Flash crash witch hunts
Yeah, they got him. The guy who single handedly caused the markets to crash, armed with his excel sheet and some spoofing algo’s. Most people in the market are sceptic. This post by Adrian Ip is one of the best reactions I’ve read. Everything below is written by Adrian (who works for Thomson Reuters). Original source is here.
I was pretty surprised this morning to read about the arrest of a London based futures trader for allegedly causing the infamous flash crash of 2010. I immediately downloaded the publicly available criminal complaint to have a read of the detail (available here).
For those that don’t know, this type of stuff holds a special interest for me as prior to TR I worked for companies selling, designing, building and supporting highly automated low latency derivatives trading systems (yes, I know, I’m the devil), which we licensed to companies to trade with. I’ve got many years experience in investigating strange market patterns and designing systems and algos to both combat and take advantage of these conditions so I have some understanding of the situation.
A few things stand out to me on initial reading of the news stories and the criminal complaint itself:
- A lot of this seems focussed on the fact that Sarao had a system which automatically placed buy and sell orders at varying price points in given contracts (layering).
- There is also mention of spoofing which takes many different forms but ultimately means an order being placed with no intention of actually executing. Difficult to prove since there are so many reasons you may want to have a system change or cancel an order under so many different circumstances.
- Activities such as layering and spoofing are standard procedure to a certain extent and the definitions vary.
- Trading systems automatically moving prices you have in the market is nothing new or bad.
HE LAYERED! HE SPOOFED! MARKET MANIPULATION! GRRR!
Honestly, I don’t get what the big deal is. Layering is an EXTREMELY common activity in the market. Imagine you’re a market maker. It’s your job to provide liquidity to the market. You make your money by taking the tiny spread between people who want to buy from you and those who want to sell to you. You’re probably making markets in more than one instrument or underlying because the amount of money you make from each lot that you buy or sell is small. In traditional terms, it’s the stack ’em high, sell ’em cheap approach and you’re not a long term positional research based trader so you aren’t up on all the latest news and rumours regarding all the companies you quote.
Now, what happens if somebody out there is trying to build up a large position in something you quote? Maybe they want to buy a few hundred shares and that’s not a big deal, but what if they want thousands? Hundreds of thousands? Millions even? Chances are they have a better idea than you where the market is heading. If they’re looking to buy so much, maybe the value is higher than you know? Wouldn’t you want to be wary about selling so much of something when normally you only trade a few thousand lots? This is a typical defensive strategy employed in the markets to deal with such scenarios. Nobody knows everything, you need to protect yourself for when someone perhaps knows something material which you don’t, as such, you layer your prices.
People who quote extremely tight spreads take the most risk that the price they have posted is out of date and they’ll lose money, this is why the majority of volume in a given contract is available at prices worse than the best bid or offer (BBO). It’s also why people use automated trading programs to shift their prices when the market moves as a slow trader won’t be a trader for long as they’ll lose all their money.
The criminal filing is odd. Page 21 of the document states “SARAO’s Manipulative Activity Contributed to the Flash Crash” and then goes on to describe trading activity which thousands of firms employ globally on a daily basis. It’s no secret that market makers, hft, algo traders etc benefit from volatility and I know other companies also made a lot of money on that day. It doesn’t mean they were illegally attempting to manipulate the markets. Automated systems have so many capabilities to do things, sometimes they do stuff intentionally, sometimes not, just look at Knight as a perfect example of an algo gone wild costing a firm almost half a billion.
Really I’m surprised that they’re looking to pin the flash crash on one person. I remember years ago having a conversation with one of my old CTO’s and remarking that the system we were building was one which would one day contribute to a global financial meltdown and he agreed. Perhaps Sarao did contribute to the flash crash, but so too did a hell of a lot of others. The focus should be on creating a better system, not on looking for a scapegoat. I’ll be following the case with interest.
what’s the name of the dude?
“His Dudeness”
The notion that one guy layering a couple of hundred eMini contracts spooks the market into a 10% plunge is plain absurd.
Can someone please explain to me how working simultaneous orders is considered market manipulation, but buying 60 billion euros worth of bonds with printed money and pushing yields into negative territory is not?
You’re comparing ECB with his dudeness?
Both are market manipulations, did someone claimed otherwise?
But ECB announces it’s intentions and his dudeness hides them.
Allegedly this guy’s algorithm wasn’t even switched on at the time of the flash crash http://www.bloombergview.com/articles/2015-04-21/guy-trading-at-home-caused-the-flash-crash
Adrian Ip def doesn’t know how to illegally make money off layering and spoofing, he should learn it and try it and expect a call from exchange once his counterparty complains that he is abusing the market
also sarao’s layering was purely for spoofing and virtually ensured no execution, unlike a real market maker who wants his bids and offers to get filled if the mid hasn’t moved
Adrian Ip’s old CTO agrees with him that their system can cause financial meltdown, this is what is defined as delusions of grandeur while being completely outdated on market structure
really disappointed that Jack couldn’t find any better sarao commentary, he too is getting outdated with how market functions, which wouldn’t be surprising if he is a headhunter who recently got married
Working Simultaneous order is considered market manipulation if you are actively misleading and abusing the market, for eg you want to buy 100 shares in less liquid stock, you post the 100 bid and then proceed to fill up the offer side with 100,000 shares to sell, some poor sucker front runs the 100,000 sell order, sells you 100 shares only to find the 100,000 sell order disappears simultaneously, that’s manipulation, expect a call from the exchange or the regulator soon after
ECB buying bonds is legal under the central bank charter, and is the case pretty much across the globe, this is because once rates hit zero bound, the way to provide monetary accommodation in a 10%+ unemployment/struggling economy is forward guidance and asset purchases, draghi has done both now, QE is unconventional but not unusual
http://www.youtube.com/watch?v=PHe0bXAIuk0
A lot of text saying nothing. Obviously we know how market-maker quoting works. And what the difference is with this guys spoofing. Still indeed it is absurd to state that he caused the flash crash. Stick to the gossips Jack, cause you seem to lag/lack when it comes to technicalities.
If you know everything, does that mean everyone else knows everything? I thought you knew everything?
The criminal complaint report is missing one key point: there is no evidence that after pulling away the layered offers the price goes up. Only this can show realized market manipulation.
that’s a counter-factual for which can there be no evidence, genius
sarao’s algo virtually ensured no execution and he was thus misleading and abusing the market with ‘fake’ orders
How did his algos ensure him of no execution? He lacked real speed for this.
Maybe he got lifted a few times, taking a loss of 500k each time.
read before you display your stupidity to whole wide world
http://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/04/21/sarao_criminal_complaint.pdf
I’ve read on bloomy that the guy made $800k+ daily on several occasion since 2010.
There was nothing on what he made have lost but I was wondering what kind of capital base he had, on flash crash day for a start, I can’t find it nowhere…
Maybe because that would seem a little bit low on cash compared to the depth of the S1P 500 futures market?
is it illegal to post orders and make sure they are never executed? If yes, please provide reference to appropriate rule.
jesus, some people never learn, god save these souls
@10.11 have you been living in a cave for the last ten years? You must have ‘het ethisch besef van een pinda’.
https://www.afm.nl/nl-nl/professionals/onderwerpen/marktmisbruik/marktmanipulatie-mm-be
who cares about Dutch local rules, SEC rules please?
http://bit.ly/1IhY78K
looks like it’s time you called your lawyer
Just got done work with Akuna… there’s been some pattern with Akuna poaching people from Optiver. Right before I left, Akuna hired yet another Optiverian Carl Williams. As far as I know he joined the team as a senior developer and used to be a senior engineer with Optiver where he focused on market connectivity and automated risk management. I wonder how long they will keep this up.
Akunas growing rapidly huh? Looks like they say they have four offices… though knowing the industry and marketing, its all probably just one room set ups with 2 or 3 ppl in them
got done? i heard akuna just let go of one of the junior traders. is that you? who used to trade silver and fx?
who cares, next
what’s Akuna’s staffing model? Cooperative (like Optiver) or mercenary (like Tower/Jump)?
it’s not question of cooperative vs mercenary, it’s more of a team vs individual performance
akuna is modeled after optiver. its definitely a coop model.
heard akuna now has an office in yemen
yeah, that sounds about right
Last I heard Skinner was fighting for ISIS.
its just the cme showing whos boss as he told them to kiss his ass and they have their shareholders to think of. remember how duffy handled mf global and 2 for 1 pretty much also ousted cd to be the boss. theyr in bed with uk gov also so he will be extradited to us no problem, theyre saying dont fck with the cme, pin it one small fish to keep the up illusion of market integrity
define Skinner, duffy and cd
Define ISIS
“duffy and cd” one who runs it now and the one who doesnt