Opening Cross: More Data = Less Layering = Less Crying = More Giggling

With new data analysis technologies, there's no excuse for not spotting market manipulation.


As any parent of multiple children—and especially twins or more—will know, despite one’s best efforts to bend the space–time continuum, you just can’t physically be in more than one place at the same time, and there’s always one (or more) giggling or crying bundle of energy demanding your attention. But this isn’t the case for traders: not that they aren’t giggling/crying bundles of energy, but rather that a trader can actually be in two places at once—just not legally.

I’m referring to a practice known as “layering,” where a trader is active on both sides of an order book at once in an attempt to manipulate prices. For instance, a trader might flood the order book with low orders to artificially depress the price to the point where it triggers a resting buy order at lower than market price. Sometimes this is accidental, when a trader simply forgets to cancel orders. Either way, regulators and marketplaces are cracking down on the practice to prevent market manipulation. This past week, BATS Global Markets has filed a new rule with the US Securities and Exchange Commission to allow it to expedite the process of suspending participants that engage in manipulative practices, such as layering and “spoofing”—where a trader rapidly places orders then cancels them before anyone can execute against them, which can have the effect of simulating interest in a security or derivative contract and artificially inflate or depress the price, allowing them to then buy or sell at an artificially advantageous price.

Announcing the proposal, BATS officials said that it can take “unacceptable” amounts of time to stop those traders—which it believes are usually “small groups of day traders, often located in foreign jurisdictions, accessing the markets via US broker-dealers,”—who engage in these manipulative practices.

It’s not just the overseas originators of the orders who can face penalties. US firms found engaging in these practices—or allowing them to take place via their infrastructures—could also find themselves in hot water. However, there’s no reason why this should occur, now that data and technology providers like Fidessa have developed tools for monitoring, analyzing and optimizing trades in real time, and when proprietary trading firm Trillium Trading has built a platform that specifically monitors for layering. Indeed, Trillium’s general counsel and chief compliance officer Michael Friedman is somewhat of an expert on the topic: while he was still an external counsel to the firm, industry regulator FINRA raked Trillium over the coals for layering between 2007 and 2010. Trillium was fined $2.26 million and fired nine traders, while FINRA demanded that the firm implement controls to prevent reoccurrences.

The result was Trillium’s Surveyor application, and Friedman has become the firm’s de facto evangelist for the tool. Yet despite clear demand existing for this type of service, the firm found it hard to attract the level of salesperson who could get Surveyor in front of the right people at potential user firms. After all, as Friedman admits, the Surveyor business is much like a startup, which might seem a risky move to the type of sales executive the company hopes to attract.

As luck would have it, mutual contacts directed Trillium to USAM Group, the outsourced sales agency set up by former NYSE Technologies exec Feargal O’Sullivan to provide experienced sales staff to financial technology startups on an on-demand basis. Since starting work with Trillium in June, USAM has already been able to get the ball rolling—though Trillium expects the sales cycle for a tool like Surveyor to be “fairly long”—and may also be able to leverage its client contacts and sales relationships with other vendors to expand Surveyor’s reach beyond what Trillium would have been able to achieve alone. And being a father of twins himself, O’Sullivan is undoubtedly well versed in juggling competing demands and making sure his clients and partners receive equal amounts of attention, to make sure everyone—not just traders—is kept giggling rather than crying.

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