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Guy trading at home caused the flash crash of 2010
- anonu 11y agoAs the article points out - this guy stopped his "spoofing" strategy and the market crash accelerated. This bit of info - coupled with the fact that it took this long to find him makes me think that this guy is only a small part of what happened that day.
- Namrog84 11y agoPerhaps covering up more major players or corporations or even potential underlying fundamental flaws?
- etaty 11y agoThis is a joke, they found the poor guy who was not big enough to have friends at the cftc. There is nothing wrong with flash crash and rally, that is just volatility, you just use the right leverage.
- ianlevesque 11y agoWell I sure am glad we found a scapegoat that doesn't require us to rethink HFT in any way. /s
- mitchell_h 11y agoCould someone point out where what this guy did was illegal? The guy simply outsmarted the algo traders by acting like he was going to push his chips in, than yanked them back. How exactly is that illegal? And if it is illegal why is the FCM allowing it? Even more so, how is it legal for people to see what he MIGHT do? This feels like a whole lot of sour grapes by the big boys. They're pissed because someone figured out their weakness.
- ikeboy 11y agoThe complaint http://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/04/21/sarao_criminal_complaint.pdf http://www.justice.gov/sites/default/files/opa/press-release... lists which exact laws he's accused of breaking on the first page. See also http://www.law360.com/articles/622358/feds-say-spoofing-law-isn-t-vague-in-1st-prosecution http://www.law360.com/articles/622358/feds-say-spoofing-law-...
- bko 11y agoSpoofing was made explicitly illegal under Dodd-Frank and is placing orders with the intent of cancelling them before execution. Generally its hard to prove intent. You can place an order and cancel it after new information becomes made available or your needs change.
- tptacek 11y agoPlacing orders that can't execute has apparently been verboten long before Dodd-Frank.
- jonpaine 11y agoThere's a technical answer, but more simply, you answered your own question: you can't push your chips in and then yank them back. Try that at a poker table - yes, you'll "outsmart" the other players by being able to see their reaction. You'll also instantly break the integrity of the game, because you're not outsmarting them, you're breaking the rules that allow the game/market to actually function. For a market to function properly that integrity that an order on the books is in good faith is vital. Of course, it's up to the SEC to enforce that.
- carsongross 11y agoThere are two possibilities here: this guy has been set up as the patsy to take the fall for this or, more terrifying, our markets are so brittle and levered that a guy at home with no juice can wipe out a trillion in notional value from his home. I pray that the former is the more likely scenario as the latter is simply too awful to contemplate.
- brownegg 11y agoThe latter is somewhat true, and probably unavoidable at this point. "The cat is out of the bag", so to speak--markets can't just go back. The problem is that the incentives are so wildly disproportionate. If a really smart guy works for the SEC or some surveillance body, he might $200k a year. That same really smart guy might make $200 MILLION trading. It has to be awfully damned unlikely to not choose the latter. And in reality, you're probably pulling $100k somehow or another while you wait. With respect to the idea that this guy is the culprit, that's literally laugh-out-loud funny. It's possible he was spoofing, etc., even with decent size. But the clearing firm (Hi, MF!) controls the throttles on those pipes. But there is what is called "sponsored direct access" in these markets, and that basically means the clearer wants your business enough you can just hook up directly so you can go really fast, and they (the clearer) will just pretend that they're looking at your stuff.
- filipet 11y ago200$ millions trading by themselves, without external investors? Very, very unlikely.
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- bko 11y agoMy (limited) understanding is that almost all high frequency hedge funds employ this tactic of placing and cancelling limit orders. Not sure why this guy is being prosecuted. > We investigate the trading of one hundred Nasdaq-listed stocks on INET, a limit order book. In contrast to the usual view, we find that over one-third of nonmarketable limit orders are cancelled within two seconds [0] When so many participants and breaking the law and the law seems to be applied somewhat subjectively, then it is ripe for corruption and political targetting. Kind of like how political dissidents get arrested for 'tax evasion' in Russia To be fair, this study was performed in 2007 and spoofing became explicitly illegal under Dodd Frank passed in 2010. I mentioned this in a comment in an earlier reply, but I think some skepticism around market participants is healthy. If market participants assume that there is no fraud or that fraud will be prosecuted by central authorities, they will be more easily defrauded. Edit: Looks like the number of unfilled orders is over 90% > New data from the US Securities and Exchange Commission (SEC) show that only 3.2% of the orders placed in the stock market in the second quarter of 2013 actually went through. [1] [0] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=994369 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=994369 [1] http://qz.com/133695/96-8-of-trades-placed-in-the-us-stock-market-are-cancelled/ http://qz.com/133695/96-8-of-trades-placed-in-the-us-stock-m...
- cma 11y agoYou are right that most place and cancel orders rapidly, but that isn't necessarily spoofing, which requires some intentionality. For example, Nasdaq even has an order type that auto-adjusts itself such that it will never execute, but it was mainly created to help market-makers dodge quoting requirements, not to enable spoofing. In symbols where they are a registered market-maker, market-makers are supposed to be obligated to make a market in the symbol. In exchange they get several regulatory benefits, like being able to naked short a stock (sell it without even locating/borrowing the shares). In practice most automated market-makers used to just put out bogus quotes they never expected to fill at $0.1/$1000000.0 bid/ask. The SEC tried to regulate this and say you had to really be making a market and put your quotes within X% of the current bid/ask. Market-makers started automatically cancelling and replacing at exactly X% away, but that was too much for them. So they had Nasdaq create an order type that automatically cancels itself and replaces it X% away from the bid/ask anytime the NBBO changes. What they are doing in that example is completely wrong, but not analogous to what the guy in this article was allegedly doing (this guy put his quotes near the money to make fake interest, market-makers put theirs as far away from the money as possible to be fake market-makers and get regulatory benefits like naked shorting in exchange, their orders don't appear like real buy/sell interest in the same way this guy's allegedly did). --- The author of the article tries to distance algorithmic-HFT from this guy operated, to cleanse its name, but come one: Sarao may have been a spoofer, but he doesn't seem to have been doing the sort of high-speed algorithmic trading that usually qualifies as "HFT." He himself claimed to be "'an old school point and click prop trader' who had 'always been good with reflexes and doing things quick,'" and the "Layering Algorithm" that he used was a customized version of "a program that allowed non-programmers to engage in automated trading using spreadsheet commands and functions." He was also the sole owner and employee of his trading firm, which he "operated from his residence." In style and substance he is not all that different from other spoofers we have known and loved, who did their high speed trading by just punching keys really fast. In style and point-and-click background maybe he wasn't a goliath HFT operation, but in substance, spreadsheet automated trading at faster than human speeds, he definitely was. -- If the charges hold up, they will have been able to convict this guy because of evidence of intentionality (the emails to his FCM). But with trading strategies now starting to delve into modern deep-learning techniques, we're probably going to start seeing algorithms learn to spoof from a blank slate. The only way to tell if one of these algorithms is really intending to buy or sell or is spoofing would be to reverse engineer something rather inscrutable... And is it the author's intentionality or the algorithm's we're really concerned with? Likely we'll end up holding things to some gamable metrics that will do about as good a job as the market-maker quoting requirements do in assuring market-maker algorithms are providing liquidity.
- IanDrake 11y agoIt seems most likely that another algorithm was looking at the full book and reacted to his spoofing order with it's own orders (that were actually executed) and which accelerated the price downward. This would have tripped algos looking at momentum and other stop loss orders in rapid succession. This is why it's dangerous to have algos run on the full book, especially without some logic to remove outliers.
- matt_morgan 11y agoThank goodness for Matt Levine. I read three other articles on this earlier today that didn't even raise the questions that he answered.
- mtanski 11y agoHe is like the John Stuart of Fin reporting.
- justonepost 11y agoI'm sure it was a collection of Sarao's that did this, rather than Sarao alone. He probably just stood out and was easiest to prosecute. Hopefully more prosecutions are coming.
- dankohn1 11y agoOne guy in his pajamas caused a market crash? How many of these events will it take to cause a fundamental rethink of the financialization of our economy? Where are the supposed benefits to justify finance gobbling up more than a third of corporate profits [0]? When will we finally see a financial trading tax [1] that ends High frequency trading (HFT) for good? [0] http://angrybearblog.com/2012/01/where-has-all-money-gone-part-ii.html http://angrybearblog.com/2012/01/where-has-all-money-gone-pa... [1] http://en.wikipedia.org/wiki/Financial_transaction_tax#United_States_financial_transaction_tax http://en.wikipedia.org/wiki/Financial_transaction_tax#Unite...
- jlebrech 11y agoso the system was the culprit
- defen 11y agoI can't help but think, "if it's really that easy to crash the market, how come terrorists aren't doing it on a regular basis?" Seems way easier, safer, and more effective than shooting people or blowing them up.
- pyre 11y agoYou can't die in a blaze of glory (possibly) on the world stage from behind a computer screen.
- tjradcliffe 11y agoThe E-mini S&P futures market is incredibly illiquid, which is why one guy can game it this way. Look at the current volume on the June 15th contract: http://finance.yahoo.com/echarts?s=ESM15.CME+Interactive#symbol=ESM15.CME;range=5d http://finance.yahoo.com/echarts?s=ESM15.CME+Interactive#sym... It's 343! That's zero to a good approximation. So this guy found a low-volume market that he could game with large sell orders above the current price that he would cancel (automatically, eventually) so he had a low (but crucially: non-zero) risk of actually having to sell at that price. Others would see the large sell volume and sell themselves, driving the price down. He would buy at the lower price, stop placing sell orders and watch the price bounce back up, absent his manipulation. This is likely illegal in the letter of the law as written in 2010, and fair enough. Illiquid markets are easily subject to this kind of thing and if you want people to invest in them maybe you need to police them against it. Whatever. But to call this "the cause" of the flash crash is like saying my neighbour's love of fireworks is "the cause" of my house burning down after I deliberately poured gasoline all over it. Sure, maybe my neighbour should have been more careful, but they had a reasonable expectation that my house would be ordinarily fire-proof, and behaved accordingly. And of course this guy dominated the market when it was falling rapidly: his algorithm would have a field day in such an event, placing and cancelling multiple sell orders as fast as it could all the way down. So to cite that as some kind of evidence is to put effect before cause. The only way this could have "caused" the flash crash is if a whole lot of large trading algorithms were using E-mini S&P futures as a a major input, and doing that--using such an illiquid, easily-manipulated market to drive large orders--that is criminal. Or should be.
- minimax 11y agoDude the front month S&P e-mini is one of the most liquid products on the planet. You are looking at a crappy chart. Look here: http://www.cmegroup.com/trading/equity-index/us-index/e-mini-sandp500_quotes_volume_voi.html http://www.cmegroup.com/trading/equity-index/us-index/e-mini...
- danbruc 11y agoI have an solution for you - instead of in real time trade in rounds every minute or ten or even only once an hour. Now everyone has some time to think about his decisions. And the real world doesn't change much within a couple of minutes so no need to worry that you can not react to events in a timely manner.
- princeb 11y agoproblem with this soln can be seen in exchanges' auction sessions: sessions of several minutes/hours during which orders only net at the end. with visible orderbook this does not avoid the problem of spoofing or eliminate the value of speed. with invisible orderbook there is still benefit in placing trades right at the last moment before the netting because you continue to accrue micromkt information from continuously trading markets and economic info from the real world throughout the netting session. and if you want to make all exchanges in all locations of the world net at the same exact moment, this is a Hard Problem.
- T-zex 11y agoHN Mods, why this discussion was dropped two pages down?
- kasey_junk 11y agoNot a mod but I believe that there is an "HFT penalty". And probably rightly so. The discussions around HFT are notorious for not being very productive.
- jacknews 11y agoOh No! We should BAN guys trading from home! Only licensed professionals, employed by the big banks, should ever be given such responsibility!
- bandrami 11y agoOld gripe of mine. I hate this phrase: investors saw nearly $1 trillion of value erased from U.S. stocks in just minutes. No. They did not. A stock's value is not "what some other dude is payed for it yesterday"; its value is whatever money you get when you sell it (plus, God forbid, whatever dividends it pays -- quaint idea, I know).
- pdovy 11y agoIt's worth pointing out that this kind of behavior gets people in trouble on a fairly regular basis, what is new is that the DOJ is starting to bring criminal complaints. It's long been the case that the SEC, or in this case the CFTC, will fine and temporarily/permanently ban you from trading for this kind of behavior, look at http://www.cftc.gov/LawRegulation/Enforcement/EnforcementActions/ http://www.cftc.gov/LawRegulation/Enforcement/EnforcementAct...