8 ms·

'Flash crash' trader loses US extradition battle

70 points by hanoz 10y ago

hood_syntax 10y ago
We've seen it before: expect to see more of it as Britain tries to keep its US ties strong in the wake of 'Brexit'
- fixxer 10y ago
  Well, that and also that he was one (of many) doing something that adversely impacted the markets. As a former trader, I think it is bullshit and he is a scapegoat, but I think he'll get due process.
  - soVeryTired 10y ago
    He won't get due process. He's being charged with offences that carry sentences totaling up to 380 years. He'll plead out to ten years in jail.
    - ghurtado 10y ago
      A plea bargain is still part of due process.
      - nitrogen 10y ago
        Much of HN would disagree. Search HN's history for arguments.
        ghurtado 10y ago
        It would seem so from the downvotes. I think it would be much more fruitful to explain those arguments, even if briefly. I'm certainly interested in hearing them. Unfortunately, the search you suggested yielded no obvious results.
        bryondowd 10y ago
        I've seen it argued mostly in relation to drug charges. Essentially, when faced with charges with a potential penalty in the decades and offered the option to plea guilty for a sentence orders of magnitude more lenient, nearly everyone will plea rather than fight their case, even if they have a strong case. Unless they know with absolute certainty that they will win, it makes more sense to take a slap on the wrist than to risk losing your life as you know it. Then there's the information asymmetry, where you don't have enough information to know if you have a guaranteed case, and aren't given the opportunity to find out before the plea bargain is taken away. So, essentially, instead of a court determining your guilt based on evidence, you have a game theory scenario what forces you into a guilty plea with no regard for the evidence. I would expect that a savvy financial type who can afford to pay a competent lawyer would be significantly less impacted by this phenomenon (if at all) than the typical person charged with a drug possession offense represented by a public defender who has too many clients to properly serve each one. Really, it seems to me that the issue isn't necessarily with plea bargains in general so much as with plea bargains with massive differentials to the original charges.
        ghurtado 10y ago
        Thank you for explaining that. > Really, it seems to me that the issue isn't necessarily with plea bargains in general so much as with plea bargains with massive differentials to the original charges. I agree with you. I think the root cause is completely unreasonable penalties for certain charges (which is especially true of drug charges). With a smaller differential, the bargaining power of the prosecution is drastically reduced (as it should be).
        EdHominem 10y ago
        Well, the root problem is prosecutorial misconduct which is how they get their success rate so high that you're forced to plea-bargain. As proof of misconduct, note that when evidence is proved systematically unreliable, prosecutors argue that the rulings should remain. (eg, hair testing, etc) There's no desire to get the right answer, just to get the most convictions.
      - SomeStupidPoint 10y ago
        The main argument to why plea bargains arent due process is that they usually are prosecutors charging people with inappropriately serious crimes and offering to settle on reasonable charges if the person pleads guilty, coercing them because they either get improperly charged (violation of due process) or waive their right to trial (violation of due process if coerced). It's a prosecutor willingly not performing their duties (charging people with appropriate crimes for their actions), because it makes their tracked stats look better (conviction rate). Im of the camp that believes plea bargains should only be allowed to negotiate sentences on the charge, not involve prosecutors charging a different set of crimes.
- blibble 10y ago
  why do you think the judiciary cares? note that the UK does not elect its judges
Mikeb85 10y ago
This is insane. How could a small trader like that possibly move enough volume to even budge the market as a whole, never mind crash it? They claim he was spoofing trades... That's more the domain of HFTs, where you can automate the process, not a lone trader, however sophisticated. And finally, let's suppose this trader is guilty of everything they allege... He still couldn't have crashed the market, it would have been a chain reaction of algos dumping stock at the same time, which he can hardly be blamed for...
- murbard2 10y ago
  1) Lone traders can do HFT, you'll get collocated at most exchanges for a couple $1000 a month. 2) You don't need to be have automated high frequency trading infrastructure and algorithms to spoof (though that would help a lot), you could do it by hand. 3) Agreed it would be ridiculous to blame this guy for the entire thing, but he did break the law (and the rules of the exchange) so there is something to be said about prosecuting him. 4) Laws and rules against spoofing are always going to be stealthily broken, and they are frustratingly vague, referring to the intangible "intention" of the trader. Exchanges would be better off removing such rules and let algo-traders take the responsibility of writing spoofing-resistant strategies. Allowing spoofing could even help improve execution. If a trader wants to execute a big order, it would be easier to just place it on the market and they wouldn't tip their hand as much. Other traders would have to guess if it's real or spoofed. 5) Another part of the problem is the asynchronous nature of order books. That's where 99% of the need for collocation comes from. You're trying to control your order in reaction to incoming information in an asynchronous way. Letting trading algos run in a round-robin fashion inside the order book would eliminate a lot of those issues.
  - nostromo 10y ago
    Or, if the markets really wanted to fix this problem (assuming it is a problem, I'm not so sure) they could add a small delay to canceling trades. That would increase the risk and cost of a spoofing strategy.
    - 10y ago
dschiptsov 10y ago
Ridiculous. No single trader could affect the whole market - it does not work that way. This is another example of how wrong the current models based on traditional assumptions and academic theories are. If a market could be nearly destroyed by one single trader, there is no market at all, but a fraud, smoke and mirrors.
klodolph 10y ago
The headline is a bit of click-bait. The charges apparently include wire fraud, commodities fraud, market manipulation and spoofing. This is relatively boring stuff, if you omit the connection to the flash crash, which everyone agrees is tenuous at best. It doesn't seem unusual at all to me that someone charged with fraud in US markets would get extradited to the US.
- ConfuciusSay02 10y ago
  All of those charges relate to the flash crash, so not sure why you would omit it. Since most everything we do today involves computers and the internet, wire fraud has become a catch-all charge that can be selectively enforced (see Aaron Swartz) to suit a prosecutor's needs. Despite the fact that many large players spoof on a regular basis, only this guy has been actually criminally charged. When a government anointed HFT firm does it, they only get a small slap on the wrist. Ironically, this guy pointed out to regulators how everyone is spoofing, and only after they did nothing to stop the spoofing did he say "well if everyone is doing it, I will too". The corrupt financial elite have found their scapegoat, and the message is clear: if you're a connected Wall Street firm, the laws do not apply to you, but if you're a regular guy day trading from home, the book will be thrown at you.
  - drakonandor 10y ago
    Can you show evidence that spoofing is common?
    - ConfuciusSay02 10y ago
      http://www.nanex.net/aqck2/4555.html http://www.nanex.net/aqck2/4555.html summarizes a study here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1955965 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1955965 Key quote: "This manipulative practice [spoofing] is illegal under the U.S. securities law, yet it has been frequently discovered in both equity and futures markets." Here's an example of the penalty a middling HFT firm sees: http://www.reuters.com/article/us-sec-enforcement-spoofing-idUSBREA331DD20140404?feedType=RSS&feedName=businessNews http://www.reuters.com/article/us-sec-enforcement-spoofing-i... $1.9M in fines - no jail. By contrast Sarao is facing up 380 years in prison. Others faced fines of only several hundred thousand dollars: http://www.wsj.com/articles/how-spoofing-traders-dupe-markets-1424662202 http://www.wsj.com/articles/how-spoofing-traders-dupe-market... Note that the most connected HFT firms (Virtu, Citadel - oh hey, Ben "Revolving Door" Bernanke works there) don't even get fines, despite engaging in spoofing, and even being banned from China for spoofing: https://www.ft.com/content/d4b61458-398d-11e5-8613-07d16aad2152 https://www.ft.com/content/d4b61458-398d-11e5-8613-07d16aad2... Also note that there have been many "flash crashes" triggered by spoofing HFT's. There's nothing special about the Sarao one, other than the fact that he was an individual operating out of his home.
smrtinsert 10y ago
I have to think parties that are actually more responsible for the flash crash pointed fingers.
Miner49er 10y ago
Correct me if I'm wrong, but I thought this was a tactic employed by HFTs? Don't they regular place market orders and immediately cancel them to manipulate the market and slow down other HFTs? How is this illegal?
- sokoloff 10y ago
  Placing a market order you're going to get filled before you can cancel if there's any book on the other side at all.
- wmil 10y ago
  He did it without belonging to the one of the correct fraternities.
- smcl 10y ago
  I'm not sure how widespread it is, but Nanex have a breakdown of a single case where Citadel were using this strategy: http://www.nanex.net/aqck2/4670.html http://www.nanex.net/aqck2/4670.html
  - evanpw 10y ago
    Very bizarre reasoning: a misconfiguration can cause the strategy to do X => the strategy was designed to do X. Seems more like evidence for "quote stuffing is a bug": https://www.chrisstucchio.com/blog/2014/quote_stuffing_is_a_software_bug.html https://www.chrisstucchio.com/blog/2014/quote_stuffing_is_a_...
    - smcl 10y ago
      That article is extremely bizarre. Nanex make a pretty clear argument that Citadel fired out a set of orders it didn't intend to get filled to introduce a delay between SIP and Nasdaq and intended to take advantage of the delay. The Chris Stucchio article opens with a cute take on the South Park underpants gnomes list ("2. ???") and suggests that nobody has outlined why this strategy would be profitable ... which is weird because this is exactly what Nanex did: "What is the benefit of a feed delay? For one, latency arbitrage is enhanced, especially if the delay is predictable, which it would be for someone running a Quote Stuffing trading strategy. The type of firm that would benefit the most from latency arbitrage would be an internalizer - someone that matched retail stock trades based on the slower SIP, but could buy and sell the same stocks on the faster direct feed, a strategy that became visible during the Nasdaq Blackout. By the way, Citadel's bread and butter is internalizing (matching) retail stock trades" This is extremely easy to understand. Reading on there are a number of xkcd-style graphs that basically say "testing is hard!" but still don't really provide a solid rebuttal. I stopped reading at that point, I'm afraid :( I'm far from an expert on this, and my opinion really doesn't matter - but I'm far more persuaded by the Nanex explanation.
gabriel34 10y ago
I live in a country which doesn't extradite its own citizens and the concept of my own country extraditing me to another one seems very strange and ungrounding.
- deleted 10y ago
  [deleted]
- kintamanimatt 10y ago
  Which country is that?
  - gabriel34 10y ago
    A few countries have such laws. Wikipedia has a (seemingly complete) list: Austria, Brazil,the Czech Republic,France, Germany, Japan, the People's Republic of China, the Republic of China (Taiwan), Russia and Switzerland [1] 1. https://en.wikipedia.org/wiki/Extradition#Bars_to_extradition https://en.wikipedia.org/wiki/Extradition#Bars_to_extraditio...
    - Lio 10y ago
      Not trying to shout "think of the children" but for the sake of discussion would it still seem strange if the crime was hypothetically murder? To me it seems clearer cut in a case which is more obviously criminal. Now unbalanced extradition, which is the case for us in UK with regard to the US, seems odder to me. Our politicians should sort that out.

70 points by hanoz 10y ago

hood_syntax 10y ago

We've seen it before: expect to see more of it as Britain tries to keep its US ties strong in the wake of 'Brexit'

fixxer 10y ago
Well, that and also that he was one (of many) doing something that adversely impacted the markets. As a former trader, I think it is bullshit and he is a scapegoat, but I think he'll get due process.
- soVeryTired 10y ago
  He won't get due process. He's being charged with offences that carry sentences totaling up to 380 years. He'll plead out to ten years in jail.
  - ghurtado 10y ago
    A plea bargain is still part of due process.
    - nitrogen 10y ago
      Much of HN would disagree. Search HN's history for arguments.
      - ghurtado 10y ago
        It would seem so from the downvotes. I think it would be much more fruitful to explain those arguments, even if briefly. I'm certainly interested in hearing them. Unfortunately, the search you suggested yielded no obvious results.
        bryondowd 10y ago
        I've seen it argued mostly in relation to drug charges. Essentially, when faced with charges with a potential penalty in the decades and offered the option to plea guilty for a sentence orders of magnitude more lenient, nearly everyone will plea rather than fight their case, even if they have a strong case. Unless they know with absolute certainty that they will win, it makes more sense to take a slap on the wrist than to risk losing your life as you know it. Then there's the information asymmetry, where you don't have enough information to know if you have a guaranteed case, and aren't given the opportunity to find out before the plea bargain is taken away. So, essentially, instead of a court determining your guilt based on evidence, you have a game theory scenario what forces you into a guilty plea with no regard for the evidence. I would expect that a savvy financial type who can afford to pay a competent lawyer would be significantly less impacted by this phenomenon (if at all) than the typical person charged with a drug possession offense represented by a public defender who has too many clients to properly serve each one. Really, it seems to me that the issue isn't necessarily with plea bargains in general so much as with plea bargains with massive differentials to the original charges.
        ghurtado 10y ago
        Thank you for explaining that. > Really, it seems to me that the issue isn't necessarily with plea bargains in general so much as with plea bargains with massive differentials to the original charges. I agree with you. I think the root cause is completely unreasonable penalties for certain charges (which is especially true of drug charges). With a smaller differential, the bargaining power of the prosecution is drastically reduced (as it should be).
        EdHominem 10y ago
        Well, the root problem is prosecutorial misconduct which is how they get their success rate so high that you're forced to plea-bargain. As proof of misconduct, note that when evidence is proved systematically unreliable, prosecutors argue that the rulings should remain. (eg, hair testing, etc) There's no desire to get the right answer, just to get the most convictions.
    - SomeStupidPoint 10y ago
      The main argument to why plea bargains arent due process is that they usually are prosecutors charging people with inappropriately serious crimes and offering to settle on reasonable charges if the person pleads guilty, coercing them because they either get improperly charged (violation of due process) or waive their right to trial (violation of due process if coerced). It's a prosecutor willingly not performing their duties (charging people with appropriate crimes for their actions), because it makes their tracked stats look better (conviction rate). Im of the camp that believes plea bargains should only be allowed to negotiate sentences on the charge, not involve prosecutors charging a different set of crimes.
blibble 10y ago
why do you think the judiciary cares? note that the UK does not elect its judges

Mikeb85 10y ago

This is insane. How could a small trader like that possibly move enough volume to even budge the market as a whole, never mind crash it? They claim he was spoofing trades... That's more the domain of HFTs, where you can automate the process, not a lone trader, however sophisticated. And finally, let's suppose this trader is guilty of everything they allege... He still couldn't have crashed the market, it would have been a chain reaction of algos dumping stock at the same time, which he can hardly be blamed for...

murbard2 10y ago
1) Lone traders can do HFT, you'll get collocated at most exchanges for a couple $1000 a month. 2) You don't need to be have automated high frequency trading infrastructure and algorithms to spoof (though that would help a lot), you could do it by hand. 3) Agreed it would be ridiculous to blame this guy for the entire thing, but he did break the law (and the rules of the exchange) so there is something to be said about prosecuting him. 4) Laws and rules against spoofing are always going to be stealthily broken, and they are frustratingly vague, referring to the intangible "intention" of the trader. Exchanges would be better off removing such rules and let algo-traders take the responsibility of writing spoofing-resistant strategies. Allowing spoofing could even help improve execution. If a trader wants to execute a big order, it would be easier to just place it on the market and they wouldn't tip their hand as much. Other traders would have to guess if it's real or spoofed. 5) Another part of the problem is the asynchronous nature of order books. That's where 99% of the need for collocation comes from. You're trying to control your order in reaction to incoming information in an asynchronous way. Letting trading algos run in a round-robin fashion inside the order book would eliminate a lot of those issues.
- nostromo 10y ago
  Or, if the markets really wanted to fix this problem (assuming it is a problem, I'm not so sure) they could add a small delay to canceling trades. That would increase the risk and cost of a spoofing strategy.
  - 10y ago

dschiptsov 10y ago

Ridiculous. No single trader could affect the whole market - it does not work that way. This is another example of how wrong the current models based on traditional assumptions and academic theories are. If a market could be nearly destroyed by one single trader, there is no market at all, but a fraud, smoke and mirrors.

klodolph 10y ago

The headline is a bit of click-bait. The charges apparently include wire fraud, commodities fraud, market manipulation and spoofing. This is relatively boring stuff, if you omit the connection to the flash crash, which everyone agrees is tenuous at best. It doesn't seem unusual at all to me that someone charged with fraud in US markets would get extradited to the US.

ConfuciusSay02 10y ago
All of those charges relate to the flash crash, so not sure why you would omit it. Since most everything we do today involves computers and the internet, wire fraud has become a catch-all charge that can be selectively enforced (see Aaron Swartz) to suit a prosecutor's needs. Despite the fact that many large players spoof on a regular basis, only this guy has been actually criminally charged. When a government anointed HFT firm does it, they only get a small slap on the wrist. Ironically, this guy pointed out to regulators how everyone is spoofing, and only after they did nothing to stop the spoofing did he say "well if everyone is doing it, I will too". The corrupt financial elite have found their scapegoat, and the message is clear: if you're a connected Wall Street firm, the laws do not apply to you, but if you're a regular guy day trading from home, the book will be thrown at you.
- drakonandor 10y ago
  Can you show evidence that spoofing is common?
  - ConfuciusSay02 10y ago
    http://www.nanex.net/aqck2/4555.html http://www.nanex.net/aqck2/4555.html summarizes a study here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1955965 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1955965 Key quote: "This manipulative practice [spoofing] is illegal under the U.S. securities law, yet it has been frequently discovered in both equity and futures markets." Here's an example of the penalty a middling HFT firm sees: http://www.reuters.com/article/us-sec-enforcement-spoofing-idUSBREA331DD20140404?feedType=RSS&feedName=businessNews http://www.reuters.com/article/us-sec-enforcement-spoofing-i... $1.9M in fines - no jail. By contrast Sarao is facing up 380 years in prison. Others faced fines of only several hundred thousand dollars: http://www.wsj.com/articles/how-spoofing-traders-dupe-markets-1424662202 http://www.wsj.com/articles/how-spoofing-traders-dupe-market... Note that the most connected HFT firms (Virtu, Citadel - oh hey, Ben "Revolving Door" Bernanke works there) don't even get fines, despite engaging in spoofing, and even being banned from China for spoofing: https://www.ft.com/content/d4b61458-398d-11e5-8613-07d16aad2152 https://www.ft.com/content/d4b61458-398d-11e5-8613-07d16aad2... Also note that there have been many "flash crashes" triggered by spoofing HFT's. There's nothing special about the Sarao one, other than the fact that he was an individual operating out of his home.

smrtinsert 10y ago

I have to think parties that are actually more responsible for the flash crash pointed fingers.

Miner49er 10y ago

Correct me if I'm wrong, but I thought this was a tactic employed by HFTs? Don't they regular place market orders and immediately cancel them to manipulate the market and slow down other HFTs? How is this illegal?

sokoloff 10y ago
Placing a market order you're going to get filled before you can cancel if there's any book on the other side at all.
wmil 10y ago
He did it without belonging to the one of the correct fraternities.
smcl 10y ago
I'm not sure how widespread it is, but Nanex have a breakdown of a single case where Citadel were using this strategy: http://www.nanex.net/aqck2/4670.html http://www.nanex.net/aqck2/4670.html
- evanpw 10y ago
  Very bizarre reasoning: a misconfiguration can cause the strategy to do X => the strategy was designed to do X. Seems more like evidence for "quote stuffing is a bug": https://www.chrisstucchio.com/blog/2014/quote_stuffing_is_a_software_bug.html https://www.chrisstucchio.com/blog/2014/quote_stuffing_is_a_...
  - smcl 10y ago
    That article is extremely bizarre. Nanex make a pretty clear argument that Citadel fired out a set of orders it didn't intend to get filled to introduce a delay between SIP and Nasdaq and intended to take advantage of the delay. The Chris Stucchio article opens with a cute take on the South Park underpants gnomes list ("2. ???") and suggests that nobody has outlined why this strategy would be profitable ... which is weird because this is exactly what Nanex did: "What is the benefit of a feed delay? For one, latency arbitrage is enhanced, especially if the delay is predictable, which it would be for someone running a Quote Stuffing trading strategy. The type of firm that would benefit the most from latency arbitrage would be an internalizer - someone that matched retail stock trades based on the slower SIP, but could buy and sell the same stocks on the faster direct feed, a strategy that became visible during the Nasdaq Blackout. By the way, Citadel's bread and butter is internalizing (matching) retail stock trades" This is extremely easy to understand. Reading on there are a number of xkcd-style graphs that basically say "testing is hard!" but still don't really provide a solid rebuttal. I stopped reading at that point, I'm afraid :( I'm far from an expert on this, and my opinion really doesn't matter - but I'm far more persuaded by the Nanex explanation.

gabriel34 10y ago

I live in a country which doesn't extradite its own citizens and the concept of my own country extraditing me to another one seems very strange and ungrounding.

deleted 10y ago
[deleted]
kintamanimatt 10y ago
Which country is that?
- gabriel34 10y ago
  A few countries have such laws. Wikipedia has a (seemingly complete) list: Austria, Brazil,the Czech Republic,France, Germany, Japan, the People's Republic of China, the Republic of China (Taiwan), Russia and Switzerland [1] 1. https://en.wikipedia.org/wiki/Extradition#Bars_to_extradition https://en.wikipedia.org/wiki/Extradition#Bars_to_extraditio...
  - Lio 10y ago
    Not trying to shout "think of the children" but for the sake of discussion would it still seem strange if the crime was hypothetically murder? To me it seems clearer cut in a case which is more obviously criminal. Now unbalanced extradition, which is the case for us in UK with regard to the US, seems odder to me. Our politicians should sort that out.