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He was manipulating the market by generating large sell orders. This would drop prices (because others can see that some stock is being rapidly sold off -- espe
by NDT 10y ago
He was manipulating the market by generating large sell orders. This would drop prices (because others can see that some stock is being rapidly sold off -- especially by high-frequency traders or other automated programs who will also start selling). He would then cancel these orders to buy at the new low prices. This is called spoofing orders.
It was a large reason for the crash (though not the only component in my opinion) because these orders amounted to $200 million worth of bets that the market would fall and they were replaced or modified 19,000 times. And of course this is just one person. The market involves multiple people so you can imagine how much money was at stake here.
- jandrese 10y agoOf course investment banks do this sort of thing all of the time, this guy's crime is that he wasn't associated with one of the big incumbents. HFT generates and cancels orders on magnitudes like this all day long, but they have to be allowed to do so because it "creates markets", whatever that means.
- gpderetta 10y ago> HFT generates and cancels orders on magnitudes like this all day long, but they have to be allowed to do so because it "creates markets", No, they are allowed because HFT firms have the intention to (and in fact, will gladly) trade.
- jondubois 10y agoI don't think the intention matters if the result is the same.
- gpderetta 10y agoit matters because the law says it matters.
- kolbe 10y agoWell, the law doesn't really say anything beyond "manipulative devices" and "contrivances," but right now, judges have kinda ruled that intention matters. But we don't know much, because most of these cases get settled out of court, so we don't have a robust case law to base any of this off of. Basically, if you participate in a financial transaction in any way, be prepared to be accused of a crime.
- lsadam0 10y agoThe law strongly disagrees, and for good reason. See: manslaughter vs murder.
- hermitdev 10y agoIntention mostly matters, sometimes doesn't. Sometimes the left arm doesn't talk to the right arm and conflicting orders go out. Technically this could be construed as spoofing, but sometimes it's business unit A not talking to business unit B, because A isn't in the same location as B, or there's a Chinese Firewall between A & B. It might not be intentional spoofing, but it can happen, anyway.
- jandrese 10y agoSort of true. They will do the trade, but only if there was already someone in the system willing to make the same trade. HFT firms don't hold positions at the end of the day.
- eridius 10y agoAIUI, the difference is that, at the moment the HFTs place the order, they have every intention of filling them. Just because they might change their mind a fraction of a second later and modify their orders isn't particularly relevant. Whereas spoofing is placing orders that you don't have any intention of filling. The only point of the orders is to move the market, rather than to actually make trades. And that's the thing that's illegal.
- roganp 10y agoTherein lies the rub. How can regulators or prosecutors discern after the fact that a canceled order was one you intended to have filled?
- lawless123 10y agoShould it be illegal for s man to shout SELL! on a crowded trading floor?
- wnevets 10y ago>on a crowded trading floor? does such a thing even exist anymore?
- brianwawok 10y agoYes just not for many products. You can tour it in Chicago.
- twinkletwinkle 10y agoIf he has no intention of selling, yes.
- reddytowns 10y agoBut he did. He just shouted, "nevermind," a few milliseconds later.
- rwmj 10y agoWhat happened if someone took him up on an order before it was cancelled?
- elastic_church 10y agoHe got some partial fills. And he had a separate account that would trade the market distortion. His big orders weren't the best bid or ask. They were a few orders deep in the market. Basically people and machines would jump further in front of the big buy or sell order with their own orders, and move the price in a direction. His smaller account would make profits from those trades. Yes you could affect trillions of dollars of derivatives and the sentiment of the entire market with just a few dozen millions. It is still a widespread practice and tough to prove. But spoofing was made illegal in the Dodd Frank Act. So if the government can nail some easy cases and create case law, then they could think about going after the banks that do it. Emphasis on think.
- jondubois 10y agoI also don't understand why this is illegal. The markets should not be predictable. People like that guy should be rewarded financially for making it unpredictable. You don't want to have an economy where only a tiny group of powerful people understand what's happening while 99.99999...% of the population are at in the dark and at their mercy. A fair system should be simple enough to be understood by everyone or complex enough to be understood by no one - Anything in-between is not a fair system.
- eridius 10y ago> The markets should not be predictable. Uh, yeah they should. To someone with perfect knowledge, a proper free market should be 100% predictable. It's only unpredictable if other people know things that you don't (and the market itself is the vehicle by which that knowledge is disseminated). Introducing uncertainty into the market without introducing knowledge into the market is a bad thing. And spoofing trades in order to move the market isn't providing any knowledge, and it is in fact making the market less efficient because it no longer matches the knowledge of the participants.
- kolbe 10y agoshouldn't a spoofer's action just be an opportunity for someone who has said knowledge to exploit the spoofter's enhanced liquidity?
- eridius 10y agoWell, I'm not really sure how exactly to exploit this (I'm not a trader, all I really know about this is what I've read in all of the previous discussions about this), but that's really besides the point, because nobody has perfect information. In any case, I suspect the only real way to take advantage of this situation is to determine the orders that the spoofer actually does intend to make (e.g. spoofing to depress the price and then buying low) and making those trades first yourself. But you're not actually harming the spoofer in that case (except in that they didn't get to make the trade they wanted), because the spoofer won't actually have executed any trades, they'll have simply attempted (and failed) to execute them. Which is to say, if you have perfect knowledge, you might be able to prevent the spoofer from reaping the benefits of their spoofing, but you won't actually have harmed them, and of course the effect on the market is just as bad as if you let the spoofer spoof in peace.