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."

Comments

So?

[Giant Electronic Bra]

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.

Re:So?

[Paleolibertarian]

Market manipulation is only legal when the big banks do it.

Re:So?

[QuasiSteve]

I'm far from a lawyer, but:

As long as you place trades on the book that you're willing to fill

The 'willing to fill' part might be key - as he had no intentions of filling the orders that led to the mini-panic, using them solely to affect the price for personal gain.

Defendant willfully and knowingly, having devised and
intending to devise a scheme and artifice to defraud, and for
obtaining money and property by means of false and
fraudulent pretenses, representations, and promises, did
transmit and cause to be transmitted by means of wire
communication in interstate and foreign commerce,
writings, signs, signals, pictures, and sounds for the
purpose of executing such scheme and artifice.

Re:So?

[Anonymous Coward]

Indeed. This man's only crime was being small enough to prosecute.

If one man manipulates the market, he gets arrested.

If a large firm manipulates the market, the're a titan of wall street and get to have dinner with congresscritters.

Re:So?

[khallow]

What they were doing was so blatantly illegal

It wouldn't be, if spoofing weren't a crime. The US could have simply not made it a crime in this case and then it wouldn't be "blatantly illegal" for small traders to do.

And notice how the problem is due to poor market design. Instead of fixing markets so that it isn't possible to "cancel before execution", they implement ridiculous rules and laws instead.

Consider this analogy. How many people here think it's a good idea to modify US law just to protect the *IAA business models? So why is it acceptable to modify US law just to protect stock market business models?

Re:So?

[AuMatar]

So lets say I have a standing order to buy FooBar stock at $50 a share. Its current price is $55. So basically I'm looking to buy on dips.

Tonight it comes out that the CEO has been falsifying all financial reports, and instead of making money for the last 3 years they've lost millions. You don't think I should be able to cancel that buy order due to the new information?

Re:So?

[barc0001]

Read Flash Boys. There is an absolute metric fuckton of orders that are generated each day that are not intended to be fulfulled and are purely there to manipulate pricing.

Re:So?

[zidium]

A more fair way would be to levy a $0.01 tax on every open position. And $0.01 on every position close. This would make HFT unprofitable instantly.

Re:A Sympton of the Problem

[rtb61]

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.

Re:So was it illegal?

[no-body]

...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!!

Re:Allegedly

[gl4ss]

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?