1) Short DJIA.
2) Pick some stocks and place buy orders at $0.01.
3) Get a friend to fill those orders for you at $0.01, taking the loss. Call it a trader error.
4) A lot of poorly written algorithms, which take into account the last traded price, start selling to cover their stoploss orders (sell if the price < X).
5) Havoc ensues. DJIA is down. Cover your DJIA short and take the rest of the day off.
Assume the stocks you are manipulating are bid at 99.99, ask at 100.
3 - Your friend's first few sell orders at $0.01 or better are filled at about $99.99.
Your buy orders go unfilled.
4 - If your friend sold enough shares, the algorithms notice someone aggressively selling. They may undercut and sell at 99.99 or even 99.98.
The algorithms also place a few buy orders at 99.96-99.97.
5 - Your friend's trades (assuming he is placing multiple orders, and is selling a lot) execute and drive the price down to 99.96-99.97 or so.
6 - The algorithm's buy orders at 99.96-99.97, are filled by your friend's sell orders.
7 - Price back up to 99.99.
8 - Algorithms eventually sell the shares they bought at 99.96 at 99.99.
Sum total: the algorithms made a few pennies off your friend. Your DJIA short does pretty much whatever it would already have done.
Also, except in the case of certain rare events which cause high latency (e.g., yesterday), it is also illegal to play games like this. For instance, if the bid is 99 on BATS and only 50 on ARCA, and I want to sell, I can't sell on ARCA. (I'm grossly oversimplifying, of course, but my simplifications don't exclude the case of selling at $0.01 to fool the markets.)
If the market is 99.99-100.00 you cannot trade even at 99.98
As I understood you, algorithms notice someone dumping stock and they pick it up. Then they hope you were selling for cheaper than market value because you were in a hurry, not because you thought said stock was overvalued, and they try to pass off the stock later on.
Is this what "providing liquidity" means? It seems like a good thing, iff people generally do high-frequency trading far more than actual investment. What's providing that confidence? Experience?