Research: Quote Stuffing Aims to Slow Rivals
June 5, 2012
In a paper released May 25, a University of Illinois research term finds evidence of industry practices consistent with ‘quote stuffing’ designed to slow down trading in a channel carrying market messages.
Mao Ye, Chen Yao and Jiading Gai of the University of Illinois at Urbana-Champaign found that ‘exogeneous technology shocks that increase the speed of trading from microseconds to nanoseconds dramatically increase” order cancellation rates and found “evidence consistent with “quote stuffing.”
“As speed is of value to a trader, it is almost equally valuable to slow his competitors down,’’ the researchers said in their paper “The Externality of High Frequency Trading.’’
They studied six “ randomly grouped channels” at the Nasdaq Stock Market and concluded that “message flow of a stock can slow down the trading of stocks in the same channel but not stocks in a different channel.
The results, they said, “suggest that investment in speed at the sub-millisecond level may allow high frequency traders to play more complex trading games without a consummate social benefit. ‘’
The researchers noted that the Dodd Frank Wall Street Reform Act in Section 747 specifically prohibits “bidding or offering with the intent to cancel the bid and offer before execution
This paper relies on data from 2010 provided by the Nasdaq TotalView-ITCH data feed from the Nasdaq Stock Market.
The data includes “all orders to the displayable book and all executions from both displayable and non-displayable orders on Nasdaq in real time.’
The messages are timestamped in nanoseconds, aka billionths of a second.