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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 spo

by 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.
  - yummyfajitas 10y ago
    That would also make it more difficult for market makers to price discriminate between large traders (e.g. Goldman) and the little guys (you with your eTrade account). The result is that you'll pay more and Goldman will pay less to trade. https://www.chrisstucchio.com/blog/2014/fervent_defense_of_frontrunning_hfts.html https://www.chrisstucchio.com/blog/2014/fervent_defense_of_f...
    - Houshalter 10y ago
      They will find some other way to price discriminate of course.
SEJeff 10y ago
A lone trader can be controlling algos. A lot of said algos aren't 100% automated. Only the best fully quantitative firms or speed only firms (that do things like market making) are 100% automated. Also sometimes they have click trading options for manually getting out of bad positions when things break. Source: I've worked for "HFT" firms the past 9ish years.
cloudjacker 10y ago
Okay, there are problems with the case but not the problems you mentioned. He had negotiated a credit line from Credit Suisse to the tune of 30million. He would then use 30 million to open futures trades with a much much greater notional value. His real positions would be in the hundreds of thousands long/short the market. His credit positions would be a little deeper in the order book, knowing that other people and algorithms would front run his order because they think it is an indication of a big buyer or trend happening. He'd close his real position at the better price to the people trying to front run him, for a profit. And simply remove the super big order from the order book. This is spoofing and yes this is what everyone else does. He is being prosecuted for it. During the flash crash, liquidity dried up and spreads got super big, front running algorithms were still responding to the spoofing and matching orders at really bad prices with wide spreads. It doesn't matter who "caused" it.
- MichaelGG 10y ago
  >front running algorithms Citation needed (and not the terrible Lewis book). He wasn't being front run. What you're describing is just called trading. Someone says they wanna buy a million shares of something, you guess demand is going up. Just because they use special hardware and react fast doesn't make them any different.
  - cloudjacker 10y ago
    Your argument is based on whether I was being accusative in a legal sense. I was not, my use of front running was hyperbole. He took advantage of the predictable machine traders, it was a good strategy, if he wasn't the fall guy.
- akhatri_aus 10y ago
  Do you have any news articles pointing to the Credit Suisse credit line? I've been following this story since last year but didn't catch that one.
  - cloudjacker 10y ago
jonknee 10y ago
The irony here is he screwed up the HFT algos and that's what caused the flash crash. There is no way his bankroll was to blame. Poor guy beats them at their own game and then gets thrown to the wolves.
- downandout 10y ago
  This is the only fascinating aspect of the whole thing IMO. If one technique can be used to manipulate HFT algorithms to this degree, there have to be others that aren't illegal. If they are this simple to manipulate, you could make a fortune.
  - pavel_lishin 10y ago
    Or techniques that are illegal that could be used by people who care more about harming the stock market than they do about making a profit.
  - r_smart 10y ago
    Any technique that produces these results will be made illegal, unless you're in a position already to keep it from being so.
joelthelion 10y ago
Not to mention that the US has no business applying its laws all over the world.
- branchless 10y ago
  He's trading on CME, Chicago.
  - joelthelion 10y ago
    So what? He's based in London. The UK has perfectly sane laws and he can be judged there.
    - Dobbs 10y ago
      If he was doing business in on a London exchange then you would be right. He decided to do business on a US exchange so US laws end up applying. And the UK laws did apply here, can we and should we allow the extradition to happen? UK laws said that he was liable under US laws so he would be extradited.
    - branchless 10y ago
      1. he's trading on the last hop which is in Chicago 2. the UK is the international home of finance fraud, the main selling point of the UK for illicit finance companies and the USA don't want yet another shitty wrist slap
reverend_gonzo 10y ago
So, there's a couple things going on here. One, he is most likely being scapegoated for the flash crash. It is highly unlikely that he alone caused the market to crash. However, he absolutely was spoofing trades. That is not a high-speed activity, and can easily be done by point-and-click traders. There have been any other traders that have been known to spoof as well. His problem, however, was that he was dumb about it. The law is about intent. When your order was placed, it must have been placed in good faith, with the intention of getting filled at the time of entry. However, it is completely okay to decide 10 milliseconds later that you no longer want to get filled (for example, you realize the market is moving against you.) The problem here is that intention is extremely difficult to prove. You could say "I have a machine learning model that said it was a good price to buy when I placed the order and a second later, it changed the price". So, even if it is generally accepted that a trader is spoofing, the burden of proof lies on the prosecutor, and its a fairly high burden. Sarao made it very easy, because he wrote in emails, exactly what he was doing, that he wanted a special order type that would never get filled. Then, the manner in which he placed those orders was obviously meant to drive fills into other opposing orders, and once those got filled, he would cancel the initial "fake" orders. He also did a number of other things, and most importantly, wrote down what he was doing to make it easy for prosecutors. I highly recommend reading the indictment: https://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/04/21/sarao_criminal_complaint.pdf https://www.justice.gov/sites/default/files/opa/press-releas... It explains everything that he did and the evidence against him. Overall, the flash crash blame is the media/officials finding someone to blame, but he did commit a crime, and that's why he's being prosecuted. The reason others are not being prosecuted is because others aren't stupid enough to write down their crimes.
minimax 10y ago
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. They have him in emails literally saying things like "If I keep entering the same clip sizes, people will become aware of what I am doing rendering my spoofing pointless" and "I need to know whether you can do what I need, because at the moment I’m getting hit on my spoofs all the time and it’s costing me a lot of money." It's not a huge reach for the government to claim he was spoofing when he himself claims he was spoofing. How could a small trader like that possibly move enough volume to even budge the market as a whole, never mind crash it? I think people who aren't familiar with trading (especially futures trading) don't understand that Sarao was spoofing massive size. He was placing orders for 500+ contracts at multiple levels in the book... that's on the order of $100M notional value. He was more of a pro than people like to believe.
- dvogel 10y ago
  It's also worth noting that he didn't have to succeed for it to be illegal. Therefore, arguments regarding the magnitude of the effect he had or could have are mostly irrelevant.
  - cmdrfred 10y ago
    The laws on fraud seem drasticly more punitive when you aren't the CEO of Wells Fargo or Mylan.
    - jrockway 10y ago
      The UK also has to court the financial industry pretty heavily now, since the banks threatened to move out of London after Brexit.
Lazare 10y ago
> This is insane. Oh yes. However... > How could a small trader like that possibly move enough volume to even budge the market as a whole, never mind crash it? He wasn't that small, but in any case the argument is basically "by spoofing, which scrambled some dumb HFT algos and made them crash the market". > They claim he was spoofing trades... That's more the domain of HFTs, Quite the reverse; HFTs and spoofers are basically the exact opposites. The archetypal spoofer would be a small trader, working alone, trying to make misleading orders to fool the HFT algos. From a spoofers point of view, they're trying to use cleverness to beat the speed advantage the HFTs have and make the markets fair. From an HFTs point of view, a spoofer is trying to use dishonesty to unfairly beat the speed advantage HFTs have. The legal system sides with the HFT view, but that's not entirely uncontroversial. > 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 You are 100% correct! However, spoofing is illegal whereas dumb algos are not illegal. IF he triggered the mess by doing something illegal, then yeah, legally he can be blamed for the mess. That being said...the timing doesn't really work. Sarao's trades don't quite line up with the flash crash. (Roughly speaking, his spoofing was causing the market to make significant moves, but he was doing it in bursts, and the flash crash happened right after he's stopped one burst and the market had already recovered. And then after the flash crash happened and then recovered, he kept right on doing it, causing no additional crashes. Current research suggests it probably wasn't him. Worst case he might have spooked some HFTs algos and made them react poorly to some other triggering event. ...of course, his spoofing was still illegal, even if it didn't cause a flash crash.)

by Mikeb85 10y ago

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.
- yummyfajitas 10y ago
  That would also make it more difficult for market makers to price discriminate between large traders (e.g. Goldman) and the little guys (you with your eTrade account). The result is that you'll pay more and Goldman will pay less to trade. https://www.chrisstucchio.com/blog/2014/fervent_defense_of_frontrunning_hfts.html https://www.chrisstucchio.com/blog/2014/fervent_defense_of_f...
  - Houshalter 10y ago
    They will find some other way to price discriminate of course.

SEJeff 10y ago

A lone trader can be controlling algos. A lot of said algos aren't 100% automated. Only the best fully quantitative firms or speed only firms (that do things like market making) are 100% automated. Also sometimes they have click trading options for manually getting out of bad positions when things break. Source: I've worked for "HFT" firms the past 9ish years.

cloudjacker 10y ago

Okay, there are problems with the case but not the problems you mentioned. He had negotiated a credit line from Credit Suisse to the tune of 30million. He would then use 30 million to open futures trades with a much much greater notional value. His real positions would be in the hundreds of thousands long/short the market. His credit positions would be a little deeper in the order book, knowing that other people and algorithms would front run his order because they think it is an indication of a big buyer or trend happening. He'd close his real position at the better price to the people trying to front run him, for a profit. And simply remove the super big order from the order book. This is spoofing and yes this is what everyone else does. He is being prosecuted for it. During the flash crash, liquidity dried up and spreads got super big, front running algorithms were still responding to the spoofing and matching orders at really bad prices with wide spreads. It doesn't matter who "caused" it.

MichaelGG 10y ago
>front running algorithms Citation needed (and not the terrible Lewis book). He wasn't being front run. What you're describing is just called trading. Someone says they wanna buy a million shares of something, you guess demand is going up. Just because they use special hardware and react fast doesn't make them any different.
- cloudjacker 10y ago
  Your argument is based on whether I was being accusative in a legal sense. I was not, my use of front running was hyperbole. He took advantage of the predictable machine traders, it was a good strategy, if he wasn't the fall guy.
akhatri_aus 10y ago
Do you have any news articles pointing to the Credit Suisse credit line? I've been following this story since last year but didn't catch that one.
- cloudjacker 10y ago

jonknee 10y ago

The irony here is he screwed up the HFT algos and that's what caused the flash crash. There is no way his bankroll was to blame. Poor guy beats them at their own game and then gets thrown to the wolves.

downandout 10y ago
This is the only fascinating aspect of the whole thing IMO. If one technique can be used to manipulate HFT algorithms to this degree, there have to be others that aren't illegal. If they are this simple to manipulate, you could make a fortune.
- pavel_lishin 10y ago
  Or techniques that are illegal that could be used by people who care more about harming the stock market than they do about making a profit.
- r_smart 10y ago
  Any technique that produces these results will be made illegal, unless you're in a position already to keep it from being so.

joelthelion 10y ago

Not to mention that the US has no business applying its laws all over the world.

branchless 10y ago
He's trading on CME, Chicago.
- joelthelion 10y ago
  So what? He's based in London. The UK has perfectly sane laws and he can be judged there.
  - Dobbs 10y ago
    If he was doing business in on a London exchange then you would be right. He decided to do business on a US exchange so US laws end up applying. And the UK laws did apply here, can we and should we allow the extradition to happen? UK laws said that he was liable under US laws so he would be extradited.
  - branchless 10y ago
    1. he's trading on the last hop which is in Chicago 2. the UK is the international home of finance fraud, the main selling point of the UK for illicit finance companies and the USA don't want yet another shitty wrist slap

reverend_gonzo 10y ago

So, there's a couple things going on here. One, he is most likely being scapegoated for the flash crash. It is highly unlikely that he alone caused the market to crash. However, he absolutely was spoofing trades. That is not a high-speed activity, and can easily be done by point-and-click traders. There have been any other traders that have been known to spoof as well. His problem, however, was that he was dumb about it. The law is about intent. When your order was placed, it must have been placed in good faith, with the intention of getting filled at the time of entry. However, it is completely okay to decide 10 milliseconds later that you no longer want to get filled (for example, you realize the market is moving against you.) The problem here is that intention is extremely difficult to prove. You could say "I have a machine learning model that said it was a good price to buy when I placed the order and a second later, it changed the price". So, even if it is generally accepted that a trader is spoofing, the burden of proof lies on the prosecutor, and its a fairly high burden. Sarao made it very easy, because he wrote in emails, exactly what he was doing, that he wanted a special order type that would never get filled. Then, the manner in which he placed those orders was obviously meant to drive fills into other opposing orders, and once those got filled, he would cancel the initial "fake" orders. He also did a number of other things, and most importantly, wrote down what he was doing to make it easy for prosecutors. I highly recommend reading the indictment: https://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/04/21/sarao_criminal_complaint.pdf https://www.justice.gov/sites/default/files/opa/press-releas... It explains everything that he did and the evidence against him. Overall, the flash crash blame is the media/officials finding someone to blame, but he did commit a crime, and that's why he's being prosecuted. The reason others are not being prosecuted is because others aren't stupid enough to write down their crimes.

minimax 10y ago

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. They have him in emails literally saying things like "If I keep entering the same clip sizes, people will become aware of what I am doing rendering my spoofing pointless" and "I need to know whether you can do what I need, because at the moment I’m getting hit on my spoofs all the time and it’s costing me a lot of money." It's not a huge reach for the government to claim he was spoofing when he himself claims he was spoofing. How could a small trader like that possibly move enough volume to even budge the market as a whole, never mind crash it? I think people who aren't familiar with trading (especially futures trading) don't understand that Sarao was spoofing massive size. He was placing orders for 500+ contracts at multiple levels in the book... that's on the order of $100M notional value. He was more of a pro than people like to believe.

dvogel 10y ago
It's also worth noting that he didn't have to succeed for it to be illegal. Therefore, arguments regarding the magnitude of the effect he had or could have are mostly irrelevant.
- cmdrfred 10y ago
  The laws on fraud seem drasticly more punitive when you aren't the CEO of Wells Fargo or Mylan.
  - jrockway 10y ago
    The UK also has to court the financial industry pretty heavily now, since the banks threatened to move out of London after Brexit.

Lazare 10y ago

> This is insane. Oh yes. However... > How could a small trader like that possibly move enough volume to even budge the market as a whole, never mind crash it? He wasn't that small, but in any case the argument is basically "by spoofing, which scrambled some dumb HFT algos and made them crash the market". > They claim he was spoofing trades... That's more the domain of HFTs, Quite the reverse; HFTs and spoofers are basically the exact opposites. The archetypal spoofer would be a small trader, working alone, trying to make misleading orders to fool the HFT algos. From a spoofers point of view, they're trying to use cleverness to beat the speed advantage the HFTs have and make the markets fair. From an HFTs point of view, a spoofer is trying to use dishonesty to unfairly beat the speed advantage HFTs have. The legal system sides with the HFT view, but that's not entirely uncontroversial. > 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 You are 100% correct! However, spoofing is illegal whereas dumb algos are not illegal. IF he triggered the mess by doing something illegal, then yeah, legally he can be blamed for the mess. That being said...the timing doesn't really work. Sarao's trades don't quite line up with the flash crash. (Roughly speaking, his spoofing was causing the market to make significant moves, but he was doing it in bursts, and the flash crash happened right after he's stopped one burst and the market had already recovered. And then after the flash crash happened and then recovered, he kept right on doing it, causing no additional crashes. Current research suggests it probably wasn't him. Worst case he might have spooked some HFTs algos and made them react poorly to some other triggering event. ...of course, his spoofing was still illegal, even if it didn't cause a flash crash.)