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Futures Trader Arrested For Causing 2010 'Flash Crash'
New submitter dfsmith writes: Apparently the "Flash Crash" of the stock market in May 2010 was perpetrated by a futures trader in the UK. The US Justice Department alleges that he used a "dynamic layering scheme" of large-volume sell orders to confuse other buyers, hence winning big in his futures trades. "By allegedly placing multiple, simultaneous, large-volume sell orders at different price points—a technique known as 'layering'—Sarao created the appearance of substantial supply in the market. As part of the scheme, Sarao allegedly modified these orders frequently so that they remained close to the market price, and typically canceled the orders without executing them. When prices fell as a result of this activity, Sarao allegedly sold futures contracts only to buy them back at a lower price. Conversely, when the market moved back upward as the market activity ceased, Sarao allegedly bought contracts only to sell them at a higher price."
Allegedly allegedly allegedly allegedly.
sounds like great advice
This is just smart trading. I know 100 guys that COULD do this, assuming they had the requisite margin. As long as you place trades on the book that you're willing to fill based on the rules of that market there's no reason why you should be called a 'crook' for that.
"Malo periculosam, libertatem quam quietam servitutem." -- Jefferson
they were pissed that an american didn't think about in first, screw up the timing and need to be bailed out. Oh wait...
So its just that he made money doing it.
...make people, not computers, buy and sell.
It'll never happen, but given that it may be hard to convince a jury that the DoJ's claim is true due to the technical nature of the 'crime', I don't see how it's going to improve when commodities and stock traders can manipulate the markets simply through the act of offering to buy and sell.
Do not look into laser with remaining eye.
This just reflects the current problem. Trades need to be slowed down and the tax about trades needs to be increased to kerb negative behaviour. Once in they need to stand for 24 hours. Transfer need to occur over 7 days, so once bought can not be sold until a week has passed and vice versa. Want a sounder fiscal market, slow it right down and start charging enough in stamp duties to cover the losses generated by a corrupted market, user pays, they play, the general taxpayer should not be the one paying, only the players should pay.
Chaos - everything, everywhere, everywhen
So was it illegal to do this? They use the word "scheme" hoping people will mentally prefix it with "Ponzi" in their minds to make it sound illegal, but was it? Sounds like he was being clever and making money - ain't that the whole point of trading?
Left MS Windows for Linux Mint and never looked back!
Vote for Bernie in 2016!
Being able to take back trades is killing investor confidence in the marketplace.
Just wondering. Though I do notice that here in America we've got lots and lots of laws to protect our investor (e.g. ruling) class and not so many for us slobs down in the working classes.
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Isn't this basically what many of the HFT's do all the time? So they found a scapegoat who was moving in on their turf and lowering their profit and so they got the political machinery to ice him.
moar plz.
You can stop after the traders decide that throwing pre-scripted parasite'ing at the market isn't a formula for an ez-money printer. A single case is only going to make them balk and whine and headhunt.
Slowly, judging by the five-year delay.
So some big guys can see these standing orders and act on them? That playing field looks tilted to me.
They would just open a market on potential trades, obscuring it by a layer.
This is basically what Market Making is: Creating a bunch of pending orders that are never triggered to push the market away and into the direction they want.
Only the biggest players on the block can get away with doing this because they have billions in equity.... such as the largest 12 banks on the planet.
Always good to know that the value of all our commodities and currencies are controlled by them on a whim, isn't it?
Also good to know that they make money by default and can't really lose the game.
Go back to sleep everyone. Nothing to see here...
READY.
PRINT ""+-0
"Spoofing" is a silly activity to make a crime. There are two reasons. First, any book order that you place has a chance of being bought. Thus, it doesn't matter if you "spoof" or not, it's something you can be called on and you have to honor the book order you placed. Second, it's very easy to conceal intent to spoof, especially with a computer program. Just don't brag about it in email while the feds are listening in.
It sounds like this guy got caught merely because he was the target of an investigation for something else and they found something to extradite him with in the emails they were reading. It'll be interesting to see if this actually goes to court and if some "parallel construction" happens.
My view is that spoofing should be quite legal and the authorities should be completely uninterested in it. The reason is that there are a lot of crappy traders out there, both human and computer. Spoofing is one of many ways to stress test these traders and weed out the ones who shouldn't be anywhere near a market.
Prevent the government from investing in or managing any markets in any form. People will be able to participate as they see fit, and loose money if they make a mistake, as long as legal contracts are not violated. With no vested interest in keeping the trading market just so for debt and political reasons, and the actual risk involved communicated to the many traders in the form of price and potential for loss, there would result:
1. Less tendency for panics because everyone would know what they were doing
2. The market would self-police, because there would be a vested interest communally to keep 'schemers,' or any other bad behavior, out
3. The country's economy would not rise and fall with the numbers in the stock market
I don't know if my suggestion would work or even if it is any good at all. All I can say is that it's probably better than any additional (or previous) regulation the government could do.
We know this UK guy did it cause the FBI found one of his hairs at the scene of the market crash.
No. HFTs detect massive orders, and quickly buy and sell for $0.004 difference or so to quickly make a profit. They FILL all orders they place. This guy was creating orders he had no intention of filling.
Easily tracked and easily identified US "fugitive" bankers who caused the crash and have Interpol warrants for their arrest are living high and mighty in Switzerland meanwhile.
(sources: Bloomberg, WSJ, and Marketwatch)
So can we actually believe this "person responsible" is not just a sacrificial lamb who will end up pardoned anyway, without doing any actual jail time?
Just saying.
-- Tigger warning: This post may contain tiggers! --
We know this UK guy did it cause the FBI found one of his hairs at the scene of the market crash.
I think they found one of his heirs at the scene.
-- Tigger warning: This post may contain tiggers! --
Why does the US have jurisdiction here?
A pizza of radius z and thickness a has a volume of pi z z a
There should be a charge for cancels orders, since you are misleading the market as to true demand.
That's not criminal, that the nature of the market. If people are lemmings, why is this guy being punished? Stupid.
Why does the US have jurisdiction here?
Extradition treaties. I'm also fairly certain financial fraud is something that's just as illegal in the UK as it is in the US. What motivation exactly do the British authorities have for not cooperating with the US in their investigation?
you've got the right idea in a society whose job is to make the world a better place. In the real world though he messed with the investor class. He cost important people lots of money and face. You don't get the break the system those guys set up. They make the rules because they're the ruling class...
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He was trading on the US stock exchange.
Isn't this basically what many of the HFT's do all the time? So they found a scapegoat who was moving in on their turf and lowering their profit and so they got the political machinery to ice him.
The futures market is a commodity market (real commodity contracts) while HFT is usually in the stock market i.e. Paper assets
Ideally you try to make specific actions illegal. However, crooks are clever, and there are far more possible combinations of circumstance than the law can spell out.
Consider this. Should it be legal to swing a bat? Right now, it is legal to swing a bat with the intention of hitting a ball; it is illegal to swing a bat with the intention of hitting a person. I don't think there is any way around that.
Sounds like he was doing exactly the same as the big players. Making bogus orders to promote a false value in a 'product', waiting for a large rush of buys, then selling before anyone else had time to respond. Exactly the same as the big players, except he didn't bribe the requisite politicians or have the requisite friends at the SEC.
If UK person in the UK hacks into a US computer, should UK person be extradited? Could this trader claim Asperger's and avoid extradition?
They would just open a market on potential trades, obscuring it by a layer.
Then tax potential trades at a penny apiece. I don't give a fuck how far down the rabbit hole you have to go. Penalize the nonsense orders that are laid into the market at a rate of millions per second.
MAKE IT TAXABLE TO INITIATE ANY TRANSACTION ON ANY EXCHANGE.
I don't care whether it executes or not, one penny per trade. The stock market is about investing in companies, right? Wink, wink? Or is it a high frequency slot machine being manipulated by those with the shortest fiber and the lowest pings?
Goldman Sachs does it. Don't you think you can do that though.
According to Forbes, this guy made over $40 million dollars trading from his house using off the shelf trading platform. He made less than $900k on the day of the flash crash. The indictment says he "contributed" to the flash crash.
Sounds like something this guy and perhaps many others have been doing for awhile, but the circumstances were such that the markets went wild that day and created the flash crash. Typical patsy taking the heat for the institutional failures that allowed the problem.
I can't believe anyone still believes the financial markets are anything other than Vegas at this point, where some people are better at poker, some people are lucky, some people count cards, and the house always wins.
http://www.forbes.com/sites/nathanvardi/2015/04/21/feds-charge-37-year-old-who-traded-out-of-his-house-for-helping-spark-flash-crash/
The real people to throw in jail are the ones who made it possible. The guys who deregulated the markets so much, the ones in oversight of the finance system who didn't see these things approaching and the people who dissolved all the protections of the real economy against the finance market because they were greedy for quick bucks.
Politicians, mostly, but we should also go after the lobbyists and their employers who influenced them.
Of course, that will never happen. Society rarely becomes self-conscious enough to get rid of its parasites.
Assorted stuff I do sometimes: Lemuria.org
If they'd been US traders, the US would not be sending them to court (unless they were a sacrifical lamb to protect a richer trader). If some other country demanded their extradition, no question, the US would summarily refuse.
But these are politically available because they're foreigners and it's possible to sue them since they won't affect the senator's chances of getting funding whilst giving someone for them to blame for it, without blaming the US.
Send the US traders to jail too.
THEN start on foreigners.
it wouldn't have worked if others didn't automate their trades.
I don't think it was wrong or illegal, it's just a system that's badly designed and had too many money for nothing traders with automatons that they did not look after.
he pressured the price down by placing orders above the lowest and then the lowest would place lower, and same again. if he intended to fill them or not is rather irrelevant when someone else's algo works like that!
world was created 5 seconds before this post as it is.
The issue is that making and cancelling orders on a market is not traditionally seen as financial fraud.
It is market manipulation. If you place large orders in the order book, anyone with basic stats can figure out that (assuming average trade sizes and 50% random trades on both sides of the book) that one side will be depleted much faster than the other, and thus the price will move that way.
Many traders front-run that "hey stats say prices will move, so I'll get in first" which causes a feedback loop.
Everyone trading on the market has a legal responsibility to ensure a "fair and orderly" market. Market manipulation is disallowed. Orders sent in without the intention to trade, just to cause market price moves, are at or near the top of list of things you're implicitly told not to do. Sending in lots of orders in the opening or closing auction to move the price is also a no-no. etc
Being a registered trader with an exchange/in a bank.... you have clear knowledge of this due to the trader tests/exams you need to complete.
From the little I can see on this story, it seems its a reasonably strong case against him.
Non authorised profiteer actually wins
They would just open a market on potential trades, obscuring it by a layer.
The term you're looking for is http://en.m.wikipedia.org/wiki/Derivative_(finance)
There's a special place in hades for the government regulators who allowed so many derivatives to be marked as 'just as safe as US govt bonds' prior to 2007.
Kill derivative market. While at it, kill high speed transaction.
Then we go back to (approximate) real value of a company being reflected on its stock.
This is ABSURD! He's being singled out because the federal government has granted blanket immunity to the big financial firms and their employees. I guess he didn't bribe the right politicians and didn't provide enough job offers to federal bureaucrats.
Yes, placing orders that you never intend to execute is technically illegal, but the big financial firms that engage in HFT do this crap every f***ing day! Pick a random trading day in the last year and subpoena the order history of a big trading firm. I guarantee that there will be thousands of orders submitted and canceled in milliseconds. Orders which the firm obviously had zero intention of ever executing. Exactly the sort of activity they are calling "criminal" in this one particular case. The U.S. government is a monstrosity. Arbitrary enforcement of the law is a hideous injustice and it's standard procedure in government.
If I was a senator I'd be grilling the AG nominee about this selective enforcement BS.
Then the cost of price discovery will go up significantly. There ARE markets which implement limits, forcing a delay on each trade, only quoting at certain periodic intervals (say once a second), requiring liquidity to rest on the book for a certain period before it becomes eligible for payment, or requiring added liquidity to be 'close to the market' so that MMs can't just lay off with some useless bid (like they can on NASDAQ). ALL of these things lead to higher execution costs through wider spreads.
I mean, I don't claim to know what the ideal balance is, but restraining trades isn't clearly a good idea, it has both positive and negative consequences and balancing them out is a very tricky prospect given how complex the markets really are.
"Malo periculosam, libertatem quam quietam servitutem." -- Jefferson
This will add to the cost of liquidity, costing legitimate traders billions. The question is which is the greater cost, excess churn in liquidity, or poorer price discovery?
"Malo periculosam, libertatem quam quietam servitutem." -- Jefferson
The CME, and EVERY SINGLE OTHER trading venue in existence, requires guaranteed credit before you trade. You simply CANNOT place an order for E-Mini on CME and not be able to make good on it if your bid/offer is accepted. Thus there is no such thing as 'kiting'. Broken trades are VERY rare and if you do break one, there's an investigation and serious penalties are in order. Generally speaking there's someone with the available credit to make the counterparty whole.
So, this Sarao guy for instance, would have been going through someone, say RCG, who is an FCM (Futures Commission Merchant) where he would have say $1 million on deposit. RCG would offer him say 100:1 margin, so he'd make positions as large as $100 million, and if at any point his unrealized P&L grew to close to his $1 million they would call his position and he'd be busted out. At the end of the day he pays RCG some interest on whatever margin he actually used and keeps his profits on whatever he made trading his $100 million in buying power. At NO POINT will RCG ever allow him to be in excess of his credit limit or underwater, and they are regulated and thus guaranteed to have sufficient risk capital to cover any shortfall with the counterparty to any trade on CME. ALL Sarao's trades will be 'given up' to them, or else placed directly through their platform (Onyx 2 I believe currently) and placed by RCG on its omnibus accounts.
The point is, you can't place trades you can't back up, its simply impossible.
"Malo periculosam, libertatem quam quietam servitutem." -- Jefferson
another step into the evolution of lazy money.
Do you know what the answer is? No, probably not. Only by analysis can we determine that.
What I would suggest is that the barrier to entry for establishing different markets should be kept as low as feasible, and it should be relatively easy for order flow to move between one and another. Then different vendors of market services can construct markets with different rules and order flow can go to the ones that function best. If a market full of HFT traders sucks for the retail investors, then they won't trade there.
Part of the problem is that currently this sort of thing is viciously suppressed. While some ECNs have been established, and there are various 'dark pools' and such it is EXCEEDINGLY hard to establish a really legitimate alternative to something like NASDAQ, and FINRA/CFTC/NFA/SEC actively inhibit such market formation for various reasons which amount to "it might fuck with established market players business models." FINRA in particular is utterly corrupt.
"Malo periculosam, libertatem quam quietam servitutem." -- Jefferson
According to the BBC. This wasn't a isolated incident from the accused trader. He has been using the tactic as late as April 6th of this year. He's made $40 million in the last 5 years. http://www.bbc.com/news/busine...
So he briefly offered something for sale. And he also bought and sold some things. And that's illegal.
. . best article on this latest fiction out of the DOJ:
http://wallstreetonparade.com/...
(From Pam Martens excellent site)
I realize that to many Ameritards, just say it is so, makes it so.
I realize that most Ameritards have no idea, or even interest, that Holder earned his big bucks defending corporations which hired assassins to murder labor organizers and protesters (South American and West Africa), nor would such background data affect their nonthinking ways.
QuasiSteve, representing the typical commenter who speaks from volumes of ignorance, makes both a legal and criminal invalid point, since the official stance of the US Government is that such nonpayment or nonpurchases DO NOT AFFECT THE MARKETS (which any sane person who passed arithmetic would disagree with, but then who the eff owns the government, of course!)!!!
This is a replay of when the criminal AG, Holder, went after some small fry awhile back, proclaiming they had violated the Law of Fraudulent Conveyance, one of many crimes which the banksters had knowingly and willfully violated to bring about the global economic meltdown a few years back.
Not a flaw, it is by design. The question you should be asking, if analytical thinking were prevalent here, is who the eff owns the NYSE? Then you will have found the culprit! Always endeavor to ask the next (and most obvious) question!
Insider trading is not illegal to Law makers;
http://cnbc.com/id/43471561
Casteism
Good for you! That means you, or funds you own, didn't have a "sell if it drops by so much" or "drops below" order.
But you aren't everyone.
And ordinary people who were invested in those stocks or market indexes, no matter how hard you handwave or blow smoke.
More moronic drivel. The claim was "nobody got hurt but speculators", not "nobody lost everything but speculators".
Are you really that spectacularly ignorant? The market average went down, which means that market index funds went down - something plenty of people who aren't speculators are invested in. On top of that, several major companies (like Procter & Gamble and General Electric, hardly something that would be invested in "only if you're a speculator") lost significant value.
I hate to be the one to break it you - but you aren't the center of the universe, and the set "people you know" is hardly a significant sample.
But you are a clueless drooling moron.
And it took them 5 years to figure this out? Nanax had the data to look at from day one with forensic account info. I don't buy it.