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I am trying to understand the economics of spoofing (I am a lay person).

I understand that from a risk point of view, aside from the legal risk, the main risk is that of having a limit order filled before one can cancel it.

My main question is: on US exchanges, do professional participants also have to pay for canceling a limit order? (is there a deterministic cost to consider as well?)

(I understand that some brokers impose charges for canceled order. But presumably, these fee schedules are more relevant for retail investors. I'am specifically wondering about non retail HFT type operations.)

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Layering is a spoofing of buy(sell) orders sometimes complemented by higher(lower) sell(buy) orders that push the market up(down). Execution of a limit order above(below) would not be a concern, as your price objective is fulfilled.

No charge to cancel orders in the most common exchanges, for example, EUREX futures and OTC FI instruments. In equity HFT would also suggest no charge as would be detrimental to exchange objective of an increased order book.

This article by Bloomberg's Matt Levine details how market making and layering activities could be a thinly separated line, https://www.bloomberg.com/view/articles/2015-10-08/why-do-high-frequency-traders-cancel-so-many-orders-.

Additionally, there exist order types in equity HFT exchanges that protect the bid(offer) from being executed, unless trade conditions are met.

Try KCG's excellent Demystifying Order Types, https://www.kcg.com/uploads/documents/KCG_Demystifying-Order-Types_092414.pdf.

Financial risk, legal, moral all abound....

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  • $\begingroup$ Brumder describes the risk well in your linked article $\endgroup$
    – rrg
    Dec 22 '16 at 13:30
  • $\begingroup$ Great answer, thanks! Can you be a bit more specific about [specific order types available in equity HFT exchange]? I would like to know more. $\endgroup$
    – user189035
    Dec 22 '16 at 13:33
  • $\begingroup$ check out Flash Boys amazon.com/Flash-Boys-Wall-Street-Revolt/dp/0393351599 ;) $\endgroup$
    – rrg
    Dec 22 '16 at 13:34
  • $\begingroup$ I have read that book a while ago. Could you add a link with perhaps more specific info about such order types? I presume offered products are somehow also advertised and I am looking for more specific/recent info. $\endgroup$
    – user189035
    Dec 22 '16 at 13:36
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    $\begingroup$ I also find this part confusing: "There are specific order types available in equity HFT exchange that protect your bid(offer) from being executed unless trade conditions are met". To my knowledge, only IEX makes an attempt to protect passive orders from being traded through. And referring to "Flash Boys" for the exchange order types is just bad taste :) $\endgroup$
    – LazyCat
    Dec 23 '16 at 15:20

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