Quote Stuffing
What Is Quote Stuffing?
Quote stuffing is the practice of rapidly entering and afterward pulling out large orders trying to flood the market with quotes and prompt contenders to lose time in processing them.
Understanding Quote Stuffing
Quote stuffing, a term previously instituted by Eric Scott Hunsader, the pioneer behind financial data company Nanex, is a strategy that high-frequency traders use to gain a pricing edge over contenders.
It is made conceivable by high-frequency trading (HFT) programs that can execute market activities with staggering speed — producing hundreds or thousands of orders each second. These programs permit high-frequency traders to bring in money by arbitrage: taking advantage of impermanent pricing failures before have opportunity and energy to notice or potentially respond to them.
As indicated by Nasdaq, HFT is estimated to account for somewhere around half of total market volume. HFT all by itself isn't unlawful. Notwithstanding, stuffing happens when traders deceitfully utilize algorithmic trading apparatuses to overpower markets by dialing back an exchange's resources with buy and sell orders in securities.
Just market makers and other large players in the market are equipped for executing these strategies since they require a direct connection to the securities exchanges to be effective. This business is about speed and the nearer a HFT server is to the exchange, the faster they can respond to new data.
Quote Stuffing and Securities Regulators
Quote stuffing has gone under investigation from financial industry regulators, including the Securities and Exchange Commission (SEC), the Commodities and Futures Trading Commission (CFTC), and the Financial Industry Regulatory Authority (FINRA). Each of the three controlling bodies have forced fines on HFTs for infringement of exchange rules, including quote stuffing, front-running, and price and market manipulation.
However the SEC's investigation eventually placed the reason on different factors, quote stuffing was initially accused as one of the fundamental drivers of the 2010 "flash crash," which drove the Dow Jones Industrial Average (DJIA) to fall 1,000 points in practically no time. Anything that the reason, it is reported to adversely affect securities exchanges' proficiency.
Furthermore, research studies arranged by ResearchGate, Nanex, and the CFA Institute, among others, propose that HFT practices, including quote stuffing, raise prices, decline liquidity, and cause greater volatility in markets.
Both the New York Stock Exchange (NYSE) and FINRA adopted rule changes to address quote stuffing, including Rule 5210 (Publication of Transactions and Quotations) to restrict "two types of citing and trading activity that are considered to be disruptive." Other proposition to address the problem and reduce the advantage of HFTs incorporate establishing least time spans, estimated in milliseconds, before buy or sell quotes could be canceled.
Highlights
- Quote stuffing was initially accused as one of the fundamental drivers of the 2010 "flash crash," which drove the Dow Jones Industrial Average (DJIA) to fall 1,000 points in practically no time.
- The goal of quote stuffing is to gain a pricing edge over contenders as it makes them lose time in processing these orders.
- Quote stuffing is a strategy utilized by high-frequency traders that includes setting and dropping large numbers of orders inside very short time spans.
