What is 'Quote Stuffing'

Quote stuffing is the practice of quickly entering and then withdrawing large orders in an attempt to flood the market with quotes, causing competitors to lose time in processing them.

BREAKING DOWN 'Quote Stuffing'

Quote stuffing was coined by Eric Scott Hunsader, founder of financial data company Nanex, is a strategy high frequency traders (HFT) use to gain a pricing edge over competitors. It is made possible by high-frequency trading programs that can execute market actions with incredible speed — generating hundreds of orders per second. High frequency trading is now estimated to account for at least 50% of total market volume. These programs allow HFTs to make money by arbitrage: exploring temporary pricing efficiencies before others have time to notice and/or react to them.

High-frequency trading in and of itself is not illegal. However, stuffing takes place when traders fraudulently use algorithmic trading tools that allow them to overwhelm markets by slowing down an exchange’s resources with buy and sell orders in securities.

Only market makers and other large players in the market are capable of executing these tactics, since they require a direct link to the securities exchange in order to be effective.

Quote Stuffing and Securities Regulators

The practice has come under scrutiny from financial industry regulators including the Securities and Exchange Commission (SEC), Nasdaq, the Commodities and Futures Trading Commission (CFTC) and the Financial Industry Regulatory Authority (FINRA). All three regulating bodies have imposed fines on HFTs for violations of exchange rules, including quote stuffing, front-running and price and market manipulation. Though the SEC’s investigation ultimately placed the cause on other factors, quote stuffing was initially blamed as one of the main drivers of 2010’s “flash crash,” when the Dow Jones Industrial Average (DJIA) fell 1,000 points within minutes. Whatever the cause, it is reported to be widespread and negative impacts on securities exchanges’ efficiency.

Additionally, research studies compiled by ResearchGate, and those conducted by Nanex and CFA Institute, among others, suggest that HFT practices, including quote stuffing, raises prices, decreases liquidity and causes greater volatility in markets.

Both the NYSE and FINRA (in December 2016) have adopted rule changes to address quote stuffing, including Rule 5210 (Publication of Transactions and Quotations) to prohibit “two types of quoting and trading activity that are deemed to be disruptive.” Other proposals to address the problem and reduce the advantage of HFTs include instituting minimum time periods, measured in milliseconds, before buy or sell quotes could be canceled.

  1. High-Frequency Trading - HFT

    High-frequency trading - HFT is a program trading platform that ...
  2. Cook The Books

    Cook the books is an idiom describing fraudulent activities performed ...
  3. Stock Quote

    A stock quote is the price of a stock as quoted on an exchange. ...
  4. Dark Pool Liquidity

    Dark pool liquidity is the trading volume created by institutional ...
  5. Large Trader

    A large trader is an investor or organization with trades that ...
  6. Order Protection Rule

    The Order Protection Rule is a policy that aims to ensure that ...
Related Articles
  1. Investing

    High-Frequency Trading Regulations (ETFC)

    Current regulations on high-frequency trading, and possible future ones. How some people think high-frequency trading should be regulated or illegal.
  2. Trading

    Strategies And Secrets Of High Frequency Trading (HFT) Firms

    Secrecy, strategy and speed are the words that best define high-frequency trading (HFT) firms.
  3. Trading

    The Perils Of Program Trading

    The increasing use of program trading makes market glitches inevitable - and sometimes disastrous.
  4. Insights

    Hedge Funds and the Law

    Learn how hedge funds have gotten in trouble for illegal insider trading. Read about questionable high-frequency trading (HFT) strategies.
  5. Trading

    Introduction to Stock Trader Types

    What type of stock trader are you?
  6. Investing

    Build-A-Bear Workshop Is Exploring a Sale

    As both a parent and an investor, Build-A-Bear Workshop (NYSE: BBW) has always struck me as a challenging business to operate. The chain, which lets kids make their own stuffed animals, has ...
  7. Investing

    Did ETFs Cause The Flash Crash?

    On May 6, 2010, the DJIA plunged 998.5 points in twenty minutes. Find out more about what happened that day.
  8. Financial Advisor

    Asset Manager Ethics: Placing and Managing Trades

    Five guidelines have been created to assist asset managers on the best practices for placing and managing trades in client accounts.
  1. What is high-frequency trading?

    High-frequency trading is an automated trading platform that utilizes powerful computers to transact a large number of orders ... Read Answer >>
  2. How are asset management firms regulated?

    Find out how the asset management industry is regulated and how those regulations fit within the broader scope of financial ... Read Answer >>
  3. How does FINRA differ from the SEC?

    Discover how Securities and Exchange Commission (SEC) is different from the Financial Industry Regulatory Authority (FINRA) ... Read Answer >>
Trading Center