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I have wrote study for Sierra Chart what reconstruct original market orders. I think I can detect scalping algorithms.
This scalp algo uses insensible big market order what dramaticaly moves price at first. Then after few milliseconds they start liquidate this position using series of small sensible market orders which do not move price. It can profit tousands $ in one second.
My question is - Is it legal to operate this scalp on CME markets?
Can you help answer these questions from other members on NexusFi?
Using retail charting tools you won't ever see the level of detail you need to be able to tell if this is truly spoofing or not.
In terms of what is legal / illegal: Spoofing is the big one. The challenge to anyone trying to report this is that at the end of the day it all comes down to intent. Someone is within their right to place a large order and cancel it. There is no rule explicitly stating that if someone ever submits an order over a quantify of X, they have to let it play out. So this becomes the challenge. Large orders are submitted and canceled all the time. You can speculate that the same party is then doing additional things that would constitute intent to deceive, but this is hard to prove. I'll give you two examples and show you one that could be proved within reason and one that couldn't.
1. Reasonably easy to prove: If a trader on very non liquid product, or a liquid product trading in non liquid hours submits an order that is 10 x the average size of all other open orders this is easy to spot. If you then see this hitting the best bid / best ask and canceling in one shot, and then you see a flurry of new smaller orders equal in magnitude to the original large order hitting the opposite side all while the market is still reacting to the large order.... It may be reasonable to believe this was the same party spoofing. Something like this could be researched and submitted to the CME, and they would likely consider this spoofing.
2. If the same event occurs during the CME US cash session you would have a difficult time proving the second part as there will likely be exponentially more participants reacting, so it would be difficult to deconstruct the raw data to support this.
Hope this helps a little.
Ian
In the analytical world there is no such thing as art, there is only the science you know and the science you don't know. Characterizing the science you don't know as "art" is a fools game.
This is very cool. But who did you think sold them the position in the first place? The buyer=seller, seller=buyer. It's just modern HFT market making.
"Free markets work because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or incentives for skill. The strategy is, then, to tinker as much as possible and try to collect as many Black Swan opportunities as you can"
Neo, I trade since 2009 I know there is opposite limit side for each market order. Let me explain my findings about HFT market making.
Firs I have to define my initial assumptions:
1. Market maker is paid by exchange for liquidity making. He should appear as limit orders to get paid for liquidity making.
2. Best suitable market environment for market making is small or constantvolatility.
3. Sudden changes of volatility or high volatility is risky environment for market making.
4. In risky environment I expect a smaller market making volume and vice versa. (You can recognize small short term liquidity on market depth at first levels. Macro data release time as example. It is expected situation by market maker - you can see their habits very clearly in this situation.)
So lets look on the picture again.
Market maker point of view:
We can see aggressive buy market order what caused sudden volatility change. Market makers limit orders got hit and he suddenly "unexpectedly" increases the short positions across all levels with average price same as market order.
Now the market makers positions are short and price is several ticks up from their average sell price. Market maker is in "unexpected" opened risk and should try to close his positions at best price as can and at best case using limit orders again (to get paid for market making).
Market order/big scalp trader point of view (or scalp HFT):
Scalp trader is expecting specific market maker activity (this is happening only a few times a day - "scalp trader know-how"). He send big market order and fill all nearest limits at across levels represented by market orders (besides). He knows that he throws market maker in risky position and use market makers bad situation again for gently close. He close his position by small sell market orders and market maker gets rid of toxic sell using buy limit.
My result:
In this particular situation the market maker is loosing. Market maker can compensates his lost thank to exchange payments for market making.
Market order HFT profits on market maker.
When market order HFT is opening his long, he is enemy of market maker.
When market order HFT is closing his long positions using short market, he is friend of market maker. Because he gives chance to market maker to close his toxic position.
(he can be best friend of market maker if he uses big sell market instead a lot of small. Because than avg open and avg close prices of HFT trades and market maker will be equal )
The above is very simplified but I think, market HFT parasites on market maker. That's why I'm asking if it's legal?
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