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Could 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

Could 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 ago
The 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 ago
Spoofing 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 ago
  Placing orders that can't execute has apparently been verboten long before Dodd-Frank.
jonpaine 11y ago
There'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.
- ryandvm 11y ago
  I think he was making the point that if something is permitted by the "rules of the game", then by definition, it cannot be a violation of the rules. And in the case of financial transactions APIs, the rules should exist as application logic. So if you're not supposed to place and immediately cancel an order, it should simply not be possible. I could certainly believe that if it was one of the large HFTs doing this, they would have had the necessary wheel-grease to not get in trouble...
  - kasey_junk 11y ago
    Placing and immediately canceling an order is fine and allowed (though doing that too much is penalized for other reasons). Spoofing is pulling them out in a coordinated fashion before they can be put at risk with no intention of them ever trading. The problem is that an api that prevented that would also prevent legitimate cancels that would have side effects that could be bad (ie making it riskier to make markets and therefore increase the bid/ask spread). Spoofing is about intention. Intention cannot be determined by algorithm (yet). Also to your point about a big HFT not being subject to this. Allston trading is a large HFT market maker that is currently in arbitration over spoofing.
- tptacek 11y ago
  You can totally push your chips in and yank them back. What you can't do is pretend to push your chips in, such that it is almost impossible to ever lose them, to bluff other players without taking any meaningful risk.
  - Dylan16807 11y ago
    And these were real orders with real risk, so...
    - kasey_junk 11y ago
      So we only have a pattern of behavior and any communications about said behavior to determine intent.
timdaub 11y ago
Thanks for pointing out. I feel the exact same way about it. What is wrong in tricking stupid bots in the market? Lets not forget, it was a flash crash, meaning that if only emotional, slow humans would have been trading this thing, it would probably have never happened (at least not in these proportions). Pretty far fetched to make one small guy responsible for a conceptual problem in the system.
neurotech1 11y ago
I think it was that this guy traded to "cause" instability, by placing bogus futures trades that were basically the value of the entire order book for those futures. If you have a Level II stock data feed, you can view the order book for particular stocks, and similar data is available for futures from CME group. As an example, a friend of mine day trades Tesla stock (& options) and basically a swing trade, has figured out if the stock cycles down by a few cents, and they put a relatively large order at a certain price. The market sees the trade with a higher price and the stock increases. This has resulted in some large profits for swing trades, somewhat due to believing in Tesla's fundamentals and in Elon Musk. Some institutional investors don't share my friends views, and trade Tesla stock down. It is legal because the trade was made in good faith, and not trying to "deceive" the market using bogus trades. In traditional HFT, the legal justification for fast trades that in some cases were never intended to be filled, is murky at best. As long as the market stays reasonably stable and the big boys profit, the complaints are somewhat muted. A friend in the same group, who also trades Tesla, was on the console during the flash crash. It was "obvious" that these automated trade bots were unloading, and there was not major news (eg. GM bankruptcy) to justify the sudden price drop in specific stocks. Her console showed "black swan" type data, and she switched to an option trade as stocks caught up in the flash event wouldn't stay down for long. The options that were "out of the money" (almost worthless) became valuable when the stocks rebounded. What caused the actual flash crash (triggered by futures trades or not) was a phenomenon called "exponential backoff" with a large automated trading bot closing out its trades, triggered by stocks below a certain price, causing downward pressure on the stocks, and the market. Another automated trade bot sees this, and also closes out its position. This automated close out then occurs exponentially, and the market goes into a "death spiral" crash. Note: I do not own stock in Tesla. I'm not a stock broker and this is not investment advice.

ikeboy 11y ago

The 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 ago

Spoofing 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 ago
Placing orders that can't execute has apparently been verboten long before Dodd-Frank.

jonpaine 11y ago

There'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.

ryandvm 11y ago
I think he was making the point that if something is permitted by the "rules of the game", then by definition, it cannot be a violation of the rules. And in the case of financial transactions APIs, the rules should exist as application logic. So if you're not supposed to place and immediately cancel an order, it should simply not be possible. I could certainly believe that if it was one of the large HFTs doing this, they would have had the necessary wheel-grease to not get in trouble...
- kasey_junk 11y ago
  Placing and immediately canceling an order is fine and allowed (though doing that too much is penalized for other reasons). Spoofing is pulling them out in a coordinated fashion before they can be put at risk with no intention of them ever trading. The problem is that an api that prevented that would also prevent legitimate cancels that would have side effects that could be bad (ie making it riskier to make markets and therefore increase the bid/ask spread). Spoofing is about intention. Intention cannot be determined by algorithm (yet). Also to your point about a big HFT not being subject to this. Allston trading is a large HFT market maker that is currently in arbitration over spoofing.
tptacek 11y ago
You can totally push your chips in and yank them back. What you can't do is pretend to push your chips in, such that it is almost impossible to ever lose them, to bluff other players without taking any meaningful risk.
- Dylan16807 11y ago
  And these were real orders with real risk, so...
  - kasey_junk 11y ago
    So we only have a pattern of behavior and any communications about said behavior to determine intent.

timdaub 11y ago

Thanks for pointing out. I feel the exact same way about it. What is wrong in tricking stupid bots in the market? Lets not forget, it was a flash crash, meaning that if only emotional, slow humans would have been trading this thing, it would probably have never happened (at least not in these proportions). Pretty far fetched to make one small guy responsible for a conceptual problem in the system.

neurotech1 11y ago

I think it was that this guy traded to "cause" instability, by placing bogus futures trades that were basically the value of the entire order book for those futures. If you have a Level II stock data feed, you can view the order book for particular stocks, and similar data is available for futures from CME group. As an example, a friend of mine day trades Tesla stock (& options) and basically a swing trade, has figured out if the stock cycles down by a few cents, and they put a relatively large order at a certain price. The market sees the trade with a higher price and the stock increases. This has resulted in some large profits for swing trades, somewhat due to believing in Tesla's fundamentals and in Elon Musk. Some institutional investors don't share my friends views, and trade Tesla stock down. It is legal because the trade was made in good faith, and not trying to "deceive" the market using bogus trades. In traditional HFT, the legal justification for fast trades that in some cases were never intended to be filled, is murky at best. As long as the market stays reasonably stable and the big boys profit, the complaints are somewhat muted. A friend in the same group, who also trades Tesla, was on the console during the flash crash. It was "obvious" that these automated trade bots were unloading, and there was not major news (eg. GM bankruptcy) to justify the sudden price drop in specific stocks. Her console showed "black swan" type data, and she switched to an option trade as stocks caught up in the flash event wouldn't stay down for long. The options that were "out of the money" (almost worthless) became valuable when the stocks rebounded. What caused the actual flash crash (triggered by futures trades or not) was a phenomenon called "exponential backoff" with a large automated trading bot closing out its trades, triggered by stocks below a certain price, causing downward pressure on the stocks, and the market. Another automated trade bot sees this, and also closes out its position. This automated close out then occurs exponentially, and the market goes into a "death spiral" crash. Note: I do not own stock in Tesla. I'm not a stock broker and this is not investment advice.