Thrust into the limelight in the wake of May 6, 2010 “flash crash”, quote stuffing, the term coined by market data firm Nanex LLC, typifies rapid-fire stock orders submitted and then forthwith frozen with an aim to sabotaging strong competitors and making a full evaluation of a certain product’s market value. The staggering rate of transfer as well as the peripheral effects it engenders, dictates the evolution of stock market transactions in the detriment of less prepared bidders by means of a series of cunning stratagems.
Large players resort to high-frequency trading programs offering direct access to stock market databases to flood markets with apparent low-cost quotes which they later sell at a much higher price. How precisely does the mechanism behind such intricate operation work? According to Nanex LLC, HFTs deluge a particular quote feed with noise data on one hand and, pinpoint the response discrepancies between a market places gateway and matching engine on the other hand. As a result, liquidity seeking smart order routers possess little or no mitigatory force, generating increased latency arbitrage opportunities for the lurking profit seekers. For example, if a big player buys a stock on an Tokyo Stock Exchange at say, $28.05 and instantly asks $30.10 for it on the NYSE, the odds are high that they make a considerable share profit in no time, and without running the risk of losing their credibility.
This cutting edge application enables the potent market makers not only to establish price rate of change, but also to gain an immense mercantile ascendancy. In the light of such intermittent and unethical assaults, many befuddled retail investors often make unfortunate decisions jeopardizing the overall transaction and paving the way for record losses.
Rumor has it that quote stuffing was considered to be the main culprit behind the drop in shares recorded by many companies during the flash crash. But the truth lies somewhere in between: While it it true that companies which can afford to pay for high performance computer setups could undermine the regular trading session at a given stock exchange market, one cannot deny that such market stratagems lack the coherence to bring down a whole system. Research conducted in the aftermath of the famous crash have evidenced beyond any shred of a doubt that to place the blame for jarring discrepancies between the quotes on sale and those purchased by smart players on quote stuffing is tantamount to nominating market fluctuations as the sole responsibility for insolvency.