"An old school trader who's good with reflexes and doing things quick"
April 22, 2015 9:03 AM   Subscribe

The story of Navinder Singh Sarao, futures trader who might have caused the flash crash of 2010 (previously), arrested yesterday for wire fraud.
The futures exchange wrote to Sarao on the day of the flash crash, telling him to stop spoofing, and he called them back "and told em to kiss my ass." And then regulators pondered that reply for five years before deciding that they'd prefer to have him arrested in London and extradited to face criminal spoofing charges. One conclusion here might be that rudeness to regulators really works.

The article is skeptical about Sarao having caused the crash, particularly because he didn't quit spoofing afterwards. Blaming him implies admitting major weaknesses in the way high-frequency trading is done nowadays:
It suggests that existing algorithms are not just dumb enough to give spoofers some of their money, but dumb enough to give spoofers so much of their money that they destabilize the financial markets. It's not especially confidence-inspiring to read that a guy with a spreadsheet can trick everyone into thinking that the market is crashing, and thereby cause the market to crash.
posted by maskd (19 comments total) 13 users marked this as a favorite
 
Right. So a trader working out of his parent’s house in the UK, probably over a domestic DSL connection is what, 200ms network round trip from New York? And he’s supposed to have crashed the market despite the plethora of HFT hedge funds fighting tooth and nail over every millisecond who are all hosting servers inside the same buildings as the exchanges in order to get the lowest possible latency.

If all the local HFT traders pulled liquidity at the same time, then a foreign trader might be able to do something destructive, but in that case the question should surely be: why are US securities markets so poorly run that they can be knocked over by some guy in his parent’s bedroom working from the other side of the Atlantic with off-the-self trading software?
posted by pharm at 9:20 AM on April 22, 2015 [9 favorites]


You saw it here first folks:

THE SKY IS FALLING, liquidate all your assets now!

Buy gold bitcoins.

Head for the hills.

Duck
posted by sammyo at 9:20 AM on April 22, 2015


I love it when people get caught stealing time.
posted by clavdivs at 9:24 AM on April 22, 2015 [1 favorite]


No way in hell I'm investing in duck.
posted by I-baLL at 9:24 AM on April 22, 2015 [7 favorites]


(Of course, our friendly trader might have been running co-located servers too...anyone know?)
posted by pharm at 9:28 AM on April 22, 2015


The article is skeptical about Sarao having caused the crash

And so, apparently, are the people who arrested Sarao:
And, to be fair, the authorities say that Sarao's "manipulative activities contributed to an extreme E-mini S&P order book imbalance that contributed to market conditions that led to the Flash Crash," rather than coming out and saying that the crash was his fault.
Doesn't that, though, make this whole debate a bit pointless? If no one is actually accusing him of having "caused" the crash (other than careless reporters in the media) is there really much point in writing articles to "disprove" that claim?
posted by yoink at 9:29 AM on April 22, 2015 [2 favorites]


Lots of people were doing what he was doing. The only thing different about this guy is that he's a solo trader working out of his parents' basement, so he doesn't have the protection of a multi-billion dollar firm and all the influence they can buy.
posted by miyabo at 9:33 AM on April 22, 2015 [6 favorites]


What is the actual law he's been arrested under?
posted by Segundus at 9:34 AM on April 22, 2015 [1 favorite]


One conclusion here might be that rudeness to regulators really works.

Another might be regulators' extreme reluctance to implement an enforcement regimen that might catch someone who matters.
posted by George_Spiggott at 9:36 AM on April 22, 2015 [5 favorites]


Lots of people were doing what he was doing. The only thing different about this guy is that he's a solo trader working out of his parents' basement, so he doesn't have the protection of a multi-billion dollar firm and all the influence they can buy.

This. A thousand times this.

As someone who has actually been subpoena'd by the CFTC I can tell you that the regulators are really bad at their jobs. Like, so bad. People who actually understand how the markets work aren't working for the government, they're out there making way more money trading themselves. Because the regulators are so bad, even a halfway decent lawyer can keep them spinning their wheels for years, meaning that even smaller firms have the resources to push back against any regulatory action. One guy trading on his own is going to be a relatively easy target. Might as well pick him to make an example of so the regulators don't look totally impotent.
posted by phunniemee at 9:44 AM on April 22, 2015 [11 favorites]


One guy trading on his own is going to be a relatively easy target. Might as well pick him to make an example of so the regulators don't look totally impotent.

All this may well be true--I don't know enough about it to say. But according to the FPP article, "Sarao, according to the CFTC, was 20-29 percent of the sell-side pressure at his peak." The article wants us to read that "20-29%" with an implied "a mere" before it. But heck--one guy in his parent's basement is ginning up almost a third of the global market's sell-side pressure, and doing it purely as a deliberate act of manipulative market-distortion.

To suggest that he's just a teeny, tiny fish in a sea of much bigger traders engaged in exactly the same practices really doesn't seem to fit with that fact. If the much bigger traders had been in anything like the same extent of similar activities, there's no way this single guy could represent a third of the apparent sell-orders by volume for any appreciable period of time, is there? I mean, doesn't that figure suggest he's doing something on a dramatically wider scale than the many tens of thousands of other traders working in the market at the same time?

And, leaving all that aside (and I'm happy to acknowledge I may simply not understand enough about the way these markets work to be getting the point)--wasn't what he was doing pretty clearly illegal regardless of whether or not it contributed to the Flash Crash? Should we really be crying over the 'persecution' of the 'small guy' when he made almost a million dollars in a single day by deliberate market manipulation?
posted by yoink at 9:53 AM on April 22, 2015 [2 favorites]


Should we really be crying over the 'persecution' of the 'small guy' when he made almost a million dollars in a single day by deliberate market manipulation?

Oh gosh no, let all these fuckers burn. I'm certainly not crying over this guy. But to portray him as some sort of lone whale is just wrong. The volumes he was trading at his peak is just one particular contract over a relatively short period of time. 20-29% is not a huge deal for a high volume trader. I've seen much, much higher attributed to single traders.
posted by phunniemee at 10:08 AM on April 22, 2015 [1 favorite]


But according to the FPP article, "Sarao, according to the CFTC, was 20-29 percent of the sell-side pressure at his peak." The article wants us to read that "20-29%" with an implied "a mere" before it

I have a pretty good idea what he would have been doing. (And probably watched him do it and fumed.)

Most of the algos are actually really dumb crowd following programs at root. Basically, they join whichever side of the market is showing sufficiently more size. At certain times of the day, most of the message volume is just algos jockeying for queue position and following each other around, oftentimes resulting in long periods where the price just floats within a three tick range or so. (Especially at the ET lunch hour.)

So: if you think it's at the bottom of this range, you want to buy. Ideally you want to be able to post and get filled passively and capture the spread, but you can do this aggressively, it's just riskier.

Optional step: Post an order on the bid that you actually want filled.

Spoofing step: Post big big size on the ask. You don't want this order to get filled. Rather, you want the algos to join behind you, and if you did the optional step, scare them off the bid so your order moves to the front. Once enough size has joined behind you (or your bidside order's been filled), you cancel your resting order and aggress into the full qty that joined behind you. Often times the reaction to a trade of that size will move the market enough for you to exit right away at a 1 or 2 tick profit, otherwise you just wait for it to drift back up.

On the E-mini, 1 tick is $12.50 per contract. He probably would have been getting into 2-5000 contract positions.

The part that's illegal/violation of trading practices is the posting of an order with the intent to cancel it. It's (currently) okay to change your mind, even very quickly; it's not okay to intend to cancel it at the time you place it.

This is a long way to saying that depending on what "his peak" means (hours or months?), and whether "pressure" means traded volume or just shown size, this is not necessarily a really hard thing to achieve.
posted by PMdixon at 10:29 AM on April 22, 2015 [9 favorites]


Hah, I love Matt Levine. With the footnotes and the snark, he's always seemed like a good fit for MeFi and I've definitely thought of doing a FPP on the highlights of his Bloomberg column. If you're looking for accuracy I'm not sure he's always your best bet, but snappy takes on supremely boring but very illegal trading? So there.

This guy? Not even in the top ten Most Interesting Probably Illegal Maneuvers for April, let alone for the year in question. And by that I don't mean to belittle what he (allegedly) did so much as marvel at the sheer chutzpah of some of the major financial institutions out there.
posted by librarylis at 11:55 AM on April 22, 2015 [1 favorite]


Wen I read the story, I can't help but think of this.
posted by happyroach at 12:30 PM on April 22, 2015 [3 favorites]


I can't help but think of a friend of mine, who got out of that business about five years ago because she was sickened by the wholesale and shamelessly obvious fraud and manipulation that was on her screens every day. The way she tells it, while it isn't impossible to make a good (for most mortals, very good) living while playing by the rules and being a moral trader, it is impossible to be a part of it and not know you are surrounded by corruption.

And so she baled (and, incidentally, has worked her danglies off from that day to this on projects that manage to combine tangible cultural worth, useful service and - barely at first, but increasingly - commercial soundness).

The bad drives out the good. I'm sure that the regulators are useless not because you can't work as a regulator and make a living, nor because the amount you can make on the dark side is immeasurably larger, but because it is impossible for people like her to have anything to do with the industry without being driven away by the stench. Especially if you are told to clean out the stables with a teaspoon, but for god's sake don't frighten the horses with the scraping noise.
posted by Devonian at 12:44 PM on April 22, 2015 [3 favorites]


Someone explain to me the reasoning against a transaction tax, please?
posted by 1970s Antihero at 1:19 PM on April 22, 2015 [1 favorite]


Well the actual reason we don't have one is that no political parties would profit from supporting it.

Ok, how about a transaction tax that directly funds the Congressional Pension fund, adjusting pension payouts higher the more revenue it brings in?
posted by radwolf76 at 2:47 PM on April 22, 2015


Trying to outbid the finance industry for legislators is probably not a winning strategy.
posted by PMdixon at 4:19 PM on April 22, 2015


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