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UK trader in fraud arrest over US 'flash crash'

56 points by goodcanadian 12y ago

fennecfoxen 12y ago
Here are some copies of the complaints from our friends at the WSJ: http://online.wsj.com/public/resources/documents/SaraoDOJ04-21-2015.pdf http://online.wsj.com/public/resources/documents/SaraoDOJ04-... (DOJ complaint) http://online.wsj.com/public/resources/documents/saraoCFTC04-21-2015.pdf http://online.wsj.com/public/resources/documents/saraoCFTC04... (CFTC complaint)
- bobcostas55 12y ago
  Reading through these it's fairly obvious that Sarao's layering was manipulative and illegal (it boggles the mind that they only caught up with him now), but blaming him for the flash crash is ridiculous over-reach.
  - icu 12y ago
    Another factor to consider is Sarao's internet speed limitations. It seems that news outlets are reporting that Sarao "worked out of his house in London"... well I lived in that part of London and in 2012 it was hard enough getting anything near 60 Mb/s downstream, 10 Mb/s upstream and 15ms ping, so how the heck could he run a HFT operation? Even if we consider the possibility of co-location it costs millions for this sort of access, and the capitalisation of his firm looks like it is sub £20mil between 2010 and 2011. I just can't see how this adds up.
    - kasey_junk 12y ago
      Colocation cost a couple grand a month. Its almost exactly the same price I paid for tier 1 internet colocation during the first dot com boom.
      - icu 12y ago
        Well since we're talking about the e-minis lets assume the CME GLink... according to CME Group it would cost $12,000/mo with a one-time install of $2,000 and a minimum commitment period of 12 months. [Source: http://www.cmegroup.com/globex/files/connectivityoptions.pdf http://www.cmegroup.com/globex/files/connectivityoptions.pdf] You then need the hardware and technical expertise to pull off the install... so lets say another $20,000 to $25,000 for hardware and I'd estimate $2,000 to $5,000 in technician charges. So total outlay just to get the hardware set-up would be about $168k to $176k. Then there is the dev costs and I shudder to think about what is actually required here bearing in mind I think I do some pretty advanced retail trading in LISP. Now, my point to all of this is when I step back for a moment and ask myself would someone outlay circa $150k on what is clearly a strategy that is blatant market manipulation, it defies belief that someone smart enough to pull it off would be dumb enough to try. I would even go further that this is especially true since there are many other opportunities to make honest money from the market trading legally.
        kasey_junk 12y ago
        You are assuming he is using the full connection and not using a hosted one. There are lots of options for spreading the cost of that around. See http://www.cmegroup.com/globex/trading-cme-group-products/trading-applications/isv.html http://www.cmegroup.com/globex/trading-cme-group-products/tr... If you read the actual complaints you will see it is explicitly outlined that he was using FCMs and was buying the trading platform. In fact one of the pieces of evidence that is mentioned are emails asking for feature requests from the software vendor. Even if you grant the 150k capital outlay, the complaint alleges that this was a scheme worth 40 million dollars, a business opportunity many people would jump at. Further, the amount of orders he was placing would put a much higher capital constraint against his margin and clearing risk management than on the colocation. My main point is that people act like getting colocation is the big barrier to entry for HFT and it simply isn't. Quite the opposite it is a business where most of the technology has been commoditized and the margins are razor thin. The barrier to entry is coming up with a trading strategy that works well on a risk adjusted basis, and spoofing may be one way to accomplish that. Firms much larger than this one have been accused of similar behavior in the past.
akhatri_aus 12y ago
Does someone have more information in whether the 'spoofing' used is illegal? From Nanex (http://www.nanex.net/ http://www.nanex.net/) I occasionally read of a practice called 'quote stuffing' which involves mass cancellation of orders. It seems so ridiculous that no one on Wall Street in prosecuted and yet this guy from the UK somehow gets charged with what seems to be the common practice of HFT firms. Does anyone have more information on this? It just seems so out of place that the damage caused can be so single handedly. If someone had nefarious intentions in a foreign government attacking financial infrastructure is probably something like our generations nukes - without the blood. I'm still dumbfounded by the scale of damage by something economic theory/markets say shouldn't happen. Am I an area 51 guy or is something seriously wrong?
lmg643 12y ago
The criminal complaint states that the trader was using an excel spreadsheet trading product, from a vendor, that was specifically augmented with order types that would automatically place orders for him at price points away from the market. Does anyone know what vendor he was using to build this product?
- cheatdeath 12y ago
  Probably something like Stellar (Stellar Trading Systems) or TT (Trading Technologies XTrader).
- cheatdeath 12y ago
  He paid a company called Edge (http://edgefinite.com/ http://edgefinite.com/) to extend the functionality of TT (https://www.tradingtechnologies.com/products/trading-analytics/api/xtapi/ https://www.tradingtechnologies.com/products/trading-analyti...). Page 49 of full CFTC document - https://www.dropbox.com/s/ego1blhnylgs7sx/Appendix.pdf https://www.dropbox.com/s/ego1blhnylgs7sx/Appendix.pdf "I asked Edge to design 3 more functions specifically to help try and hide my orders from these people. I do not know if this can be described as HFT, to me it is just giving me the ability to have some extra functions that my base trading software (TT) does not give me..."
joshstrange 12y ago
Ok, maybe I'm horribly misinformed but I thought this was commonplace on wall street (trying to trick other algorithms and the like). Are we really going after this guy because he is just a guy and not some massive corporation? I mean it wouldn't be the first time the single person doing something is made an example of while corporations do it without repercussions but surely I'm missing something here... Edit: ok this article (posted in new right now) http://www.businessinsider.com/what-is-spoofing-the-market-2015-4 http://www.businessinsider.com/what-is-spoofing-the-market-2... seems to have a lot more information. Relevant bit: > The tactic [Spoofing] was outlawed in the 2010 Dodd-Frank regulation, but, as with other forms of fraud, it's hard to prove the trader's intent – in this case, the trader's intent to cancel the order. Prosecutors must prove the trader didn't change his or her mind for legitimate reasons after placing the trade. Edit 2: Ok looks like regulators are just now starting to really go after these people. Who wants to take bets on the chance that ANY major financial orgs get in trouble (and no, fines that are pennies on the dollar for what they are making is not "trouble", I want to see people in jail seeing how we are trying to extradite this UK guy.)
- steamy 12y ago
  It's the same story like that of Bernie Madoff and also the same morale. You're free to do whatever you want hustling & bustling screwing people over but if you dare to mess up with the wrong people, you're toast and you will be made an example of for everyone to see.
  - arca_vorago 12y ago
    Not sure why you got downvoted with no reasoning, but you're right. I would bet my left testes that major money corps of the Three Sister Cities do the exact same thing but just make it less obvious and do it over longer periods of time. The whole things is rigged anyway, and the SEC is a joke. Also, there are plenty of middle-men scapegoats to be sacrificed if the big boys get caught too. (see, gold manipulation scandal, libor, etc).
    - steamy 12y ago
Someone1234 12y ago
akhatri_aus's post has been incorrectly flagged as a dupe. If a mod is reading they may wish to look into that.
- deleted 12y ago
  [deleted]
- MarcScott 12y ago
  Check the comment history. Dupe is from another thread.
  - Someone1234 12y ago
    Fair point. It is a thread about the same topic (one that didn't receive a lot of activity). So I don't really blame them for trying to post it here.
    - MarcScott 12y ago
      Also a fair point. I guess the HN dupe algorithm is imperfect.
mike_hearn 12y ago
This sounds like it may be possible only because of the exceptionally weak US-UK extradition treaty, which gives the USA unusually strong powers to grab people from the UK without any equivalent ability for the UK to extradite people from the USA. The one-sidednesss of this agreement has caused political problems before as it is seem as epitomising the slavishness of British politicians to Washington. If "spoofing" was really only outlawed in the Dodd Frank act then it seems likely that most countries wouldn't have any laws against it, and an extradition would fail on the grounds that what Sarao is accused of would not be a crime in his country of origin. I'm sure the UK Government will love the idea of sending a trader to the dogs in America regardless of whether or not this is actually illegal in the UK itself, just because it's election time and like all politicos everywhere they want to be seen as whacking financial types. But it seems to lead to a bad precedent. If trading strategies can be simply made illegal in a law so large even the people who voted on it didn't read it, then how can anyone really know if their trades are illegal or not?
- tptacek 12y ago
  The last time this was hashed out on HN, all the available documentation seemed to establish that the UK-US extradition treaty had recently changed --- to correct an imbalance that had historically favored the UK, and is now more equitable.
  - learnstats2 12y ago
    Equitable? Why does it matter if this is equitable? In practice, UK citizens now have to obey US law or risk being extradited - in this case, for conducting their work legally in their home country. This is not right.
    - tptacek 12y ago
      You cannot be extradited from the UK to the US for things that aren't crimes in the UK. Check out the treaty.
      - 12y ago
tptacek 12y ago
From the actual complaints, it's not clear to me that Nav Sarao is being charged with helping cause the Flash Crash, but rather for flagrantly executing a spoofing strategy during the Flash Crash.
- nissimk 12y ago
  From the complaint: 35. According to Consulting Group analysts and the expert, that day, SARAO was active in the E-Mini market on the CME, and contributed to the orderbook imbalance that the CFTC and the Securities Exchange Commission have concluded, in a published report, was a cause, among other factors, of the Flash Crash. Among other activity, SARAO used the dynamic layering technique extensively. ... 36. SARAO's use of the dynamic layering technique was particularly intense in the hours leading up to the Flash Crash. SARAO used the technique continuously from 11:17 a.m. until 1:40 p.m.
  - tptacek 12y ago
    Huh. And, from a much earlier source: High frequency trading did not cause the flash crash according to a joint report by the CFTC and the SEC. The staffs of the two agencies concluded that a large fundamental trader's order to quickly sell 75,000 CME S&P 500 mini contracts (with a notional value of over $4 billion) created a "liquidity crisis" in the CME E-Mini futures that caused the price to drop more than 5% in four-and-one-half minutes during the most intense part of the episode.
nissimk 12y ago
Zerohedge gloating: http://www.zerohedge.com/news/2015-04-21/step-step-guide-how-crash-entire-market http://www.zerohedge.com/news/2015-04-21/step-step-guide-how... Is there a difference between Layering/Spoofing and "quote stuffing?" I thought quote stuffing was a technique intended to overwhelm analytics software with volume of ticks rather than manipulate interpretation of current supply/demand dynamics. I suppose they are variations on the same theme.
- tptacek 12y ago
  I'm not sure I even see how layering and "quote stuffing" are related. Here's what Zero Hedge says: In other words, 5 years after Zero Hedge first explained precisely what happened on May 6, 2010, the CFTC finally admits that the flash crash was not due to Waddell & Reed, but due to HFTs and quote stuffing. That doesn't sound true at all. The point of the layering strategy is entering huge orders (not lots of little ones) that can't trade, and that's what SEC/CFTC said years ago as well. Immediately and automatically canceling the orders isn't required for layering to work; the layered orders are several price levels away from the clearing price. The point is to sustainably convince market makers of a change in the market's direction, and then profit from its correction. As I understand it, the point of "quote stuffing" is literally to disrupt the market; it's akin to DDoSing the exchange and profiting from the change in behavior. It's tricky, however, to nail this down, because the term "quote stuffing" was invented by people examining trading artifact data to explain anomalous graphs; the effect and even intent of "stuffing" is all supposition, and I guess the term can mean whatever Zero Hedge wants it to mean.
  - kasey_junk 12y ago
    Layering does not have to be done with huge orders, lots of little orders work fine as well, as long as you can cancel them quickly (in some ways that is better because on some exchanges you get fills before public feeds). Other than that I completely agree with you. Some people used quote stuffing to mean a DDoS style attack with orders (which if it ever happened was never wide spread and is trivial to prevent on the exchange side). Others do use the term for spoofing or layering.
1971genocide 12y ago
Wait. So the apparent "crime" this person committed is the literal definition of playing bluff. How is that even a crime ?? It seems the financial system is screwed up if someone playing bluff can crash it.
- bbcbasic 12y ago
  Every one of us has a vested interest in stable financial markets. I am for any law that helps make financial markets serve businesses and society and not high-stake casino players. We need laws like this because of the endless supply of greedy assholes who want to game the system. This extends to other areas like systematic tax avoidance used by rich individuals and large corporations.
  - 1971genocide 12y ago
    Wait. So you are saying to solve the problem of rich individuals and large corporations from using tax loopholes, we need to implement more laws ? Do you seriously think that solution will work ? When was the last time you though looking at shitty code "hey ! do you know how to solve the problems in this shitty code, write more shitty code !" I do not think the problem is as complicated as it is made out to be. The tax code is already freaking huge ! no human nor even the people making them can read all of it. Every time you try to "fix" the problem by introducing more laws you make it easier for rich ppl to find new loopholes. Its the same thing with MPAA trying to stop ppl from torrenting, or ISPs trying to block websites.
    - bbcbasic 12y ago
      Interesting, but I can't see a solution in your reply. Unless you are saying we should let the market be free, so we can have insider trading and big corps that pay less tax than a janitor (in $ terms not just %)? Laws can be reformed. Ideally laws are tidied. To reuse your analogy: "hey ! do you know how to solve the problems in this shitty code, <<refactor>>"
      - 12y ago
padmanabhan01 12y ago
Seems like an open glaring flaw in the trading systems if it can be manipulated in such ways. Why not focus on fixing such flaws instead of legislating against such trades? So, the law says it's legal to place order and then change one's mind and cancel it, but is not legal to place order with the intent to cancel later? Seriously?
- bpodgursky 12y ago
  Seriously. It seems like there are many very easy technical fix the markets could implement -- - hard-cap the number of cancellations a trader can order - penalize traders if they have too many cancelled orders (delay further transactions) - add a cost to cancellation Why does this require police action? Is the exchange just using the police as a bulldog to avoid having to implement technical fixes for these problems?
  - phdp 12y ago
    This would most likely have the effect of widening the bid/ask spread. Market makers wouldn't be able to react to changing conditions in the marketplace as quickly, and they would therefore set bid lower/ask higher than they would in a friction-free market.
  - kasey_junk 12y ago
    Most of those do exist on exchanges. The mechanics usually involve a fee attached with your fill ratio (ie the number of orders/number that actually trade). The thing about spoofing is that it doesn't require tons of cancels. Done right it falls well within the bounds of normal trading ratios.
- itchyouch 12y ago
  In regards to the law, one is the normal behavior of market makers submitting their quotes, then changing the prices when the market moves. The latter would constantly chase orders with cancels with only microseconds in-between them. The best firms can respond to a tick in under 10 microseconds, so bad behavior really can't stay on the book for more than 10s of microseconds.
nostromo 12y ago
I'm amazed that "spoofing" is illegal. If your high frequency trading algorithm is so dumb that it can be tricked by an order that is then canceled, you deserve to lose money. Anyone doing actual analysis of companies and trading accordingly would be completely unaffected by a spoofed order.
- kasey_junk 12y ago
  What sort of analysis are you suggesting? Because common analysis of supply and demand for instance is very much affected by a spoofed orders. If an exchange says that 10000 people want to sell at X and 2 want to sell at X-Y that is a pretty good mechanism for price discovery (something we want the markets to enable). That means nothing in the face of rampant spoofing. You might as well get rid of public price feeds at that point. I think that there is an argument that spoofing should be legal, but we would need to de-anonymize the trades so that you could develop some digital analog for reputation. That way if I see an order from a known spoofer, I can discount it.
  - NickNameNick 12y ago
    He's arguing that people should be trading based on an assessment of the actual value of the assets behind the stock, rather than the price that other people are trading the stock at.
    - tptacek 12y ago
      Isn't that like arguing that we shouldn't have markets at all? The primary function of a market is price discovery. If we could all agree on the value of things, today and in the future, things would be a lot simpler.
      - lobe 12y ago
        But that price discovery should reveal the price that the underlying security is worth. If shares were only traded based on what other people trade it for, isn't that the blind leading the blind, and the price it is traded for will have little grounding in reality. I have several issues with HFT, however 'spoofing' as it is described sounds like it should be perfectly legal to me. If a player wants to trick the market, it is an irregularity that should be capitalised on by someone with a better understanding of the true value of the security
arthurcolle 12y ago
How was he able to single handedly build up the volume necessary to affect what is literally the most highly traded futures contract? I imagine he wrote some awesome C++ code plugged into MetaTrader or TradeStation, but certainly they have checks in place to ensure that he can't just place tons of orders that fake the volume of a whale without having lots of proxy servers that also place orders (which would also require proxy accounts). If so, wouldn't he have to have multiple accounts with his broker (I assume Interactive Brokers, given they have the only reasonable rates of all the retail brokerage firms). Can someone shed some light? I know a little about finance and I'm genuinely curious how some random guy could possibly pull this off without some complicity with his broker.

56 points by goodcanadian 12y ago

Here are some copies of the complaints from our friends at the WSJ: http://online.wsj.com/public/resources/documents/SaraoDOJ04-21-2015.pdf http://online.wsj.com/public/resources/documents/SaraoDOJ04-... (DOJ complaint) http://online.wsj.com/public/resources/documents/saraoCFTC04-21-2015.pdf http://online.wsj.com/public/resources/documents/saraoCFTC04... (CFTC complaint)

bobcostas55 12y ago
Reading through these it's fairly obvious that Sarao's layering was manipulative and illegal (it boggles the mind that they only caught up with him now), but blaming him for the flash crash is ridiculous over-reach.
- icu 12y ago
  Another factor to consider is Sarao's internet speed limitations. It seems that news outlets are reporting that Sarao "worked out of his house in London"... well I lived in that part of London and in 2012 it was hard enough getting anything near 60 Mb/s downstream, 10 Mb/s upstream and 15ms ping, so how the heck could he run a HFT operation? Even if we consider the possibility of co-location it costs millions for this sort of access, and the capitalisation of his firm looks like it is sub £20mil between 2010 and 2011. I just can't see how this adds up.
  - kasey_junk 12y ago
    Colocation cost a couple grand a month. Its almost exactly the same price I paid for tier 1 internet colocation during the first dot com boom.
    - icu 12y ago
      Well since we're talking about the e-minis lets assume the CME GLink... according to CME Group it would cost $12,000/mo with a one-time install of $2,000 and a minimum commitment period of 12 months. [Source: http://www.cmegroup.com/globex/files/connectivityoptions.pdf http://www.cmegroup.com/globex/files/connectivityoptions.pdf] You then need the hardware and technical expertise to pull off the install... so lets say another $20,000 to $25,000 for hardware and I'd estimate $2,000 to $5,000 in technician charges. So total outlay just to get the hardware set-up would be about $168k to $176k. Then there is the dev costs and I shudder to think about what is actually required here bearing in mind I think I do some pretty advanced retail trading in LISP. Now, my point to all of this is when I step back for a moment and ask myself would someone outlay circa $150k on what is clearly a strategy that is blatant market manipulation, it defies belief that someone smart enough to pull it off would be dumb enough to try. I would even go further that this is especially true since there are many other opportunities to make honest money from the market trading legally.
      - kasey_junk 12y ago
        You are assuming he is using the full connection and not using a hosted one. There are lots of options for spreading the cost of that around. See http://www.cmegroup.com/globex/trading-cme-group-products/trading-applications/isv.html http://www.cmegroup.com/globex/trading-cme-group-products/tr... If you read the actual complaints you will see it is explicitly outlined that he was using FCMs and was buying the trading platform. In fact one of the pieces of evidence that is mentioned are emails asking for feature requests from the software vendor. Even if you grant the 150k capital outlay, the complaint alleges that this was a scheme worth 40 million dollars, a business opportunity many people would jump at. Further, the amount of orders he was placing would put a much higher capital constraint against his margin and clearing risk management than on the colocation. My main point is that people act like getting colocation is the big barrier to entry for HFT and it simply isn't. Quite the opposite it is a business where most of the technology has been commoditized and the margins are razor thin. The barrier to entry is coming up with a trading strategy that works well on a risk adjusted basis, and spoofing may be one way to accomplish that. Firms much larger than this one have been accused of similar behavior in the past.

akhatri_aus 12y ago

Does someone have more information in whether the 'spoofing' used is illegal? From Nanex (http://www.nanex.net/ http://www.nanex.net/) I occasionally read of a practice called 'quote stuffing' which involves mass cancellation of orders. It seems so ridiculous that no one on Wall Street in prosecuted and yet this guy from the UK somehow gets charged with what seems to be the common practice of HFT firms. Does anyone have more information on this? It just seems so out of place that the damage caused can be so single handedly. If someone had nefarious intentions in a foreign government attacking financial infrastructure is probably something like our generations nukes - without the blood. I'm still dumbfounded by the scale of damage by something economic theory/markets say shouldn't happen. Am I an area 51 guy or is something seriously wrong?

lmg643 12y ago

The criminal complaint states that the trader was using an excel spreadsheet trading product, from a vendor, that was specifically augmented with order types that would automatically place orders for him at price points away from the market. Does anyone know what vendor he was using to build this product?

cheatdeath 12y ago
Probably something like Stellar (Stellar Trading Systems) or TT (Trading Technologies XTrader).
cheatdeath 12y ago
He paid a company called Edge (http://edgefinite.com/ http://edgefinite.com/) to extend the functionality of TT (https://www.tradingtechnologies.com/products/trading-analytics/api/xtapi/ https://www.tradingtechnologies.com/products/trading-analyti...). Page 49 of full CFTC document - https://www.dropbox.com/s/ego1blhnylgs7sx/Appendix.pdf https://www.dropbox.com/s/ego1blhnylgs7sx/Appendix.pdf "I asked Edge to design 3 more functions specifically to help try and hide my orders from these people. I do not know if this can be described as HFT, to me it is just giving me the ability to have some extra functions that my base trading software (TT) does not give me..."

joshstrange 12y ago

Ok, maybe I'm horribly misinformed but I thought this was commonplace on wall street (trying to trick other algorithms and the like). Are we really going after this guy because he is just a guy and not some massive corporation? I mean it wouldn't be the first time the single person doing something is made an example of while corporations do it without repercussions but surely I'm missing something here... Edit: ok this article (posted in new right now) http://www.businessinsider.com/what-is-spoofing-the-market-2015-4 http://www.businessinsider.com/what-is-spoofing-the-market-2... seems to have a lot more information. Relevant bit: > The tactic [Spoofing] was outlawed in the 2010 Dodd-Frank regulation, but, as with other forms of fraud, it's hard to prove the trader's intent – in this case, the trader's intent to cancel the order. Prosecutors must prove the trader didn't change his or her mind for legitimate reasons after placing the trade. Edit 2: Ok looks like regulators are just now starting to really go after these people. Who wants to take bets on the chance that ANY major financial orgs get in trouble (and no, fines that are pennies on the dollar for what they are making is not "trouble", I want to see people in jail seeing how we are trying to extradite this UK guy.)

steamy 12y ago
It's the same story like that of Bernie Madoff and also the same morale. You're free to do whatever you want hustling & bustling screwing people over but if you dare to mess up with the wrong people, you're toast and you will be made an example of for everyone to see.
- arca_vorago 12y ago
  Not sure why you got downvoted with no reasoning, but you're right. I would bet my left testes that major money corps of the Three Sister Cities do the exact same thing but just make it less obvious and do it over longer periods of time. The whole things is rigged anyway, and the SEC is a joke. Also, there are plenty of middle-men scapegoats to be sacrificed if the big boys get caught too. (see, gold manipulation scandal, libor, etc).
  - steamy 12y ago

Someone1234 12y ago

akhatri_aus's post has been incorrectly flagged as a dupe. If a mod is reading they may wish to look into that.

deleted 12y ago
[deleted]
MarcScott 12y ago
Check the comment history. Dupe is from another thread.
- Someone1234 12y ago
  Fair point. It is a thread about the same topic (one that didn't receive a lot of activity). So I don't really blame them for trying to post it here.
  - MarcScott 12y ago
    Also a fair point. I guess the HN dupe algorithm is imperfect.

mike_hearn 12y ago

This sounds like it may be possible only because of the exceptionally weak US-UK extradition treaty, which gives the USA unusually strong powers to grab people from the UK without any equivalent ability for the UK to extradite people from the USA. The one-sidednesss of this agreement has caused political problems before as it is seem as epitomising the slavishness of British politicians to Washington. If "spoofing" was really only outlawed in the Dodd Frank act then it seems likely that most countries wouldn't have any laws against it, and an extradition would fail on the grounds that what Sarao is accused of would not be a crime in his country of origin. I'm sure the UK Government will love the idea of sending a trader to the dogs in America regardless of whether or not this is actually illegal in the UK itself, just because it's election time and like all politicos everywhere they want to be seen as whacking financial types. But it seems to lead to a bad precedent. If trading strategies can be simply made illegal in a law so large even the people who voted on it didn't read it, then how can anyone really know if their trades are illegal or not?

tptacek 12y ago
The last time this was hashed out on HN, all the available documentation seemed to establish that the UK-US extradition treaty had recently changed --- to correct an imbalance that had historically favored the UK, and is now more equitable.
- learnstats2 12y ago
  Equitable? Why does it matter if this is equitable? In practice, UK citizens now have to obey US law or risk being extradited - in this case, for conducting their work legally in their home country. This is not right.
  - tptacek 12y ago
    You cannot be extradited from the UK to the US for things that aren't crimes in the UK. Check out the treaty.
    - 12y ago

tptacek 12y ago

From the actual complaints, it's not clear to me that Nav Sarao is being charged with helping cause the Flash Crash, but rather for flagrantly executing a spoofing strategy during the Flash Crash.

nissimk 12y ago
From the complaint: 35. According to Consulting Group analysts and the expert, that day, SARAO was active in the E-Mini market on the CME, and contributed to the orderbook imbalance that the CFTC and the Securities Exchange Commission have concluded, in a published report, was a cause, among other factors, of the Flash Crash. Among other activity, SARAO used the dynamic layering technique extensively. ... 36. SARAO's use of the dynamic layering technique was particularly intense in the hours leading up to the Flash Crash. SARAO used the technique continuously from 11:17 a.m. until 1:40 p.m.
- tptacek 12y ago
  Huh. And, from a much earlier source: High frequency trading did not cause the flash crash according to a joint report by the CFTC and the SEC. The staffs of the two agencies concluded that a large fundamental trader's order to quickly sell 75,000 CME S&P 500 mini contracts (with a notional value of over $4 billion) created a "liquidity crisis" in the CME E-Mini futures that caused the price to drop more than 5% in four-and-one-half minutes during the most intense part of the episode.

nissimk 12y ago

Zerohedge gloating: http://www.zerohedge.com/news/2015-04-21/step-step-guide-how-crash-entire-market http://www.zerohedge.com/news/2015-04-21/step-step-guide-how... Is there a difference between Layering/Spoofing and "quote stuffing?" I thought quote stuffing was a technique intended to overwhelm analytics software with volume of ticks rather than manipulate interpretation of current supply/demand dynamics. I suppose they are variations on the same theme.

tptacek 12y ago
I'm not sure I even see how layering and "quote stuffing" are related. Here's what Zero Hedge says: In other words, 5 years after Zero Hedge first explained precisely what happened on May 6, 2010, the CFTC finally admits that the flash crash was not due to Waddell & Reed, but due to HFTs and quote stuffing. That doesn't sound true at all. The point of the layering strategy is entering huge orders (not lots of little ones) that can't trade, and that's what SEC/CFTC said years ago as well. Immediately and automatically canceling the orders isn't required for layering to work; the layered orders are several price levels away from the clearing price. The point is to sustainably convince market makers of a change in the market's direction, and then profit from its correction. As I understand it, the point of "quote stuffing" is literally to disrupt the market; it's akin to DDoSing the exchange and profiting from the change in behavior. It's tricky, however, to nail this down, because the term "quote stuffing" was invented by people examining trading artifact data to explain anomalous graphs; the effect and even intent of "stuffing" is all supposition, and I guess the term can mean whatever Zero Hedge wants it to mean.
- kasey_junk 12y ago
  Layering does not have to be done with huge orders, lots of little orders work fine as well, as long as you can cancel them quickly (in some ways that is better because on some exchanges you get fills before public feeds). Other than that I completely agree with you. Some people used quote stuffing to mean a DDoS style attack with orders (which if it ever happened was never wide spread and is trivial to prevent on the exchange side). Others do use the term for spoofing or layering.

1971genocide 12y ago

Wait. So the apparent "crime" this person committed is the literal definition of playing bluff. How is that even a crime ?? It seems the financial system is screwed up if someone playing bluff can crash it.

bbcbasic 12y ago
Every one of us has a vested interest in stable financial markets. I am for any law that helps make financial markets serve businesses and society and not high-stake casino players. We need laws like this because of the endless supply of greedy assholes who want to game the system. This extends to other areas like systematic tax avoidance used by rich individuals and large corporations.
- 1971genocide 12y ago
  Wait. So you are saying to solve the problem of rich individuals and large corporations from using tax loopholes, we need to implement more laws ? Do you seriously think that solution will work ? When was the last time you though looking at shitty code "hey ! do you know how to solve the problems in this shitty code, write more shitty code !" I do not think the problem is as complicated as it is made out to be. The tax code is already freaking huge ! no human nor even the people making them can read all of it. Every time you try to "fix" the problem by introducing more laws you make it easier for rich ppl to find new loopholes. Its the same thing with MPAA trying to stop ppl from torrenting, or ISPs trying to block websites.
  - bbcbasic 12y ago
    Interesting, but I can't see a solution in your reply. Unless you are saying we should let the market be free, so we can have insider trading and big corps that pay less tax than a janitor (in $ terms not just %)? Laws can be reformed. Ideally laws are tidied. To reuse your analogy: "hey ! do you know how to solve the problems in this shitty code, <<refactor>>"
    - 12y ago

padmanabhan01 12y ago

Seems like an open glaring flaw in the trading systems if it can be manipulated in such ways. Why not focus on fixing such flaws instead of legislating against such trades? So, the law says it's legal to place order and then change one's mind and cancel it, but is not legal to place order with the intent to cancel later? Seriously?

bpodgursky 12y ago
Seriously. It seems like there are many very easy technical fix the markets could implement -- - hard-cap the number of cancellations a trader can order - penalize traders if they have too many cancelled orders (delay further transactions) - add a cost to cancellation Why does this require police action? Is the exchange just using the police as a bulldog to avoid having to implement technical fixes for these problems?
- phdp 12y ago
  This would most likely have the effect of widening the bid/ask spread. Market makers wouldn't be able to react to changing conditions in the marketplace as quickly, and they would therefore set bid lower/ask higher than they would in a friction-free market.
- kasey_junk 12y ago
  Most of those do exist on exchanges. The mechanics usually involve a fee attached with your fill ratio (ie the number of orders/number that actually trade). The thing about spoofing is that it doesn't require tons of cancels. Done right it falls well within the bounds of normal trading ratios.
itchyouch 12y ago
In regards to the law, one is the normal behavior of market makers submitting their quotes, then changing the prices when the market moves. The latter would constantly chase orders with cancels with only microseconds in-between them. The best firms can respond to a tick in under 10 microseconds, so bad behavior really can't stay on the book for more than 10s of microseconds.

nostromo 12y ago

I'm amazed that "spoofing" is illegal. If your high frequency trading algorithm is so dumb that it can be tricked by an order that is then canceled, you deserve to lose money. Anyone doing actual analysis of companies and trading accordingly would be completely unaffected by a spoofed order.

kasey_junk 12y ago
What sort of analysis are you suggesting? Because common analysis of supply and demand for instance is very much affected by a spoofed orders. If an exchange says that 10000 people want to sell at X and 2 want to sell at X-Y that is a pretty good mechanism for price discovery (something we want the markets to enable). That means nothing in the face of rampant spoofing. You might as well get rid of public price feeds at that point. I think that there is an argument that spoofing should be legal, but we would need to de-anonymize the trades so that you could develop some digital analog for reputation. That way if I see an order from a known spoofer, I can discount it.
- NickNameNick 12y ago
  He's arguing that people should be trading based on an assessment of the actual value of the assets behind the stock, rather than the price that other people are trading the stock at.
  - tptacek 12y ago
    Isn't that like arguing that we shouldn't have markets at all? The primary function of a market is price discovery. If we could all agree on the value of things, today and in the future, things would be a lot simpler.
    - lobe 12y ago
      But that price discovery should reveal the price that the underlying security is worth. If shares were only traded based on what other people trade it for, isn't that the blind leading the blind, and the price it is traded for will have little grounding in reality. I have several issues with HFT, however 'spoofing' as it is described sounds like it should be perfectly legal to me. If a player wants to trick the market, it is an irregularity that should be capitalised on by someone with a better understanding of the true value of the security

arthurcolle 12y ago

How was he able to single handedly build up the volume necessary to affect what is literally the most highly traded futures contract? I imagine he wrote some awesome C++ code plugged into MetaTrader or TradeStation, but certainly they have checks in place to ensure that he can't just place tons of orders that fake the volume of a whale without having lots of proxy servers that also place orders (which would also require proxy accounts). If so, wouldn't he have to have multiple accounts with his broker (I assume Interactive Brokers, given they have the only reasonable rates of all the retail brokerage firms). Can someone shed some light? I know a little about finance and I'm genuinely curious how some random guy could possibly pull this off without some complicity with his broker.