I don't get it. This guy's crime is placing offers with the intention of canceling them before they are executed. Why is this a crime, and what does it have to do with the flash crash?
It was a large reason for the crash (though not the only component in my opinion) because these orders amounted to $200 million worth of bets that the market would fall and they were replaced or modified 19,000 times. And of course this is just one person. The market involves multiple people so you can imagine how much money was at stake here.
HFT generates and cancels orders on magnitudes like this all day long, but they have to be allowed to do so because it "creates markets", whatever that means.
No, they are allowed because HFT firms have the intention to (and in fact, will gladly) trade.
Whereas spoofing is placing orders that you don't have any intention of filling. The only point of the orders is to move the market, rather than to actually make trades. And that's the thing that's illegal.
does such a thing even exist anymore?
And he had a separate account that would trade the market distortion.
His big orders weren't the best bid or ask. They were a few orders deep in the market.
Basically people and machines would jump further in front of the big buy or sell order with their own orders, and move the price in a direction. His smaller account would make profits from those trades.
Yes you could affect trillions of dollars of derivatives and the sentiment of the entire market with just a few dozen millions.
It is still a widespread practice and tough to prove. But spoofing was made illegal in the Dodd Frank Act. So if the government can nail some easy cases and create case law, then they could think about going after the banks that do it. Emphasis on think.
People like that guy should be rewarded financially for making it unpredictable.
You don't want to have an economy where only a tiny group of powerful people understand what's happening while 99.99999...% of the population are at in the dark and at their mercy.
A fair system should be simple enough to be understood by everyone or complex enough to be understood by no one - Anything in-between is not a fair system.
Uh, yeah they should. To someone with perfect knowledge, a proper free market should be 100% predictable. It's only unpredictable if other people know things that you don't (and the market itself is the vehicle by which that knowledge is disseminated). Introducing uncertainty into the market without introducing knowledge into the market is a bad thing. And spoofing trades in order to move the market isn't providing any knowledge, and it is in fact making the market less efficient because it no longer matches the knowledge of the participants.
Which is to say, if you have perfect knowledge, you might be able to prevent the spoofer from reaping the benefits of their spoofing, but you won't actually have harmed them, and of course the effect on the market is just as bad as if you let the spoofer spoof in peace.
Also, I would assume spoofers don't typically place orders in illiquid markets, precisely because they risk having someone use their new order as a source of liquidity. I mean, spoofers don't actually want their orders filled. Plus, the whole point of the spoofed order is to trick market makers into moving their positions, and if the market isn't liquid then clearly there's no market makers (because if there were market makers, then the market would be liquid), and if there's no market makers then spoofing isn't going to work to begin with.
I can point out many significant inefficiencies in the system - E.g. Nepotism (allocating employee rank and pay based on social connections instead of skills/results), executive bonus structures which favor short-term gains over long-term gains, monopolies which make companies complacent and employees less productive, other anti-competitive behaviours - These factors allow large, inefficient companies to beat competitors in the market in spite of significant internal inefficiencies.
Anti-competitive behaviour will probably always exist in the markets; it's part of human nature and it's basically universally accepted except in the most extreme cases (E.g. antitrust cases).
Maybe if humans become smarter and more psychopathic (like in the novel 'Atlas Shrugged'), then we could have an efficient market, but right now, I think it's very far from efficient.
Maybe it's efficient on a human psychological level (from the perspective of an average trader/investor) in that there is some sort of universal consensus about the value of everything. The problem is that this consensus is not rooted in reality but on a superficial, socially-constructed representation of it - That means it's not necessarily efficient in terms of maximizing the output of companies and the happiness of their customers.
These two statements don't seem related. And I don't understand the first one anyway. Where does "fairness" come in? It doesn't seem unreasonable to me that one person who has perfect knowledge about a financial market would be able to make money that someone who doesn't have perfect knowledge wouldn't. And it seems quite "fair" to me that this would be so; why should the person with better knowledge not be able to benefit from their better knowledge?
The reason this gets prosecuted is that it's an easy target for the exchanges to make it look like they care. They are now publicly-traded companies interested in profits first and foremost--not market integrity (which maybe used to be the case--different discussion).
source: 25-year vet of futures markets, the last 10 in HFT; many many millions of orders and executions
what about buy-and-hold investors who don't do anything to deserve that ? Why should they get unnecessary volatility in their portfolios just because some get-rich-quick kids want to treat NYSE like its Mortal Kombat?
> if people are so stupid as to move their orders trivially based on others' actions
Then why show level 2 quotes at all ? Isn't your argument equivalent to "level 2 information is useless"? If not, then people wouldn't be stupid for using it, would they ? Would you trade in a market that only had level 1 quotes ?
Yes, "flash crashes" exist, and normally because of liquidity disappearing. Yes, algos are basically sheep that all bail at the same time. But overall, the net effect is massively beneficial to everyone except lazy traders (which include fund managers who miss the days of getting lots of steak dinners from their favorite brokers).
The "average investor" doesn't need L2, and doesn't care what it says, including flashing "fake" orders.
I thought true HFT (not short-term momo, etc. where the intention is to actually take risk) had essentially died already, Virtu aside
The stock market cannot go to 0. It is literally impossible. If you are invested in the fortune 500.. and the value went to literally 0.. we are in a zombie Apocalypse. Money no longer has value. So yes I lost all my investment, but I also don't have a job, and a gun is my most valuable asset.
Buy and hold = Buy big index funds (i.e. Fortune 500), and then never ever ever ever sell, until you are ready to spend the money (i.e. draw-downs in retirement).
Trying to go "oh the market lost 20% this week, it is going to 0 soon" is a fools investing.
Flash crashes massively hurt people who invest in particular stocks because they do often have exit points which get triggered by those crashes. The advice you're giving doesn't apply to these people, they're not the ones just dumping everything into an index fund.
In a general sense though I agree that the behavior shouldn't be illegal but am fine with exchanges implementing rules about it. For a trade to occur both the buyer and the seller are getting what they want at a price they both deem acceptable. Phantom orders does not inherently change that.
Later, you find out that one of the most aggressive bidders in the auction was actually just a buddy of the seller, trying to increase the price in his/her favor but avoid at all costs actually winning the auction.
You'd probably rightfully think this was unfair, and this is exactly what spoofers are doing in an electronic market. They are generating the illusion of interest to buy or sell, without the intention to actually do so, in order to move the market in their favor.
If we are playing poker, and you cheat, you have stolen my money through fraud.
Certainly if I cheat at a casino, I'm likely going to jail.
Also, perhaps there is a differentiation between working within the mechanics of a system to cheat, and going around a system to cheat. An example from the esports league would be the difference between using a corner case to shoot through a wall, versus hacking into the server and modifying the code.
That isn't the definition of stealing. In fact I would argue, while it is dishonest, it isn't stealing in slightest. Stealing means you took something, without agreement, that rightfully belongs to someone else. The scheme is more accurately described as fraud than stealing.
I'm not going to bid more than the car is worth to me.
If a hedge fund behaved the exact same way, they'd get in trouble for it. That is, if Renaissance Technologies decided to do spoofing on 99.999% of its market action, they'd get in trouble for it. Hedge funds doing high frequency trading, is not the same as spoofing.
https://www.bloomberg.com/view/articles/2015-10-08/why-do-hi...
Is there a law that stated/states all trades need to be with real intention to buy?
How can they prove that intention? Even if an indicator is actually having the amount of cash to finance the trades, that could be covered as well.
Lastly, is it not the responsibility of the people receiving the trade orders to not let the new trade information out or do anything with that information themselves which would affect the market until the actual trade takes place?
We're not talking about trades, but rather the illusion of an intent to trade, when really there is no intent, and pushing that illusion onto the world to give the market the impression you will trade that amount, causing other market participants to react accordingly, which causes the market to move in the direction you wanted. Then you cancel your planned trade and profit off the move you manipulated.
That's the gist of it, and yes there are laws against it.
But is it a common sentiment that you can be charged with anything by a district attorney?
Pretty much. If you piss them off enough, or if they are trying to get elected to something else and think you are a good way to do it, then yes, they will charge you with something and keep going at it. (See: Aaron Schwartz).
I think it's safe to assume that this is not a "one daring bet" kind of manipulation, like e.g. badly disguised insider trading could be, it is rather wealth by a thousand papercuts. The pattern is very unlikely to be worthwhile without excessive repetition and there are only so many million times where you can believable claim that you wanted, then you didn't, and than you wanted the opposite, all in carefully timed lockstep.
Genuinely curious of your thoughts!
Posting an order is a statement of intent. If you allow a machine to post those in your name you take responsibility for the claims made by that machine. Discovery of that "one magic trick" by ML reminds me of the way toddlers learn all kinds of mischievous "life hacks" like "I can reach goal X by dropping object Y" before they start to respect more cooperative forms of interaction. I am skeptical of allowing toddlers on the trade floor. And if you did allow then, you would want to have mechanisms to make their parents take responsibility while their children are not yet able to.
If the decision-makers at the exchanges running the show were not so much closer with those trading for trade than with those trading for actual ownership, they would have curbed this abuse very early. Maybe by introducing a sufficiently low upper limit to the volume of offers that can be cancelled (relative to the volume of offers that are followed through), or some form of progressive cancellation fee that would protect the market from this form of abuse. The observation that only external supervision put an end to it (instead of the "house rules" of the exchanges) makes it difficult for me to dismiss as paranoid the claims made in the discussion here that he just lacked the right friends to pull this off.
Obviously they cannot. It's basically subjective, and it looks like Sarao just got too greedy.
The CME does enforce rules about trade executions, that the ratio of orders placed to orders executed does not get too low (like 1/30 or something.) I'm guessing Sarao just placed a small amount of large-size orders to get around this.
The whole thing kind of surprises me as I think it is well known that there are plenty of algos that place orders with the sole intent of enticing/manipulating the market. But as I said, it's not really something you can define objectively.
EDIT: I did a bit of reading, yes, Sarao placed orders for massive size on CME. Big kahoonas for sure.
Reliably determining intent is just about impossible, but it doesn't stop the courts from trying.
Like many things in life, there are complete bullshit situations where some people get a better deal than others simply due to some arcanery. Are doctors in America 4x better than European ones, or are residency spots artificially restricted to keep salaries high?
The world has less and less parasites every day because technology allows us to see them for what they really are. This is just one of the many