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Thursday, 06/13/2019 12:41:57 PM

Thursday, June 13, 2019 12:41:57 PM

Post# of 790506
Note on Proprietary Trading - Prop Shops for GSE Intraday and Short Traders

Proprietary trading can be defined as taking positions in equity and debt securities, their derivatives and options, and commodities to gain profits from short-term price moves and short-term arbitrage profits through short-term resales. A proprietary shop or prop shop is trading firm with traders engaging in the above activity with own capital.

If you are using a standard broker/retail trading platform with a computer with less than optimum CPU speed and without Level II data, the information below is a reminder affording protection from prop traders not having your interests at heart. Below is an excerpt from this 2014 article: https://corpgov.law.harvard.edu/2014/05/23/increased-scrutiny-of-high-frequency-trading/

"Private plaintiffs and regulators will likely focus their attention on high-frequency proprietary trading firms pursuing strategies that resemble traditionally prohibited forms of market manipulation such as spoofing, layering, marking the close and painting the tape. Spoofing and layering occurs “when a trader creates a false appearance of market activity by entering multiple non-bona fide orders on one side of the market, at generally increasing (or decreasing) prices, in order to move that stock’s price in a direction where the trader intends to induce others to buy (or sell) at a price altered by the non-bona fide orders.” Marking the close is a strategy that “involves the placing and execution of orders shortly before the close of trading on any given day to artificially affect the closing price of a security.” Painting the tape is the placing of “successive, small-amount buy orders in increasing prices to simulate increased demand.” The SEC has long contended that these practices violate Exchange Act Sections 9(b) and 10(b) as well as Exchange Act Rule 10b-5. As recently as April 4, 2014, the SEC imposed an industry bar and monetary sanctions of $1.9 million on the owner of a trading firm for misconduct that included spoofing and layering.

“Quote stuffing” and “price fade” are additional HFT practices that may attract attention from regulators and plaintiffs lawyers. Quote stuffing is a strategy that “floods the market with huge numbers of orders and cancellations in rapid succession, … creating a large number of new best bids or offers, each potentially lasting mere microseconds.” This tactic may be used to generate buying or selling interest in certain securities or compromise the trading decisions of other market participants by forcing them to process false order information. Order fade—sometimes referred to as price fade—is a trading practice that involves the rapid cancellation of orders in response to other trades. It results in “volume disappearing immediately after a trade on the same venue.”

High-frequency proprietary trading firms that engage in strategies similar to any of these practices may face examination, investigation and perhaps, enforcement action from regulators, in addition to private plaintiff actions."