Sometimes there is a limit order inserted as the best sell/bid, but when my program sees the opportunity and places a market order immediately trying to hit it, it's canceled which causes a big slippage to my order. I am thinking maybe the limit order is fake and used to lure orders in the first place. I am not sure what it can be called (maybe spoofing?) and wondering if anyone can give me some directions or references about how to detect and avoid this damage. Thanks. (Using of a FOK or limit order on my side is not ok since I have to hedge to prevent bigger loss in a fast moving market.)
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$\begingroup$ I would use an IOC limit order for that. You write that is not possible due to you also immediately trading a second leg against. Assuming the market that you are hitting is less liquid than the market you are using for your hedge and trading there is more noisy, then you could also wait with your hedge until the hit succeeded or not. If there were no fake orders in the hit market then this would increase your p&l variance but not really affect your mean. In the last presence of these fake orders I’d expect your mean to improve (still at the cost of more variance). $\endgroup$– LocalVolatilityJun 3, 2021 at 8:06
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$\begingroup$ If the order is resting in the order book - it is not fake. It is an actual order but it can have a very short life cycle, sometimes measured in 100s of microseconds. Consider adding an IOC condition to your orders as suggested. This way your incoming order will execute (partially) only if the short-lived counter order is still present. $\endgroup$– Sergei RodionovJun 3, 2021 at 8:17
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