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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.
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
...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.
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!
That's stupid. You only need to delay settlement by seconds, force the buyer to hold for 6 minutes, and the HFT system is broken.
Or you could levy a truly minimal transaction tax, even processing fee for orders executed in than 250ms from offer to buy to re-offer... Maybe.
But thinking you should force holding stock for days means you need to suspend trading when any news breaks. Which halts the market.
Just slow HFT by milliseconds.
Oh, and audit brokers. If they persist in offering stock they actually don't have, perhaps that's a problem? This whole episode sounds like NASDAQ, except they seem to have the stock.
deleting the extra space after periods so i can stay relevant, yeah.
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.
Perhaps, just maybe perhaps, something that is inherently broken should be broken. As a means by which to increase the prices of commodities, not to the benefit of producers or to the benefit of end consumers purely to create an artificial point by which disgusting individuals can insert themselves into the transaction and claim that price increase as profit for doing nothing other than speculating and seeking purposefully manipulate the price. It ain't stupid to try to eliminate the current commodities pricing scam.
Chaos - everything, everywhere, everywhen
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
Brokers are supposed to offer stock they don't have. In many cases, they are legally required to do so. They have to offer to sell even if they hold no shares. This makes them "naked short." They have to run out and buy the securities before the price moves or they will lose their tail so to speak.
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
That's stupid. You only need to delay settlement by seconds, force the buyer to hold for 6 minutes, and the HFT system is broken.
Or you could levy a truly minimal transaction tax, even processing fee for orders executed in than 250ms from offer to buy to re-offer... Maybe.
But thinking you should force holding stock for days means you need to suspend trading when any news breaks. Which halts the market.
Just slow HFT by milliseconds.
Oh, and audit brokers. If they persist in offering stock they actually don't have, perhaps that's a problem? This whole episode sounds like NASDAQ, except they seem to have the stock.
The argument by HFT traders is that reduces the liquidity and efficiency of the stock market.
They are right in the effect. However, you never see anyone take it to the next step. Do we NEED to market to be THAT liquid?
I, personally, think that the market is currently too liquid if flash crashes can that easily take place on fake orders. It means that the HFT programs are reacting even before the trades have been completed. I agree that they need to be slowed down.
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?
The risk of investment on the scale of the stock market isn't borne only by the investors. Manipulation gone wrong can destroy economies. Most of the regulation that exists is a reaction to catastrophic losses felt far outside the stock market. It simply isn't reasonable to claim that the problem is overregulation, or that less regulation promotes educated investment or self-policing.
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...
Hi! I make Firefox Plug-ins. Check 'em out @ https://addons.mozilla.org/en-US/firefox/addon/youtube-mp3-podcaster/
Brokers are supposed to offer stock they don't have. In many cases, they are legally required to do so. They have to offer to sell even if they hold no shares. This makes them "naked short." They have to run out and buy the securities before the price moves or they will lose their tail so to speak.
Not really. They match buyers and sellers so when a buyer's offer meets a sellers ask then the trade occurs. They make their money on the commission, although they could sell the stock from their portfolio if they wanted. Market Makers do that but they are a specialized type of trader, since they keep the market liquid for a specific stock.
I'm a consultant - I convert gibberish into cash-flow.
Apparently, the market failed the stress test, and that's why people are looking for someone to blame.
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
You know that thing penny-stock-bugs get arrested for? They talk down a penny-stock on their forums and get it for a penny, then they use other accounts to talk it up so they can sell it for a quarter? And it's illegal market manipulation because they were making shit up with the intent of acquiring large amounts of money from rubes?
That's precisely what this guy did, except instead of using his First Amendment right to find rubes he used a computer algorithm.
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.
We've tried this before.
It resulted in huge swings in the market (because scam artists could get away with all kinds of shit), that resulted in major harm for ordinary people because their boss gets his capital from the capitalists on either the stock market or the bond market, and if he can't do that he has to fire you, which means you buy less food, etc.
The panic of 1873, which bore the title "Great Depression" before the one of the 30s, was caused partly because Austria-Hungary's barely regulated stock market collapsed. In the US the problem was that investors got wind of a bank's impending bailout by the treasury before the bail-out could actually happen.
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.
> hat's stupid. You only need to delay settlement by seconds, force the buyer to hold for 6 minutes, and the HFT system is broken.
Yes, and good riddance to it. It's arbitrage on a tremendous scale, sicking thought and personal investment right out of hte market into the pockets of those with the fastest connections. The "high frequency trading" market became very strange when companies started selling FPGA's to connect directly to the fiber optic feeds leaving the stock exchanges. I understand a number of extremely expensive data centers low latency network basically fell apart when that technology became commercially available.
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
The argument by HFT traders is that reduces the liquidity and efficiency of the stock market.
And people still fall for that argument, which amazes me to no end.
Yes, markets need liquidity.
No, markets do not need 5000% liquidity.
Everything is toxic in overdose, even water.
Assorted stuff I do sometimes: Lemuria.org
"curb" meaning a restraint or to restrain (as used by the OP) is spelled "curb" in both British and American usage.
"curb" meaning the raised edge of a roadway is spelled "kerb" in British usage.
That wouldn't fix this. It wasn't a matter of him cancelling orders that someone picked up on, it was him placing orders that gave the appearance of a greater market than actually existed, causing the price to move in a certain direction, then cancelling orders before they got picked up.
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.
They are right in the effect. However, you never see anyone take it to the next step. Do we NEED to market to be THAT liquid?
We can't really know the answer to this. The applications that would benefit from instant liquidity haven't been developed because instant liquidity has not been available.
Maybe there are some true killer applications for this that just need a few more years of HFT-provided instant liquidity for someone get around to inventing, and once they do, we'll all wonder how people could even pay their bills under the old system let alone live their lives to the full.
sigs are hazardous to your health
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
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!
Sorry, David_Hart, but you are falling for their trap, and allowing them to define everything, including the latest in bullcrap charges.
In fact, this is to redirect attention from the actual cause, which is internalization, which is the purchase of almost 100% (like around 93% to 96%) of all public stock purchases by the top banks and hedge funds from the major brokerage firms. Then they do these trades they have purchased on their own internal systesm (known as dark pools), thus they control the public trades, and they have the insider data as to the trends --- really almost complete command and control.
As I understand the HFT (High Frequency Trading) (Flash Boys book) often saw an order on one exchange and beat the order to other exchanges that were needed to fill the order thus driving up prices. Liquidity is fine but not at the expense of something similar to "front running". Each exchange should list the number of shares they can fill. Purchase orders should be made for fewer shares than the number they can fill rather than relying on the exchange to fill the order from other exchanges. The person making the order should place orders at several exchanges so the arrival time of the orders is simultaneous. So the exchanges should allow pinging to determine the arrival time. Of course, this has to be over a dedicated line as the internet can send packets by different routes.
This case seems to be about someone purchasing options to manipulate the stock price. So if a source creates a lot of orders which are never executed, why does it affect the price at all? It seems the market does not rate the credibility of the orders that are posted. If someone buys an option to purchase at some time in the future at some price but has a history of cancelling 99% of the their options, why would the market give any credibility and consequently a corresponding price change in response to the purchase of the option? The new or unknown people should have limits on the value of the orders until their credibility is determined at that level of order. So they would have to work their way up a tiered system to affect the market. The higher the value of the order the higher the impact on their credibility. All options are not equally credible.
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.
You are correct. I did intend to say market makers here. But I still got modded up!