I'm not surprised in the least. The industry is full of stories that started out as rumors but have ended up proven as true about the lengths they will go for more or better information.
I've heard an apocryphal story that I'm still waiting for truth on. It was of a soybean prop trading firm quant who reverse engineered a cross-town rival's trading strategy, allowing them to front run their strategy. The way that they did it was taking a number from the firm's name, and using it as a random number seed, and then using that seed to find the randomized order sizes would result from their iceberg order algorithm. They would use those sizes to match to l2 passive limit order flow to try to identify activity coming from the firm. Once they discovered the direction the firm was going, they'd place a huge market order and suck up all of the liquidity that the competitor was trying to acquire passively, effectively moving the market before their competitor could fill their position.
Stuff like this still blows me away, but it's just crazy enough to be true.
I heard that story from a quant friend. However, the way I heard the story, the targeted firm found out about their rival's attempt to game their strategy, and faked a bunch of activity. The rival's algorithm acted on the activity and placed a large market order...in the wrong direction.
From a place of total ignorance, why would telegraphing a particular false strategy to your competitor in order to get them to respond in a way that is profitable to you be illegal?
Because you’re not just telegraphing it to your competitor, you’re moving the entire market and affecting the bid/ask and price transparency for all its participants. That affects liquidity, derivatives, a lot of downstream negatives.
That said, there are narrow instances where you can place less-than-real orders in a market [0]... it just has to be a market that is nearly and completely illiquid.
Sorry, should have been more specific. As I understand it, no trades were made--they just spoofed whatever activity their competitor was looking at, so it wasn't illegal (but then again, I was hearing the story second-hand).
I'm lost as to what is meant here by "number". Are you saying the target firm was randomizing its iceberg order's component order sizes using the same seed? If yes, how could the target firm's usage of that seed be known by the "attacker" here?
The target firm had a number in their name, kinda like a16z or Office365. The attacking quant knew the target was using iceberg orders which split up and randomize parts of large orders. Attacking quant took a guess at an RNG seed by guessing they used the number in the target firm's name, and then somehow fit the resulting random number stream to order chunk sizes, and was able to confirm they used that number as a seed. From then on, using that information, they would identify (I'm assuming probabilitistically) when the target firm was executing a large iceberg order, and then front run the remainder of their order.
It sounds ridiculous on its face, but the industry is known for going to extremes, and that sort of problem solving isn't unheard of in other domains (like cryptography for example). I'm way out of my depth with understanding it, and it could be complete bullshit, but it isn't outside the realm of what I've seen proven in the past, which is why I'm hoping someone someday will confirm it.
It would be amateurish if it were cryptography for sure. But I would never expect that sort of attack vector as a quant. Most quants are worried about alpha loss, not having your order flow fingerprinted.
I've heard an apocryphal story that I'm still waiting for truth on. It was of a soybean prop trading firm quant who reverse engineered a cross-town rival's trading strategy, allowing them to front run their strategy. The way that they did it was taking a number from the firm's name, and using it as a random number seed, and then using that seed to find the randomized order sizes would result from their iceberg order algorithm. They would use those sizes to match to l2 passive limit order flow to try to identify activity coming from the firm. Once they discovered the direction the firm was going, they'd place a huge market order and suck up all of the liquidity that the competitor was trying to acquire passively, effectively moving the market before their competitor could fill their position.
Stuff like this still blows me away, but it's just crazy enough to be true.