Quote Stuffing and Sub-Penny Prices Probed as Market Manipulations

They may have caused the Flash Crash.  

One thing is clear, say traders and regulators: An eye-popping number of the stock quotes entered in the U.S. market's exchange system are canceled.

For example, on Feb. 18, trading volume on the Nasdaq exchange totaled about 1.247 billion shares, according to data compiled by T3 Capital Management, a New York hedge fund. However, over the course of the same day traders submitted offers to buy or sell stock for roughly 89.704 billion shares. In other words, only 1% of the orders posted on Nasdaq actually traded.

While a portion of cancellations are part of the natural course of trading, Sean Hendelman, chief executive officer at T3, says he believes most of these canceled stock quotes are from traders loading up a stock's computerized order book with essentially fake bids and offers.

Mr. Hendelman, whose firm employs other high-frequency trading tactics, says the practice creates an inaccurate picture of the true supply and demand for a stock. "People are relying on the [stock quote data] and the data is not real," he says.

 

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