Slashdot Mirror
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."
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.
It has yet to be proven in court so it is "allegedly".
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
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.
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.
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.
well allegedly they're not even certain why it would be illegal for him to have done so.
the real problem isn't his tactic.. it's the way the markets allow for robo traders in the first place. if it was legal for him to do algorithmic trading, why this algo was illegal?
world was created 5 seconds before this post as it is.
Same reason for all DOJ cases - Marketing and Politics.
Futures and Shorts may stabilize markets in the short term but they are an incredible drain on long term investments.
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
Because the complaint is ridiculous, that's why.
It describes actions that are common practice among Wall Street's biggest banks and trading desks.
Let's remember that to date, no one has done jail time for rigging LIBOR. A crime that is exponentially more serious than this one.
When you're committing crimes for a megabank, your chances of seeing a prison cell are essentially zero.
it even describes layering as something that "was" sort of an industry standard practice.
How does having a name make it an industry standard practice? "Ponzi scheme" has a name too and it is illegal. I don't see and reference to "layering" being standard practice.
is it strange to ask for a facility into hft that would cancel unprofitable trades?
He cancelled trades that would have been profitable but that he had no intention of fulfilling. He created a large volume of sell offers just above the market price knowing that no one would buy them but that it would make it appear that there was a lot of supply. That drove down the price. He then lowered his offers to keep just above. By the volume and the pattern he was manipulating the futures.
The issue is that making and cancelling orders on a market is not traditionally seen as financial fraud.
Yes, but you don't have to repeat it five times in a single paragraph.
Yes, you do, if you're the Department of Justice.
I would think that whoever is in charge of press releases for the DOJ would be at least be competent at writing.
They are competent, but they also have to be acutely aware of not stating as fact something which they have yet to prove in court.
systemd is Roko's Basilisk.
In other words he was using the system to make money. But because he's not one of the big players they're all crying because a little guy got in on their action.
so the crime he was committing was making money for himself instead of for Goldman Sachs.
I think it tells us everything we need to know about how corrupt our society has become.
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.
the real problem isn't his tactic.. it's the way the markets allow for robo traders in the first place.
Yeah. It's the robo algos that sent the market into the flash crash as a result of this guy's trading. If he had taken his trading plan and implemented it as an algorithm to do the same thing, he probably could have just called it "arbitrage" and been scott-free.
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
Then the cost of price discovery will go up significantly.
Define "significantly."
Do we really need nanosecond resolution on stick price changes?
Do fluctuations at those levels REALLY reflect changes in the actual value of a company? At 4:01.000000001 PM is GM really worth 14.01, but at 4:01.0000000012 something changed and it is now worth 14.02? And what is the cost of having this "extra resolution?"