll be gone.
Essentially the market makers are crying because their systems and valuation models didn’t want to buy at 8.75 but they were happy to do so at 9.00 shortly afterwards without a change in the underlying. Now who’s manipulating markets and prices again?
As Eric Hunsader argued: spoofing with manual orders should be allowed.
Who’s to say it is the same person? Anyone who read last week’s story could have figured out what was happening and tried their luck today.
Must be Jan Sem. He did this trick on the trading floor already with SOEX trades.
@3:56
Market makers in AEX 2020 options don’t use electronic eye for 10 cents profit.
For point and click one second in the book is usually too fast.
So retail Jerry is better at market making than the big HFT firms. What a big deal, taking low frequency advantage of market inefficiencies. That is not fair MM computer firms will say.
Off course if the AFM will find him, he will be heavily fined for “kleintje bier”.
Maybe it is the guy who joined AO from ATG.
Jerry keeps exposing the stupidity of hft market makers)
This is obviously not done for profit. Just to show off.
Market makers without theo are useless parasites and must be put where they belong, i.e.
MAR has come into effect. This means jail time.
Second – Market making has nothing to do with HFT.
Third – spoofing is not involved here at all.
“Second – Market making has nothing to do with HFT” so it is still done manually? Sure.
Maybe Jerry just want to point out another time the obsolete routing system of TOM.
http://www.amsterdamtrader.com/2014/12/degiro-trashes-tom.html
That deGiro thing was about stocks. Another ballgame.
I dont see how this is fraud
Finally an easy case for the AFM.
Manipulating a quote on Euronext with the intent to take advantage on TOM.
Easy.
STOP this NONSENSE
the solution is pretty simple: forbid OPT-OUT (it shouldn’t be allowed in the fisrt place) and the whole “fraud” isn’t possible anymore.
Clean and simple STAT-trades remain.
Hilgers?
Ben, I am market maker.
Opt-out is just a regular trade on mass quote prices, in practice.
I quote same prices on Euronext and TOM options. But due updating of quotes sometimes Euronext is better, sometimes TOM.
The margin (in general) is less than 1 cent. With automatic hedge (stat trades) you do a lot of transactions, without much profit.
Only in AEX long terms manipulation is possible. Not in other options : also given the cost level for retail investors (scalping 4 cent wouldn’t be enough with Binck).
The real problem is with the “join” orders at DeGiro. This doesn’t reach the market, stays with HiQ (?).
Other market participants don’t see these trades at DeGiro. Really hurting market integrity.
I also don’t see how this could be fraud. The guy gives quotes in 2 different products, with 2 different counterparty risks. The time to trade is an eternity
Back in the day’s with SoeX you also often got fucked by Off Floor Traders when the quote wasn’t adjusted in time.
There was a simple solution to that: NOT logging in into SoeX.
Same here: don’t choose to OPT-OUT, and reward the guy who’s providing the best price (on Euronext) by giving him the ‘execution’.
Jack,is dat je Schlussfolgerung?
Why didn’t the smart market makers hit the 9.0 bid and 8.75 offer on Euronext? Feels weak to run to “Mommy” because they lost.
@7:36: Market makers are supposed to provide liquidity and minimize the spread, not take liquidity. Most MMs make the lion’s share of their profits not from smart tactical trading decisions, but rather from rebates by meeting their obligations.
But there are several clever MMs such as Virtu and Optiver that not only make profits from rebates but also make a lot of so-called “fat stacks” by excellent trading and nerves of steel.
@10:11
Rebates in the option market in Europe? Sorry, but the only rebate you can get are slightly lower fees.
There is no maker/taker model here.
Of course someone is manipulating and breaking the rules . Maybe merge in one exchange again. Solves the problem …….,;-) . Real frustrating when I have an order at euronext to see that price trading at TOM and the other way around. MM getting screwed for a change feels good.
Finaly a subject that the AFM is able to understand!
Let’s crucify the retail-investor clever enough to exploit opt-out and earned €600.
a mechanism designed by TOM ’cause MM were, on a broad basis, only able to send in worse prices than towards Euronext.
I’m curious what the AFM will do. If this was in the US, he could look forward to a three year jail sentence: http://www.bloomberg.com/news/articles/2016-07-13/first-trader-convicted-of-spoofing-gets-three-year-prison-term
Well – it’s not spoofing.
@3:51 PM It’s difficult to see how one could argue that an order for 8 lots could be considered spoofing the market in the other direction. Besides, the guy traded on half of his orders. I think that’s a pretty cool ratio. If cancelling half of your orders is considered excessive, all HFTs can go rot in jail.
@12:42: MMs and similar trading entities that ensure the orderly and continuous nature of the markets, should be rewarded by being given certain privileges such as being able to spoof orders, momentum ignition and front running.
They risk a great deal of their personal finances to ensure they meet their obligations to the market, why shouldn’t they have certain special privileges afforded them? seems fair to me.
@9.11 pm
In the article it says: ‘He was the first person tried under a provision of the 2010 Dodd-Frank Act that made it illegal to manipulate prices by placing orders without intending to execute them.’
It’s not the placing and cancelling orders in itself that’s the problem, the problem is placing orders which are not intended to be executed, which is exactly what happened with the orders on Euronext.
And as Jack mentioned in the articles, this didn’t happen once, but many times on TOM/Euronext. So it’s more than a single 8 lot order.
Anyway, I don’t care whether people think this should be allowed or not. Just don’t come complaining when some regulator decides to prosecute, fine and/or jail you.
An HFT trader like Virtu will place a dozen or more equal bids in the same stock across multiple exchanges. The fact of the matter is, they don’t really have the intention of being filled on ALL of these orders. As soon as they get one or two fills, they scramble to cancel the others within a fraction of a millisecond. There are people who refer to these multiple bids as fake liquidity. Some even write a book about it (“Flash Boys”). This practice goes on all day long.
The fact remains that the HFT would honor whatever executions he gets. Thus his actions aren’t considered spoofing. Opting out of an FX trade on the basis of “look back” would also classify as spoofing by your definition of a lack of intent to trade.
Much like the HFTs, the guy on Euronext would have honored whatever execution he might have gotten on Euronext. And he certainly would’ve gotten an execution on Euronext if the stupid MM on TOM hadn’t opted out. And he didn’t cancel his order in a DIFFERENT!!!! (but somewhat related) security on Euronext until a second or more after he traded on TOM. Compared to the HFT flash boys and the “look back” in FX, that’s an eternity.
When Euronext and Virtu were fined by the French regulator last year, it was revealed that Virtu had placed millions of (ping) orders that they had cancelled within the same millisecond (more than half of the orders pumped out by 1 strategy of theirs). Btw the fine was explicitly not for this behavior but for the exchange’s favorable treatment of Virtu over other market participants. Anyway, if it’s the intent to trade, I would say it was questionable that the HFT really expected much less wanted to be filled on all of these orders.
Finally, you missed my point about the “single” order. For every (Euronext) order that this guy cancelled, he got a fill on TOM. That’s a 50% fill ratio which is way higher than what HFTs will attain. The (convicted) guy in the Bloomberg article on the other hand had a fill ratio FAR below 1% AND he placed orders for large size. (“[he] placed orders that were much larger than any others trading at the same time and also that he canceled those orders much more frequently.”) As such that guy cannot be compared to the guy on Euronext.
Good luck arguing in court that a guy who trades on half of his orders had “no intent to trade” on the other half that were in the markets for many seconds, but HFTs who cancel millions of orders within the same millisecond had genuine intent to trade on each and every one of them.
“the problem is placing orders which are not intended to be executed”
By this logic anyone who ever had his fat fingers get stuck in his keyboard should be thrown in jail for spoofing the market.
Fill ratio is irrelevant for whether trading is intended or not, when you only ever get execution on one side of the trade. The Euronext side is never intended to be executed, and is never executed. Good luck arguing in court that you intended to execute on Euronext as well when you never actually did any trades there.
As for the fat fingers analogy I would hope you can see yourself why that analogy doesn’t make sense. A fat finger error is about orders that were never intended to be placed (but got executed). Market manipulation is about orders that were intended to be placed (but didn’t get executed).
I never said that what happened on TOM is spoofing, spoofing is just another kind of trading that is illegal based on the same premise: placing orders that are not intended to be executed.
“Market manipulation is about orders that were intended to be placed (but didn’t get executed).”
You learn something new every day! I’m glad that ‘pump & dump’ and ‘wash trades’ – to name but two practices – do not fall in the category of market manipulation because for them you most definitely need to do some trades along the way.
“A fat finger error is about orders that were never intended to be placed (but got executed).”
I’m sorry, but you previously spoke of orders that you do not intend to trade on as constituting spoofing behavior (quote: “the problem is placing orders which are not intended to be executed”). A fat finger trade – by definition – wasn’t intended to trade [not at the entered price anyway] but placed nonetheless.
The whole spoofing thing is as vague as it can get. Most HFT’s that provide, fake, liquidity are spoofing in a similar way.
Bid 100 lots on exchanges x, y and z. When exchange Z is being sold pull X & Y fast enough. So they are actually bidding for 300 lots but only with the intention to only trade 100 lots at that price. And thus creating fake liquidity. I cannot think of a more clear example of spoofing. But then again, this seems okay.
“Under the 2010 Dodd-Frank Act spoofing is defined as “the illegal practice of bidding or offering with intent to cancel before execution.”” – I beleive this is the whole business model for a lot of HFT’s these days (Virtu), see also flash boys.
anonymous @ July 19, 2016 at 1:42 pm
is clearly and experienced trader. Maybe even French.
The guy will be sanctioned for “creating an artificial price”, not for spoofing.
No he won’t. His only trades (and orders btw) were INSIDE the quotes of the market makers for crying out loud. How can that ever be considered an “artificial price” without sanctioning the market makers who provided WIDER bids and offers?!?! You don’t get it do you?
The only thing he’s guilty of is demonstrating that some option traders have sh!t for brains. Last time I checked, that’s not a crime.
Actually, it is. http://www.computerworlduk.com/news/infrastructure/norwegian-traders-convicted-for-outsmarting-us-stock-broker-algorithm-3244186/
Actually, those two guys were cleared of all wrongdoing and won on appeal.
“Two expert witnesses testified that the activities of Svend Egil Larsen and Peder Veiby were common market practice. The defendants also argued that they were making the market more efficient by exploiting a flawed system.”
“The court said that the transparency of their trades was one reason for their acquittal.”
(FT story from May 2 2012)
In plain English: dumb algos must feel the pain.
Jack, if an retail “inverstor” outsmarts in low freqeantcy a HFT algo firm is that a wrong doing or is it better market making?
@9:18pm The answer to that question really depends on if the so-called “retail investor” is of French nationally and if the HFT is either Norwegian or American (aka from USA)