Market manipulation video: is this for real?

[Capt. Ridley's Shooting Party]

This is part GQ/GD question, so I decided to put it in here.

I've just come across this (http://www.youtube.com/watch?v=xOr5suFJ6-k&feature=player_embedded) video, which purports to show blatant market manipulation, supposedly illegal, which isn't being picked up on by the regulators. As far as I understand it, HFT programs are offering to buy/sell at a certain price, then, as the market adjusts to this new information and the price changes slightly, they quickly cancel their order, and take advantage of the price movement. Is this correct?

Is this really market manipulation and illegal? The video states this tactic is impossible without using HFT programs. Is that correct? What can be done to stop this, if it is market manipulation? What are the downsides to this type of manipulation?

Also, something I wondered: why does this trick seem to be so infrequent in the video? If I found a way of virtually printing money by manipulating markets, I'd be doing it constantly. But, as it appears in the video, the placing of large numbers of bogus orders to manipulate the market only seems to happen once or twice a minute or so. What am I missing?

(Excuse the naivete, I know next to nothing about how the stock market works. I've come across "manipulation videos" before that appeared to look like CT videos. This one actually seems to show the phenomenon happening in real time.)

[Damuri Ajashi]

I have placed orders to sell options in order to narrow the spread and then buy the options on another exchange. Every once in a while someone comes along and buys my "fake" sell order but for the most part, competition among market makers to offer the best price that causes them to "meet the competition" (me) that allows me to buy from them at a price they are willing to sell at.

I don't think this harms the average investor in most cases except when the computer trading has a black swan day and the market drops 1200 points in an hour.

[doubled]

As far as I understand it, HFT programs are offering to buy/sell at a certain price, then, as the market adjusts to this new information and the price changes slightly, they quickly cancel their order, and take advantage of the price movement. Is this correct?

Is this really market manipulation and illegal?


Market professional weighing in here. If you think that makes me biased, so be it. But how in the world is this market manipulation? I see nothing illegal or unethical here.
The guy is placing a ***binding*** offer in the market to buy/sell at a certain price. If anyone says "I'll take it" then the guy is forced to do the trade. But until someone takes the offer, he is of course free to withdraw his offer, and he does so as soon as he sees how the market reacts to his bid/offer. So what? That's no different than you negotiating with a car dealer and offering a lowball price that you know he won't accept, just to see what his counter-offer is.

The video is trying to imply other people will see his "fake" bid/offer (and by the way, it's *not* fake since he will be required to act on it if anyone accepts his bid/offer) and think "Oh, lots of people are trying to buy at a really bad price, so that means the stock is going lower and I'd better sell out now!" Well, sortof true -- people are trying to guess where the market is heading by seeing what prices other people are offering. But trust me -- there's so many people trying to buy at so many different prices that the stock will definitely NOT nose-dive just because somebody submitted a low-ball bid.

Anyway, the video even admits that these differences change so fast that only HFT algorithms can detect them, so it won't affect any "normal" person. Worst case, this type of "manipulation" can manipulate prices by a few pennies for a minute or two -- long enough to trade with another HFT algorithm; but there is no way this could ever affect your 401K value.

[msmith537]

I would argue that HFT makes markets MORE efficient, not less by increasing the frequency of trades.

For some reason I'm seeing a lot of these sort of posts these days. They usually start with "I know nothing about finance/stocks/economics/etc but take a look at this" followed by some sort of professional looking video presentation that attempts to debunk stuff that is usually taught in a basic economics or finance class.