One of the attendees to my recent webinars attempted to challenge some of my assertions about high frequency trading. He wrote me a very lengthy email that I will summarize here.
Basically, this gentleman was saying that market makers and other savvy institutional traders place very large false sell limit orders that are visible in Nasdaq Level II and Totalview to hold down stock prices while they accumulate shares. After accumulating the intended number of shares, they “lift” or cancel their false sell order and the stock takes off, giving them instant gains. This also occurs to the downside, where institutional traders place a large fake buy limit order in a stock that they intend to short, which allows them to keep building their short position. When they achieve their desired short position, these traders then cancel their false buy order and the stock plunges.
While there is definitely truth to this gentleman’s assertion, he insists that these manipulative orders are actually “fake” orders, but I explained to him that these orders are very real. If you or any other trader attempts to execute these orders, they will get filled. Even though the market makers don’t intend for these manipulative orders to get executed, they are still on the hook to execute these orders if need be.
To prove my point, I made him a bet: if he attempts to “hit” one of these so-called fake orders and the order actually proves to be fake, I will give him $10,000. If he was wrong and I was right, however, he has to pay only $29 for a one-week subscription to our CyberGroup chat room. Talk about a great proposition! Despite this, the gentleman never even answered my challenge. If he believed so strongly that these orders were actually fake, why didn’t he take my $10,000?!