Talk

Stock market spoofing

IP Spoofing is no longer the only method of masquerading in my vocabulary. It is possible to spoof the stock market. This weakness is due to the way market makers set their bid/ask prices.

Market makers set their bid/ask prices. (Bid is the price the dealer will pay for your stock and ask is the price at which the dealer will sell you the stock). The SEC has a Limit Order Display Rule which requires that limit orders for 100 shares or more is displayed on the system (NBBO - National Best Bid and Offer). The display of the limit order influences the dealers bid/ask price (because the dealer knows of an outstanding order for a higher price). This weakness is exploited by a trader sending in a limit order at a higher bid price and then selling his shares when the dealer honors the higher price. The immediately the trader cancels his limit order leaving the dealer with the stock.

An example:

the Commission’s complaint against Alexander Pomper alleges that Pomper placed a limit order to buy 300 shares of Gumtech International (“GUMM”) at $11.375 per share when the best bid side of the NBBO was $11.0625 per share and the best offer side was $11.4375 per share. Due to the Limit Order Display Rule, Pomper’s $11.375 per share buy order became the new best bid price. Pomper then placed an order to sell 2000 shares of GUMM at $11.375 per share through another market making firm. Pomper obtained immediate execution at $11.375 per share (rather than $11.0625 per share) because the other market maker honored the $11.375 best bid price created by Pomper’s buy order. After Pomper obtained his price improvement of $.3125 per share, or $625.00, he canceled his order to buy at $11.375. Pomper’s conduct was deceptive because he improved the NBBO with a limit order he did not actually want filled.