By definition, quote stuffing is the art of manipulating the cost of a specific good or commodity in the sale. This is achieved by injecting a lot of trading orders, whether for buying or selling, then pulling them down shortly afterward. The investor doing this act has the intention to manipulate the values of these goods at that time, therefore probably favouring their investment. Quote stuffing is, therefore an act of manipulating sale figures by distorting the actual information of service supply and demand. It’s aimed at misguiding prospective competitors with false orders, leading to loss of investment time.
Quote stuffing has very diverse yet key effects in the exchange. For instance, a bond has a selling price of $100 and an order of 500 potential buyers. Injecting 1000 new fake potential buyers leads to an increase in its demand. Other buyers, on seeing the increase in demand, proceed to bid in the purchase of the security too. As a result, even when the fake bids are pulled down, the demand for the bond is already high. This leads to a higher sale price for the seller that they would otherwise have. These new investors are conned into bidding for the security or shares they’d otherwise never have invested into and the seller acquires a price they’d otherwise not have gotten for the security.
In the same scenario, the security has a selling price of $50, 000, and orders of 5000 interests. Adding more securities of the same provides interested buyers with more options. Some of them will then shift to other similar securities leading to a decrease in the value of the first security. Even after the fake shares are withdrawn, processing delays cost the seller money. The number of interests in the said item decreases leading to a huge dip in the market value. These tactics prove effective for the people on the receiving end of figure variations.
High Frequency Traders apply quote stuffing as a key strategy to heavily short change their competitors. The platform through which HFTs (High frequency trading) thrive is the use of computer software and speed. Quote stuffing requires servers and the ability to manipulate data in extremely short periods. Their ability to have backdoor access to market variations and fast software makes forging and running of these orders at supersonic speeds quite easy. Trading companies, commercial institutions, and other financial data companies use this to control market access.
With its continued use over time, and following the illegality of quote stuffing, financial institutions have been put in place to control its practice. In the United States, such bodies as SEC and FINRA have put up strong regulations to keep HFTs in check. Violating these guidelines has great fine repercussions for the defaulters that get caught. The reason behind this heavy regulation has been the effect of market efficiency. Quote stuffing undermines the market balance and is therefore considered an illegal practice similar to spoofing.
There is no easy way to determine whether the values on the screen are accurate. Its adverse effects are way more than the advantages. This is what makes quote stuffing a huge problem in the industry. While financial traders and data companies might be able to make a profit of it, the undermining of value is too much of a charge to pay. Regulation has helped level the playground for competitors.