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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."
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
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
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! --
...The markets aren't there for this sort of thing, they're primarily there to fund businesses.
You are making me laugh - the joke of the day!
Mark parent up as funny!!
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.
You can buy a penny stock. You have a First Amendment right to talk it up on penny stock forums. You can then sell for a profit. No single step is illegal. But if the police prove you intended to pump and dump it you have committed a crime. The whole process, taken together, is a crime if they prove you were trying to convince a bunch of idiots to do something stupid (ie: buy your $.05 penny stock for $0.25) that a) cost them money while b) earning you money. You manipulated the market for your personal gain, and that's bad.
This guy made a series of perfectly legal moves that had the effect of a) costing a bunch of idiots to lose money in the Flash Crash while b) he gained money.
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.
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.
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.
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