Chinese-based day traders are taking increasingly sophisticated steps to manipulate stocks traded on US markets, according to a surveillance firm executive.
Research and analysis conducted by Eventus Systems, a compliance, surveillance, and risk management firm, has detected regular instances of manipulation by Chinese-based traders trading predominantly Chinese companies listed on US stock exchanges.
Travis Schwab, co-founder and CEO of Eventus Systems, said traders use a complex scheme involving multiple brokers to execute buys and sells of various stocks on multiple exchanges to avoid detection. Eventus is developing a tool called Relationship Finder, to filter and decipher trading patterns and activities, using a diverse set of data.
“We see manipulation every day, spoofing and layering activities,” said Schwab, in an interview at the FIA Boca conference. “But with the cross-firm, cross technology platform, cross market, we’ve seen up to 12 different parties involved in market manipulation schemes. That’s 12 different accounts doing the manipulation.”
He said the Financial Industry Regulatory Authority (FINRA) is aware of the practice but it is difficult to suss out the participants doing the market manipulation. The fragmented US securities markets, with dozens of exchanges, dark pools and alternative trading systems, makes it hard, even with the consolidated audit trail (CAT), to trace misbehavior. Adding to that is the ability for individuals to quickly close an account and open another elsewhere.
Schwab said one of the problems is that brokers often have no way to tell they are being used to manipulate markets because one broker may be used only to buy stocks, while another is used to sell stocks. So one broker may have no idea who the other brokers are yet still may be held responsible for not having the right compliance structure in place. Exchanges themselves only know what stocks are being traded on their platform.
Schwab said Eventus has a good sample set of clients which helps it examine various relationships within the markets.
“We’re able to sniff out these relationships that you would not be able to do if you were just looking at one firm,” Schwab said.
While the ongoing behavior is centered on Chinese stocks listed on US exchanges, the broader concern is that the practice may spread to other securities. There conceivably could be a case in which stocks in benchmark indices could be moved, leading to a ripple effect on other markets such as options or futures.
Schwab believes the market manipulation is much more easily done on stock markets than on futures markets, which often have one central pool of liquidity that is easier to monitor.
“It is a pretty challenging problem,” he said.