Manipulators Find Cloak in Splintered Market, Finra’s Gira Says

Rogue traders are benefiting from the splintered U.S. equity market by spreading their buy and sell orders across multiple exchanges, according to a top U.S. regulator.

Traders pepper one venue with quotes in an attempt to move a security’s price, while sending other orders to different markets to profit from the change, said Thomas Gira, executive vice president of market regulation at the Financial Industry Regulatory Authority.

“People are trying to make the activity look more random than it is,” Gira said during a telephone interview this week. “They’re trying to make it look like there’s a lot of noise in a stock where it really could be one person that’s behind it.”

Scrutiny of the U.S. stock market, which is spread across more than 50 electronic venues, is growing amid complaints that it’s become too complicated. Gira’s comments refer to trading practices where orders are placed and quickly canceled in an effort to create false -- and illegal -- impressions of supply and demand. These techniques account for more than half of all price manipulation schemes, Gira said.

The regulator said rogue trading makes up a small portion of stock trading.

“It is not even remotely close to being rampant,” Gira said. “People have always tried to manipulate markets, and there will likely always be a small group of bad actors who attempt to manipulate markets. But our job is to make sure that we have the capability to detect and deter manipulative activity and work to ensure the integrity of the market.”

Sloppy Algos

At any one time, Finra is looking into around 170 to 200 cases of market manipulation, many originating outside the U.S., Gira said, adding that many cases cannot be prosecuted for lack of evidence.

“It is hard to prove intent, when you’re bringing a manipulation case,” he said. “A lot of this is just sloppy; they don’t test an algo before they launch it.”

Traders are increasingly sending their quotes through numerous brokers to confuse regulators, he said.

“You might see layering being done by one firm, and then the order that would be advantaged by the layered orders where the market starts to move is being put in through another firm,” Gira said. Layering is a term regulators use to describe attempts to manipulate prices through bogus orders that are quickly canceled.

Sprecher, White

Gira’s comments came two weeks after trading executives including Intercontinental Exchange Inc. Chief Executive Officer Jeffrey Sprecher said the market should be less complex. Securities and Exchange Commission Chairman Mary Jo White said this month that she’s concerned about private markets such as dark pools, where bids and offers are kept secret, masking the true extent of demand for shares.

The proliferation of exchanges and dark pools hasn’t drawn scorn from Gregg Berman, the Princeton-trained physicist who runs the SEC’s analytics office.

“One of the things I’ve been concerned about is when people talk about fragmentation: ‘There are too many markets,’” Berman said June 17 at the Securities Industry and Financial Markets Association conference in New York. “So how many should we have? And if the answer is, ‘not one,’ then I’m going to push back. So if someone says, ‘just three,’ why is three better than 11?”

At a speech in April, Berman explained market complexity by saying that “the desires of investors and investment managers” required “an unavoidable increase in the complexity of our markets.”

Before it's here, it's on the Bloomberg Terminal.