Compliancex

High frequency traders are desperate to get ahead. Their latest tactic? Buying huge quantities of shares only to cancel the orders milliseconds later.

According to a CNBC report, an algorithm from a single, unknown high frequency trader was responsible for 4% of all quote traffic last week. But the algo didn’t actually execute any of the trades that it ordered, cancelling all of them fractions of a second after they’d been placed. All of the trades were routed from Nasdaq.

Although the motivation for the event is not known, experts speculate that the algorithm is intended to “…gum up the system so it slows down the quote feed to others and allows the computer traders (with their co-located servers at the exchanges) to gain a money-making arbitrage opportunity.”

“My guess is that the algo was testing the market, as high-frequency frequently does,” says Jon Najarian, co-founder of TradeMonster.com, to CNBC. “As soon as they add bandwidth, the HFT crowd sees how quickly they can top out to create latency.”

An alternate view, presented by Business Insider, is that the algorithm is a clever way to get other market players to “show their hands,” or reveal the trades they plan to make, leaving their intentions exposed once the algo backs out of the trades it ordered.

The algorithm stopped at 10:30AM on Friday. At times during the week, it was responsible for up to ten percent of the day’s trading volume.

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Beth Connolly is Editor-in-Chief of the Wall Street Job Report and the Compliance Exchange. She blogs creatively at When Nutmeg Met Basil. Connect with her on LinkedIn , Twitter, and About.Me.