Trading losses caused by fake stock transactions

Watch for “Trade fake” stock transactions trying to trick you into stock trading losses that can be avoided

For those who are not basketball players a head fake is using body language to shows you intend to move in one direction when you really plan to move in a different direction.  If the opponent moves out of the way then you have easy access to the basket.  I think we should call this a “Trade fake” since I  can’t see their head but the intent to deceive is the same.

I am showing you this stock trading tactic to share knowledge you can use to protect yourself from the stock trading equivalent of a Used Car Salesperson.   Please use it ethically.

Bayes Analytic provides a stock trading engine which specialized trading algorithms to detect “Trade Fakes” so you can maximize trading revenue and protect your self from the trading losses or even turn the table on the culprits and make trading profit.

Suckers discount  sell

A trade fake works like this;  First thing in the morning sell a small number of shares of a stock like AA at a price a few percent below the open price.   Before you do this enter a limit order to buy AA at just above your suckers price.   What happens is your opponent sees the chart drop like a stone and panics selling a bunch of AA stock at a discount to avoid a larger loss.     Since you have an order sitting there to pick it up you buy his stock at a discount and turn around and resell it a few minutes later at the higher price.

The value of the stock hasn’t really changed so you just faked your opponent into incurring trading losses while giving you a fast buck at low risk.    If nobody takes your bait then you lose your discount but it was against a small amount of stock so you can try the trick dozens of times just in case somebody takes the bait.

Watch out because you can trigger a drop that causes the entire day to drop for that stock and then you too could incur trading losses.

Suckers premium stock purchase

The same technique works in reverse where you buy a small number of shares at a price substantially above market after you have entered a limit sale order just below that price for a larger quantity.   Other buyers see that the price is starting to move up and jump in and buy hoping to catch the momentum.  Within a short period of time the price ticks back down and you re-purchase the shares you just sold at a discount.   Again the poor trader on the other end has incurred trading losses while you gained a profit.

Pick your timing to avoid getting lost in the noise

You have to pick your stock and your timing so your transaction doesn’t get lost in the noise or it will all be for nothing.   I think this is the reason I see more of this kind of trickery in option trading because there are so many option issues available that it spreads the traffic out and makes it easier to keep your fake transaction in the limelight of the chart for long enough to obtain the desired results.    I have seen the tactic used for large high volume stocks but you have to work harder.

When I say a small amount of stock used for the bait it is all relative.   I have seen what appear to be larger traders use this  tactic but their bait transactions can be thousands of dollars.  I actually figure they are fair game and look for them because they represent a way to make a buck off somebody’s greed.

Multi-tick repeated baiting

The multi-tick bait tactic takes the other two and makes them super powerful and super dangerous.    The data appears to indicate  power traders use this adaptation but all I can really see is the numbers while guessing at the motivation.

You take either the fake sale or fake buy  and choose a period when volume is fairly low so your transaction doesn’t get lost in the noise.   You invest a little more by using a series of baited sells or baited buys separated by anywhere from 15 seconds a few minutes sometimes several minutes or longer.   Several variations of this occur where the bait transactions remain at the same price, move up over time, move down over time or use a more sophisticated up then down pattern.

I have personally observed patterns where it looks like this tactic was used to fake a large buyer into buying over $100,000 worth of options at a price 5% above what they should have paid while the total cost of discounts applied to the bait was less than $500.

If you are trying to make it look like the value of a stock has moved by 5% and are willing to invest a $1,000 to do it you can buy up to $20,000 dollars worth of a stock at 5% premium.   If you do this in $500 transactions then you can make 40 transactions.   If you trade at a rate of 2 per minute then you can run the fake sequence for 20 minutes.  The poor retail investor with a graph just sees  the upward trend.

In the mean time you may be sitting on $300,000 in stock you want to sell and if you succeed in selling at a 4% premium you just made $12,000 or 12 times what  you spent in bait.  You may not sell all $300,000 at the higher price but you only need to sell  $25,000 at the higher price to recovery your bait investment anything else is gravy.

The $ values may change and the percentage of bait may change but the principal remains the same.

The bait transactions should fire as close to the end of minute as possible so they have the best chance of to be the closing bar value which is shown in most trading systems.

This works very well against retail traders looking at 1 to 15 minute bars because the action on the stock chart looks very choppy with a trend in direction that makes the users think the market is moving in directions it really isn’t.

Do not accidentally consume your own bait

One risk when you enter your real transaction order is that since it is much larger total amount than the bait transaction that it will consume the transaction you entered for bait.

This can work as an advantage since all you lose is the transaction fees and the graphing systems still show the desired movement.   I am convinced that bigger traders use this trick to amplify the amount of cash they have available to use as bait.  On the other hand make sure this is desirable and always assume somebody else may eat your bait so you can only treat it as a lucky side effect when it occurs.

WARNING: Selling with intent of consuming your own bait only to jigger the market seems unethical.   I would strongly suggest you consult with an experienced attorney before trying anything similar or you could end up taking an unexpected vacation to the federal penitentiary.   Even if you accidentally consume your own bait it may be impossible to prove it was accidental.   It is easy to avoid consuming your own bait by breaking the bait orders into a given size such as under $500.00 then sent your larger transactions with a AON (all or none) flag with their sizes to at least $1.00 larger than the largest bait transaction.  That way the bait will never qualify to fill your larger order and you can at least claim that you took rational steps to prevent it from occurring.

Origin and discovery

I first discovered this tactic when analyzing option data when one of the strategies was showing unexpected results.   I ultimately tracked it down to the fact that many options and many stocks have dozens to hundreds of these stock fake transactions per day and they skew that statistics unless you detect them and adjust.

The phenomenon seems to be strongest in the last 5 minutes of trading and in the first 1/2 hour but you will see people attempt it throughout the day.   It seems more prevalent in options but it definitely occurs for stocks.

When testing complex trading algorithms I have no choice but to crawl through massive reams of detailed data to figure out why the computer is doing something unexpected.   Every so often you discover a real gem like this one.   I would never have found this unless I was reviewing the stock trading data transaction by transaction because  the normal charting systems would simply show the price move and suppress the detail.

I am convinced the rational for these trades is to fake other traders into following suit and either buying at higher prices than they should or selling at lower prices with the net effect of causing them to incur trading losses.   Most of the time the bait has little net effect because the volumes traded are low but every so often you will see a larger buyer get faked out and purchase over $50,000 worth of options that rapidly fall back in line.

How head fake stock transactions mislead virtual trading systems

One of the truly misleading outputs from virtual trading systems is that they  can execute buys and sells against which there are no real parties on the other side who would execute that transaction.

The virtual system or back-trace system sees the bait transactions and thinks it could have purchased the stock at a discount but it was really only bait  so there was never a large amount of stock available at that price.  The virtual system doesn’t know this so it goes ahead and emulates buying a much larger chunk.  In the mean time the market corrects back to the true level and the virtual system could then sell and think it just made the bait discount such as 5% on the transaction.  If the virtual system or back-trace was trying to move $1,000,000 it thinks it just made the purchase for $50,000 under market when there was actually only a few hundred dollars of stock available at the discounted price.  This can combine with other baits on the high-end so the back-trace system thinks it purchased at a discount and sold at a premium and ends up thinking it made $100,000 on the deal when in reality the deal could never have been made.   If this was repeated several times per day or even per month the back trace could think it made a lot of money that you couldn’t duplicate in real trading.

“Trade fake” transactions are one of the reasons I feel believable test trading must be done with real money.

I think this is one of those critical learning’s that can fundamentally change your success in trading.

Bayes Analytic can provide software to help detect “Trade Fakes” so you can protect your self from the trading losses or even turn the table on the culprits.

Contact us

Required Disclaimer

Forex, futures, stock, and options trading is not appropriate for everyone. There is a substantial risk of loss associated with trading these markets. Losses can and will occur. No system or methodology has ever been developed that can guarantee profits or ensure freedom from losses. No representation or implication is being made that using this methodology or system or the information in this letter will generate profits or ensure freedom from losses.  Forex and Option trading can result in losses that exceed the original principal balance.

Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.

Even results from Live cash trading can be subject to specific market conditions that may not repeat in the future and as such, duplicate results from future trading is unlikely to duplicate past results.    Changing the dollar amount traded can cause different behavior in live trading markets especially when trading large positons that can exceed the liquidity available in the market and cause changes in pricing behavior.

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