Momentum Ignition and Rumors

As the US equity market continues its run higher disregarding all major potential disasters, the rumor mill has heated up.  Rumors are nothing new on Wall Street.  In recent weeks, we have  heard takeover rumors on GME, PTV, HOG and a host of others.  All of these rumors had one thing in common: they turned out to not be true.

We found an interesting piece of information in the recently released SEC Concept Release http:

“Another type of directional strategy that may raise concerns in the current market structure is momentum ignition. With this strategy, the proprietary firm may initiate a series of orders and trades (along with perhaps spreading false rumors in the marketplace) in an attempt to ignite a rapid price move either up or down.  For example, the trader may intend that the rapid submission and cancellation of many orders, along with the execution of some trades, will “spoof” the algorithms of other traders into action and cause them to buy (sell) more aggressively. By establishing a position early, the proprietary firm will attempt to profit by subsequently liquidating the position if successful in igniting a price movement.  Of course, any market participant that manipulates the market has engaged in misconduct that already is prohibited. “

So, big deal you say.  This has been going on forever and will continue to go on.  But it made us begin to wonder, if you can spike a single stock after establishing an early position and then “spoof” the algos into chasing it higher, why can’t a major player “spoof” an ETF?  Or, maybe even “spoof” the entire market? 

Our equity market is comprised of multiple exchanges and market centers all weaved together through high speed, low latency connections.  Many trades are executed electronically by algorithms that have pre-defined parameters that robotically go about their business.  It wouldn’t take much to get these machines to follow along and chase the market higher.   As these institutional algos attempt to achieve their stated VWAP or similar benchmark, the original momentum igniter is more than happy to sell their original position back to the algo.  This may explain that all too familiar daily chart pattern that we see in the major ETF’s.   Just something to think about when you wonder how this market continues to defy most logic.