To illustrate, let’s use an institutional algo order pegged to the NBBO with discretion to
pay up to $20.10. First, the predatory algo uses methods similar to the liquidity rebate
trader to spot this as an institutional algo order. Next, with a bid of $20.01, the predatory
algo goes on the attack. The institutional algo immediately goes to $20.01. Then, the
predatory algo goes $20.02, and the institutional algo follows. In similar fashion, the
predatory algo runs up the institutional algo to its $20.10 limit. At that point, the predatory
algo sells the stock short at $20.10 to the institutional algo, knowing it is highly likely that
the price of the stock will fall. When it does, the predatory algo covers.
To illustrate, let’s use an institutional algo order pegged to the NBBO with discretion to pay up to $20.10. First, the predatory algo uses methods similar to the liquidity rebate trader to spot this as an institutional algo order. Next, with a bid of $20.01, the predatory algo goes on the attack. The institutional algo immediately goes to $20.01. Then, the predatory algo goes $20.02, and the institutional algo follows. In similar fashion, the predatory algo runs up the institutional algo to its $20.10 limit. At that point, the predatory algo sells the stock short at $20.10 to the institutional algo, knowing it is highly likely that the price of the stock will fall. When it does, the predatory algo covers.