medium · Market Microstructure hft
An HFT firm places a large sell order at the best ask with the intent to cancel it the moment a buyer-initiated trade occurs at that price. This is done to induce other algorithms to lower their bids.
Why is this considered manipulative under the Dodd-Frank Act?
- The strategy uses co-location and fast feeds for microsecond execution.
- The trade results in a negative realized spread for the resting market maker.
- The order's notional size happens to exceed roughly 10% of the average daily volume.
- The trader lacks a bona-fide intent to execute the order at the time of entry.
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