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Comment by gt2 | Hacker News Reader

Honest questions from someone who is only slightly educated on market making:

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?

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> Is there a law that stated/states all trades need to be with real intention to buy?

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.

You didn't answer the Parent Poster. He's asking how can the law determine if the trader was spoofing or legitimately trading. What are the criteria for that.

Repeatedly following through with a second batch of orders just right after cancelling a large batch of offers in the opposite direction will do wonders to put the sincerity of the first batches into question.

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.

What if what you described was done by an algorithm rather than by human trickery? What if that action was discovered "per chance" through machine learning? I myself don't feel there is anything morally wrong with that. Why should I feel differently when a human does it rather than an algorithm at an HFT firm?

Genuinely curious of your thoughts!

Late reply, but the question is too interesting to resist:

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.

Same way we decide everything, a sitting judge or a jury of your peers.

I know it's a common sentiment that "You can sue anyone for anything".

But is it a common sentiment that you can be charged with anything by a district attorney?

>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).

It's not "anything", it's "intent to defraud". The prosecutor needs to provide a minimum standard of evidence to bring charges, they don't need to prove intent (to hear the case). The rest is like I said.

AIUI the answer is basically "it's very hard to prove", which is why very few people actually get punished for it. IIRC in the flash crash trader's case he actually had emails that made it very clear what his intentions were with the orders he placed (but I could be misremembering).

A spoof is about orders, not trades. Those are two very different things.

I thought it is called negotiation.

Note that intent is a necessary component of many (most?) crimes. For example, if you accidentally get someone killed, with no intent, you haven't committed murder. If you try to kill someone but fail, you've still committed attempted murder even if the target is untouched.

Reliably determining intent is just about impossible, but it doesn't stop the courts from trying.

> How can they prove that intention?

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.

The purpose of markets is taking risk. Any participant whose intention is not to take risk is a parasite

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

The purpose of blackjack tables is taking risks. The purpose of markets is to determine a price that is fair to both sellers and buyers. Risk-taking intermediates are just a possible building block for coming up with a solution to that goal.

I don't consider arbitrageurs parasites. They ensure that I am paying a fair price for my SPY shares.

Arbitrage that only exists due to the technicalities of market microstructure is parasitic to me. True HFT identifies trades with no risk; a long and a hedge at the same microsecond. That's just fractions of pennies that true risk takers lose, every day. They don't care at all about the intrinsic value of the security

The order book is public. Anyone can go look at the outstanding orders (offers really) for any stock.

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