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Comment by ChuckMcM | Hacker News Reader

So that is a better hacking strategy than ddos'ing mt. Gox. Clearly if you can make the DOW drop 127 pts on demand you can figure out a way to profit handsomely from that. The simplest being to short a basket of stocks that are going to be affected and cover the shorts with buy orders. Harder to track than a 'one stock shock' as they say since by their nature DOW stocks are heavily traded and people are guessing all the time if they are going to go up and down. Spread $15 - $20M in shorts across the basket, cover them on a 15% net gain in proceeds and then shoot the canary.

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I work at a fund and we discuss this Ad nauseam:)

There are a few problems with this.

1) Forget execution and settlement risk, assuming you can get away with it, can you really make enough to make it worth your while.

You only get one shot at this, how many times can you anonymously crater the market?, and if you get caught you'll never trade again so you need to make retirement levels of money on this one "trade".

2) Execution risk. Assuming you've got your short butterfly setup so that no one will know you now need to unwind your trade in a matter of milliseconds while making it look like you are reacting, rather than knowing this event was coming.

Part of this is that like you said you'd do this over a basket of stocks. Looking at a butterfly option layout in wikipedia it seems pretty simple. Trying to get out of 30 or so of these trades in under 100 milliseconds isn't.

3) Settlement risk... You'd' be trading across multiple exchanges all with different timings and liquidity. There is a good chance that your trade gets busted by some but not all exchanges which means you go partial fills all over the place and you might end up partially short and long when all the accounting is done:(

You don't need to make "retirement levels of money" on one trade, because if you're caught, you'll be paying it all back and spend your retirement in jail.

In fact, isn't it fairly safe to assume that the SEC will spend a good deal of resources looking into any unusual trading patterns around this dip?

I know of at least 5 firms who would have the means to make a big profit in a rather stealth way and all of the infrastructure needed to minimize execution risk (to the point that it may be negligible)... Just because you cannot do it or that it is hard for you, do not assume it cannot be done or that it is (as) hard for everybody...

I do to, and all 5 of them make more money as part of the regular operation of the markets than they would as part of some Jerry Bruckheimer movie plot.

You don't need to time it, do you? If you have resting buy orders the market is going to come down and hit you at a favorable (to you) price. You can close the position when the market rebounds.

> You don't need to time it, do you? If you have resting buy orders the market is going to come down and hit you at a favorable (to you) price. You can close the position when the market rebounds.

You are, of course, right if you know how far down the bottom is and that the market will rebound.

Maybe I'm just a coward, but all I see is risk:) Here are the big questions to ask yourself before trying this.

What if the market doesn't rebound, ie if you set your buy at a 1% drop and it drops 3% and then closes down 2.5%. That's enough to shut down alot of prop shops:)

What if it doesn't drop low enough to hit your bid, ie the market just ignores your buy and shoots way up. Then your short position crushes you.

Or if you use a short butterfly, what if the market just yawns, you've lost your one chance at moving the market but atleast you live to trade another day:)

Agreed.

A strange game. The only winning move is not to play.

SEC investigates stuff like this. So not a better strategy. Who benefits from stocks like this is information available to investigators.

Trading that looks like foreknowledge of the release of fake news would stand out, but purchased based on knowledge that the news was fake would blend in with trades by plenty of other people who simply figured it out quickly.

No it won't, the market is too large. This is not a option opportunity after all.

Someone(s), made a LOT of money today. More than you or I will ever make in a lifetime.

Someone(s) also lost a LOT of money today. Given 2 scenarios: A) A script kiddie had fun with a tweet just for the lolz and it had a short term unintended impact on the Dow. B) There is a nefarious plot by folks who have the no how and infrastructure to pull off a highly risky, illegal trade who couldn't make more money just doing what they normally do.

Yeah, the dumb money lost again, as always.

Understood, but the SEC doesn't investigate every butterfly [1] transaction, and since you're spread wide its a lot more subtle.

[1] Butterfly - a limited risk investment that exploits volatility see [http://en.wikipedia.org/wiki/Butterfly_(options)]

In order to benefit they would have had to sell in very short time.

Try FBI and Secret Service, along with 10 other agencies. Perhaps even US Cyber Command could get involved. If this is a trading strategy, its a really really dumb move.

Yeah, how often do prosecutions actually occur? The market is huge and trades can easily get lost in the noise. Was anyone arrested for trading prior to 9/11?

The only way to figure out who was making trades on the expectation of this hoax would be to find the hacker, which probably means finding who controlled a botnet, which probably means convincing Russia to extradite someone. Good luck.

> Spread $15 - $20M in shorts across the basket, cover them on a 15% net gain in proceeds and then shoot the canary.

Eh, the percentage loss for DJI(https://www.google.com/finance?q=INDEXDJX:.DJI ) and the NASDAQ composite(https://www.google.com/finance?q=INDEXNASDAQ%3A.IXIC ) is around 1%, though. Unless you knew the exact stocks that would be disproportionally effected by this news, you're more likely to end up with around 1% net proceeds.

Which is a lot, but it's also what you could have gained just from being in the market this morning, or if you bought at yesterday's low and sold near close.

If you know for a fact it's going to go down you can use massive leverage to make a lot more than 1% off of a 1% movement.

Leverage is tricky though. Derivatives markets are orders of magnitude smaller than the stock market so setting up a big trade there would probably be as/nearly as visible as setting up a gigantic short on DOW stocks.

You can easily profit from ETF Volatility stocks (UVXY, TVIX, etc). They were up 20%+ during the 'crash'

Yes, but due to their structure perhaps, these ETFs generally seem only to go down day-to-day according to their graphs. You would have had to have bought them right before and sold at the bottom - otherwise you wouldn't make much, since you slowly lose money on these ETFs over time. Also, such a trade combo would probably appear to an investigator to indicate questionable fore-knowledge on your part.

if you bought call options beforehand on the volatility index VIX ( https://www.google.com/finance?q=INDEXCBOE%3AVIX or rather VXX, which are futures on the volatility index) you could have profited a lot indeed. take a look at this chart: http://i.imgur.com/XQfWra4.png with good timing you could've made a return of 1300%, using only call options on VIX futures.

"The simplest being to short a basket of stocks that are going to be affected and cover the shorts with buy orders."

Don't even worry about the basket thing. You would just use SPY (S&P 500 ETF) or ES (e-mini S&P futures). If you can predict how far it will drop ahead of time (a big if) then the strategy is, as you have said, to leave resting buy orders at the bottom of the dip. You don't need to short though, you could just unwind when the position when market bounces back.

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