Order Flow Spoofers and how to avoid them.

I love to read the press releases of the Commodity Futures Trading Commission. Its a constant stream of enforcement actions against fraud and phonies within the Futures trading world. In fact, many of my articles have triggered enforcement actions so its fun to read who got hammered and sort of admire my work.

During the month of September 2018, the CFTC has announced a new round of spoofing violations against various individuals and trading firms. The following are just the most recent…for September,

Usually, these spoofing violations result in fines and penalties that start at $2ook and can go as high as hundreds of millions of dollars. Many readers might even be surprised to read that some of the “cleanest” and reputable trading firms also engage in this illegal behavior.

During the month of January and February alone, Deutch Bank was fined over $100 million dollars for spoofing Futures markets–in two separate trading divisions.

Heck, there is even a cottage industry of software developers that design and create specific software programs that facilitate this illegal activity. During the month of January 2018, Edge Financial Technologies was charged with fraud and aiding and abetting for creating a spoofing software program that systematically fleeced investors.

What exactly is spoofing?

Spoofing is incredibly simple. It is the act of stuffing the order book with buy or sell orders…that you have no intention of actually executing. Anyone can do it. Lets take a look at the most common example.

Suppose that you enter a long position in the Emini SP500 futures contract at 1300. You want the price to go higher so that you can make a profit. For the majority of us, we have to sit and hope that additional buyers will push the market higher.

Spoofers do not wait for ‘organic’ or natural buyers to enter the market. Spoofers use sophisticated computer programs that instantaneously enter massive quantities of orders in the area where they want to exit their trade. Not where they want to enter a trade.

The influx of orders is meant to fool small investors into believing that something big is happening. And they should pile into their position, in the direction of the order flow.

However, the spoofed orders are never actually filled. They are canceled just a millisecond before the price touches the order. Small traders, like us, cannot see the manipulation because humans do not have the capacity to digest information and react at the millisecond level.

The end result is that small investors, like us, are spending a great majority of our time ‘chasing our own tails’ while the spoofers are leading us from point A to point B.

The scam of Order Flow Analysis

If you Google search Order Flow Analysis, you will be presented with a range of software providers that supposedly can predict the future by analyzing order flow. The most popular include:

Since 2014, I have written about many of the companies listed above. They all offer the same Order Flow ‘snake oil’ pitch where they promise that their day trading software predicts the future by looking at institutional trading volumes entering and exiting the market.

However, not a single one of these providers have been able to develop a definable and systematic approach to their software.

In the past several years, I have gone around and around emailing with nearly all of these Order Flow software providers and asked for a systematic approach…not a single provider has answered the call.

Instead, they give the usual soft response like, “we design tools and visualization techniques that help traders better understand order flow.”

The scammers have noticed

One of the great pioneers of the electronic trading arena is a person named Jonathan Walden of Rithmic. Many readers are familiar with Rithmic and use it daily. Jonathan essentially designed the plumbing that nearly all Futures contracts are currently trading. He is a true pioneer.

Whenever we have a rash of spoofing violations, I usually send Jonathon an email and ask for help explaining how the fraud is being executed. As a technology provider, it is never in his interest to “open the kimodo” of companies that use his technology. But Jonathon just tells it like it is.

I don’t want to put words into his mouth or mischaracterize our conversations, but it is pretty obvious what has been happening.

In the past 15 years, as more and more traders have come to rely upon Order Flow as their main analysis channel…the larger institutions have devised increasingly sophisticated methods of manipulating the short term actions of small investors.

In short, they are using our flawed tools against us.

So what is the solution?

In my opinion, short-term ‘order flow’ analysis tools are just another technical analysis scam. On a short-term basis, none of this stuff and be clearly defined and backtested for performance.

So should you become a spoofer? I am sure that many readers are asking themselves this very question. However, in order to become a spoofer, you will need an extremely large futures trading account. Preferably several massive futures trading accounts.

Once you have several accounts, then you would need a software solution that aligns the activities of each account, so that they mirror each other.

Next, you would need an automatic program that fires off thousands of ‘fake’ orders in the direction of where you want to fool your fellow traders.

Yes, you can probably earn millions of dollars and might even get away with it. At least for a while. But eventually, the truth leaks and the next thing you know…you are being shoved inside a concrete box. Just not worth it. You cannot put a price on freedom.

In my opinion, the best solution is automated futures trading strategies. Do the hard work of programming and developing a series of edges that you can execute yourself. Stop relying upon whack-a-doodle software providers promising zany profits with indicators that look like a Christmas tree lights.

A great starter book for Futures traders

One of the best books that I have discovered regarding developing intraday futures trading strategies is a book written by Art Collins.

Nobody really knows about this guy. He a CME member and full-time Futures traders based out of Chicago. In 2006,  Art published the following book:

Beating the Financial Futures Market: Combining Small Biases Into Powerful Money Making Strategies

 

I know, its an ugly book. But its full of really good short-term trading strategies. I have programmed them all.

Some readers might already be griping, “Its an old book!” Yes, that is true. However, in 2017, Art followed up the original book with an almanac book that reexamines how each strategy has performed since the original publishing.

Beating the Financial Futures Market: 2017 Almanac

Some readers might be tempted into just purchasing the 2017 Almanac. Don’t. If you are considering purchasing the book, then buy the original book.

The original book contains the logic behind the code. The logic is where the real power is revealed.

Wrapping things up

This blog post went on for quite a while. I wanted to talk about spoofing and give the CFTC some praise for recent busts.

Then I wanted to transition into the shitty ‘Order Flow’ software that everyone seems to be using. Maybe take a bit of luster off thy turd.

And finally, remind people that success in Futures trading is not found in trading indicators that more resemble an ensemble of Christmas tree lights. Instead, success is mostly found in programming and backtesting trading strategies. And then automating the strategies, or developing a hybrid framework that allows a person to manually execute.

Thanks for reading. Oh, and I have to disclose that if you purchase Art’s book on Amazon, I receive compensation of .35 cents. Yes, I am getting rich.

On the agenda for the remainder of September 2018:

Thanks again for reading.

-Emmett

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7 Comments on "Order Flow Spoofers and how to avoid them."

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Cristian
Guest

I do not argue with anyone just want to say that FT71 (member of CME and licensed Eurex trader) , one of the most reputable traders and mentors of these days is using Bookmap as his final decision and execution platform.
IMHO saying not using orderflow tools because of spoofers its like saying not using brokerage firms because PFGBest fraud.

David
Guest

I watched FT71 trading live with bookmap, he took a shot and quicky lost couple points and that was it. Nothing that was in the bookmap could provide information to act, of course after the fact you could have said orders were stacked here or there and it provided support or resistance.

Cristian
Guest

Yep ! I’m disappointed too..FT71 is not one of those traders never having a losing trade

David
Guest

I am talking about Bookmap not FT71.

Truth Crusader
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Truth Crusader
It is possible to develop a system; but it won’t be taught anywhere; you yourself have to devise it. Your own ..(I equally don’t kno if it’d work as I had reason to pursue other avenues b4) .. To be fair, he did say can’t really be backtested, try it out; you’ll see w/in a bit if this is smth you want to do. And it is to read it .. Not spoof; I’ve highlighted certain OF vendors here previously; no denying their character..so where do you put them 🙁 in the insane box .. Bah, Market Profile; you know… Read more »