“Quote Stuffing” the Latest Possible Culprit in Wall Street Investigations

As reported earlier (“High Frequency Trading Re-Visited – After Wall Street’s Freefall” Vol 8, No 23, May 19, 2010), the US Securities and Exchange Commission has launched investigations into anomalous trading patterns during 2009 and 2010. An important aspect of the practices under investigation has been the essential role that computer-directed trading plays in new trading practices and patterns. Only now has it emerged in the public media that not only have computer programs been used for high-frequency trading, but often such trading is being used to both buy and sell the same shares within micro-seconds. This practice of “quote stuffing”, according to some observers, has been used as a tactic by firms to distract rival trading firms from other strategies they are using. Also, investors could think that a sudden jump in trading volume was a sign of increased liquidity whereas, in fact, the mutually cancelling buy and sell orders reflect no real market shift whatever. As further practices of this type emerge from the obscurity of brokers’ backrooms into the full light of day, some observers are voicing concern of the effect this will have on investors’ confidence in the markets and whether the so-called “average investor” will gradually begin to feel that the trading of equities is a rigged game. For an article by the Reuters news agency, follow this link: http://www.reuters.com/article/idUSTRE6812ZS20100902 Summary by: Richard Potter