I'm sorry, but I don't buy it. I see spoofing still happening to this day, mostly by HFTs (from what I can tell). To say that a lone wolf trading from his mom's basement is solely responsible for the Flash Crash is little too much to stomach. Isn't that why CFTC decided to not press charges against him in the end? They know this story is BS. It's just laughable how incompetent these regulators are. (Or they know who the REAL culprit is, but choose not to prosecute for political reasons.)
What are you presently reading?
- Thread starter mikeriley
- Start date
Well, technically he wasn't trading from his mom's basement, he was actually upstairs in his bedroom. 
The flash-crash happened precisely at the moment he winded down some of his trades and went downstairs for 30 minutes to eat supper at the table. As soon as he was done, he went back upstairs to wind things back up again. And then the crash recovered. Quite literally, he didn't know during the 30-mins he was eating what he had caused in the markets. These time-stamps are critical and noted.
The official ruling after many, many months of investigating and re-constructing his S&P futures contract spoofing, lead to the conclusion that while they couldn't prove he was the only cause of the crash from start to finish, he did however significant'y contribute to the intensity of the crash.
Just before it all began, the futures market was noted by many to begin acting un-natural. At the time, Sarao was the largest holder of these contracts, bigger than anyone. He had over time leveraged up after snowballing into many millions of $ from spoofing the contracts against the bots/algos at the time. He quite effectively, was able to move the market.
The flash-crash happened precisely at the moment he winded down some of his trades and went downstairs for 30 minutes to eat supper at the table. As soon as he was done, he went back upstairs to wind things back up again. And then the crash recovered. Quite literally, he didn't know during the 30-mins he was eating what he had caused in the markets. These time-stamps are critical and noted.
The official ruling after many, many months of investigating and re-constructing his S&P futures contract spoofing, lead to the conclusion that while they couldn't prove he was the only cause of the crash from start to finish, he did however significant'y contribute to the intensity of the crash.
Just before it all began, the futures market was noted by many to begin acting un-natural. At the time, Sarao was the largest holder of these contracts, bigger than anyone. He had over time leveraged up after snowballing into many millions of $ from spoofing the contracts against the bots/algos at the time. He quite effectively, was able to move the market.
Remember this was in 2010, only 2 years after 2008 crash. The market was still recovering and was very jittery. The daily trading volume for ES was pretty significant even then, which I was actively trading. There was no way a single individual could have essentially moved the market. This might work during the overnight session. But I highly doubt that would have worked in the RTH. Needles to say, these are my own opinions.
What everyone seem to forget is that spoofing didn't start on that day. It has been going on long before Flash Crash by the bots. It was just a matter of time before the house of cards would come crashing down. Navao might have triggered the crash, but I believe it was the bots that later piled on that eventually turned a snowball into an avalanche.
Anyway, here's the documentary with the author of your book:
What we need, is a movie on this like The Big Short 
Looks like it's Monday already
I got through a couple more books the last week:
ANALYSIS of FINANCIAL STATEMENTS
By Pamela Peterson Drake & Frank Fabozzi
★★★
Distrupted
My Misadventure in the Start-Up Bubble
By Dan Lyons
Looks like it's Monday already
I got through a couple more books the last week:ANALYSIS of FINANCIAL STATEMENTS
By Pamela Peterson Drake & Frank Fabozzi
★★★
A very decent book that I can not complain about. This one could very well turn into a re-read a few years down the road. Oddly, this is the first time I've come across a book regarding financials that even spends a chapter on Porter's Five Forces.
Distrupted
My Misadventure in the Start-Up Bubble
By Dan Lyons
Very interesting read. Deals with the bullshit of non-profitable tech start-ups, and goes into detail from the inside. Including many episodes of typical work banter from whiny toxic feminists to the stupidity and gullibility of millennial workers today. Interestingly enough, HubSpot did everything including illegal means to prevent the author from publishing the book.
The government's case is an exercise in the government's insatiable appetite for exploiting public gullibility. If Navinder Sarao caused the flash crash, why did he only cause one? I've seen several smart traders make this point over the years but it never gains any traction because we accept the government's case and Nav's plea. But seriously, if his activity led to the flash crash, why did he cause no further flash crashes during the following five years during which he not only continued to trade, but exponentially increased his size?
Nav did not cause the flash crash. He was a scapegoat.
But Flash Crash, the book, is worth reading for the coverage of Nav's development as an extremely successful, extremely high stakes day trader.
TRADERS: The 'Flash Crash' arrest is a joke
https://www.businessinsider.com/traders-think-arrest-is-a-joke-2015-4
Sarao's been charged on one count of wire fraud, 10 counts of commodities fraud, 10 counts of commodities manipulation, and one count of "spoofing". According to the complaint, Sarao allegedly used an algorithm to manipulate the market for E-Mini S&P 500 futures contracts, or "E-Minis," on the Chicago Mercantile Exchange (CME).
Here's how futures traders reacted (emphasis added):
- "Well what he did is a problem for CME, which they are cleaning up. They have been cracking down over past 6 months hard. He was not the cause of the flash crash. That is a joke," one New York-based trader said. (The problem the trader is referring to is "spoofing.")
- "[Spoofing] is a separate issue, but spoofing doesn't happen risk free," another trader said. "If someone is in the market spoofing it they are taking the chance that a real buyer can lift their contracts and all of the sudden they are seriously short or long a position they never wanted to be in ... which is why the market is normally a better liberator of these things than regulators. If I'm a big fund and see someone doing this, I may try and wait for the right time and then buy 5,000 contracts when I see them doing this if I know I need to buy a lot more and squeeze him as a short. That's far more painful to him than a one time fine."
- A New York-based quant trader said that regulators absolutely should be tracking spoofing. However, the trader thinks regulators needed someone to blame this time. "My gut says he is basically being made a target because they need someone to blame for the 'Flash Crash.' The trader thinks that this "case smells of political PR" and that "someone somewhere is really working hard on their career."
- The quant also pointed out that the complaint said Sarao had been using the trading algo before the "Flash Crash" and in the years after. If he was the cause of the crash, why did we only have one crash in that period?
- One Midwest-based trader said it was "impossible to have been caused by one trader or even exaggerated." He added, "It's insanely entertaining to think an individual or an entity caused that day."
- The trader explained that there were "far too many other markets losing liquidity just as fast and in fact FASTER that it's LUDICROUS to think one individual in just the EMINI caused it. Insanely [reckless] in fact."
- "To blame them, to blame them for the 'Flash Crash' is absolutely ridiculous. It's beyond ridiculous," one trader said. "If anything, OK someone is trying to game the market here. It's f------ stupid."
Securities lawyers told Reuters that this case is going to be difficult to prosecute because they have to show that Sarao intentionally canceled orders.
"How do you prove an order is false?" one trader we spoke with asked.
The trader explained this is a "very fast market." He speculated that it would be difficult to just look at the order book and see if someone is intentionally cancelling orders. It's normal for traders to cancel. "You'd have to look at it and see a continuous behavior," the trader said.
Here's an excerpt from the book:
When it came to speed, the leading HFT firms invested hundreds of millions of dollars in computers, cable, and telecommunications equipment to ensure they could react first in what was often a winner-takes-all game. Exchanges charged tens of thousands of dollars a month to allow customers to place their servers next to the exchange’s to minimize any lag in receiving data. The result was, in the words of Eric Budish at the University of Chicago Booth School of Business, a “never-ending socially-wasteful arms race for speed.” Only the top-tier firms could afford to keep up, meaning barriers to entry were high. And the exchanges gave their most valued customers sweetheart deals that slashed their cost of trading to a fraction of other participants’. Point-and-click traders had no chance. By the time a human being had seen, processed, and reacted to a buy signal or news of an interest rate cut, the market had entirely absorbed the information and any value had evaporated.
The final element of HFTs’ success was an understanding of the plumbing underpinning electronic markets. The CME’s platform, Globex, is what’s known as a “First In First Out,” or FIFO, market. That means that whenever a trader places a limit order (that is, an order away from the current price), it joins the back of the queue, behind any other orders at that level. If the best bid in the market is currently $99.00 and you want to sell when it reaches $100.00, for instance, your order will be placed last in line behind any other traders currently looking to sell at $100.00.
HFT firms monitor these queues for opportunities to benefit from what is essentially a risk-free option. Consider an example: HFT firm AGGRO decides the market is statistically likely to fall and so places an order to sell ten e-minis at the current price (the “best ask”), again let’s say $100.00. As AGGRO’s ten-lot order makes its way to the front of the queue, new orders join at the same price; by the time AGGRO’s e-minis are purchased, or “hit,” another one thousand lots are waiting in the $100.00 line for a buyer. At this point, there are two possibilities. If the market falls, as AGGRO predicted, the firm can buy ten e-minis at a lower price, say $99.50, and walk away with a profit. If it starts to appear, however, based on fresh information entering the order book, that the price is actually going to rise, AGGRO can quickly turn around and buy ten e-minis from somebody further back in the $100.00 line, exiting the trade without taking a loss. By consummating trades only when they knew they could extricate themselves with little or no loss when they got it wrong, HFT firms largely eradicated losses. They also helped create a situation in which, by 2010, the overwhelming majority of all orders on the CME were canceled before they were consummated.
With all this to-ing and fro-ing, it’s easy to understand how day traders like Nav came to believe they were being targeted. Every time they placed or canceled an order, even if it was only a handful of contracts, the market moved. “I remember clearly the first time I noticed the HFTs,” recalls one of Futex’s senior traders from that era. “It was the start of a new year, we logged on, and the order book just seemed subtly but discernibly different, like an update on your phone or something. I was on a bank of twelve desks and we all just looked at each other and said, ‘What is going on?’ And from then on it became much harder.” At arcades around the world, algos became like bogeymen, blamed for anything and everything that went wrong. If a trader took a position and the market moved against him, it wasn’t a bad trade, it was the “fucking algos picking me off.” Rumors abounded about illicit deals between the exchanges and the HFT giants, but the truth was that the robots didn’t need to know their opponents’ identities to thrive. Fast machines, cheap commissions, and probability were enough.
The ascendancy of HFT squeezed many human scalpers out of the market. Some adapted by trading over longer time horizons, leaving positions running for hours or days rather than seconds. Others took to actively seeking out and trying to exploit algorithms, which quickly became ubiquitous among banks and asset managers as well as HFTs. In 2007, Svend Egil Larsen, a self-described algo hunter from Norway, noticed a flaw in the way an entity reacted to trades in certain stocks and set about taking advantage. He made a modest $50,000 but was later charged, along with a colleague, with market manipulation. The alleged victim in the case was a broker called Timber Hill, one of a raft of companies owned by the Hungarian-born electronic trading pioneer Thomas Peterffy, a man whose personal wealth is estimated by Forbes at $17.1 billion. Larsen was originally found guilty and given a suspended sentence, but the conviction was overturned on appeal. “We feel like Robin Hood, or David beating Goliath,” he told the Financial Times.
Most day traders harbored a degree of resentment toward the HFTs, but for Nav, who had a fierce anti-authoritarian streak, it tapped into something deeper. How could he compete with a bunch of faceless billionaires who never lost? And how was that fair? The markets were supposed to be the ultimate meritocracy. It didn’t matter what you looked like behind your screens, or where your parents came from. If you made the right moves, you got the rewards. Except, Nav was increasingly coming to believe, that wasn’t true. Like so much else in life, the players destined to win were the ones with the most money and the right connections. In reality, Nav didn’t know who his opponents were, and it would later transpire that some of those he complained about the most were actually gifted human scalpers with limited technology just like him. But to his mind, they were all cut from the same cloth: privileged elites with better equipment hell-bent on trying to take him down.
With his math skills, his aptitude for pattern recognition, and his lateral way of thinking, Nav might have made a highly prized employee for an HFT firm. Instead, he made a decision that, as an already successful and wealthy trader, he didn’t have to make. On June 4, 2007, after three years of silence, That’s a Fugazi (Nav's online monicker) filed a new post. It was titled “S&P 500 Futures Corruption,” and it read:
For all those that trade the e-mini S&P 500 with a ladder (where you can see the bids and offers), you must have realized now how some market participants have an unfair advantage over the rest. I’m mainly referring to the two spoofers…who are there everyday and seem to push around the market. Now, I’m not one to complain about spoofing I mean hey it happens in every market, but these two S&P spoofers CANNOT BE HIT. I’ve tried many times gentlemen and they simply can’t. Hence, they contravene the rules, as per CME themselves and should be eliminated from the market…I’ve spoken to CME about this and they simply refuse to accept that it is going on, even though you only need to watch the ladder at any time during the day to see that it is. It’s a clear example of letting the big guys get away wth blue murder at the expense of the small guys.
The post went on to suggest that traders should consider boycotting the e-mini to force the exchange to take action before concluding:
I’m half thinking of asking CME directly how I can get the equivalent software which allows you to spoof without being hit, because I do a fair volume myself, but I feel it would be wrong. THE MARKETS SHOULD BE ON A LEVEL PLAYING FIELD FOR ALL.
Fugazi’s language was less combative than in his earlier posts, but still nobody replied. Four days later, he posted an update:
Oh one final caveat. I am working on a program on TT to get the exact same cheating software. If you cant beat em you may aswell join em eh? Europeans have a pathetic attitude of accepting whatever authority throws at them—they never fight back. With the volume I do I know the exchange will turn a blind eye. And just imagine how easy trading will be since one is already cleaning up whilst playing by the rules. Tis been a sweet week.
There, on a popular public forum, Nav laid out the seeds of a plan that eight years later would culminate in his arrest for manipulating the market and helping cause one of the biggest intraday financial crashes in history. If anyone was paying attention, they might have been able to talk him out of it or notify the authorities. But, like the boy who cried wolf, he’d run out of credibility
(Continued)
Four years after the spoofing rules came into force, questions were once again asked about whether the practice was as heinous as the government suggested. John Arnold, a renowned energy trader and hedge fund manager worth an estimated $4 billion, wrote a piece in Bloomberg arguing that spoofing in the electronic era was actually a necessary counterbalance to the “front-running” perpetrated by many HFT firms. “A front-runner profits by gleaning the intentions of legitimate market participants and jumping in front of their orders, thereby causing the original traders to buy and sell at a less favorable price,” he wrote. “But with spoofers in the mix, the picture looks quite different: When the front-running HFT algorithm jumps ahead of a spoof order, the front-runner gets fooled and loses money…Suddenly the front-runner faces real market risk and makes the rational choice to do less front-running.” The only losers from spoofing, Arnold surmised, were front-running HFTs whose “strategies are harmful to every other market participant.” Others disagreed. Kipp Rogers, the owner of an algorithmic trading firm, pointed out on his blog “Mechanical Markets” that all trading, regardless of the time horizon, is ultimately about using data to predict the future, so to describe entities that were particularly adept at it as front-runners was, to his mind, a “gross misuse of the term.” Rogers also rejected Arnold’s contention that only HFT firms were impacted by spoofing, arguing that all participants had an interest in the integrity of the marketplace.
Among the independent trading community, Nav’s reputation didn’t turn on whether he caused the Flash Crash or the ethical merits of spoofing. To the dwindling army of day traders, Nav was nothing short of a god, the lone trader who took on the machines and won. For years, human scalpers had been squeezed out by the “HFT geeks” and Wall Street traders, with their innate advantages and connections. Now somebody on a home PC had found a way to fight back, all while sticking two fingers up at the establishment. Who cares if what he was doing was legal; Nav Sarao was a rock star. “To be honest I think the guy involved in this story is a trading hero and an inspiration to everyone out there,” wrote one forum poster. “To think he started trading 1 lots 10 years or so ago and is now one of the biggest S&P traders in the world using…software and brokers any one of you can get access to…thats what we all dream of.”
Four years after the spoofing rules came into force, questions were once again asked about whether the practice was as heinous as the government suggested. John Arnold, a renowned energy trader and hedge fund manager worth an estimated $4 billion, wrote a piece in Bloomberg arguing that spoofing in the electronic era was actually a necessary counterbalance to the “front-running” perpetrated by many HFT firms. “A front-runner profits by gleaning the intentions of legitimate market participants and jumping in front of their orders, thereby causing the original traders to buy and sell at a less favorable price,” he wrote. “But with spoofers in the mix, the picture looks quite different: When the front-running HFT algorithm jumps ahead of a spoof order, the front-runner gets fooled and loses money…Suddenly the front-runner faces real market risk and makes the rational choice to do less front-running.” The only losers from spoofing, Arnold surmised, were front-running HFTs whose “strategies are harmful to every other market participant.” Others disagreed. Kipp Rogers, the owner of an algorithmic trading firm, pointed out on his blog “Mechanical Markets” that all trading, regardless of the time horizon, is ultimately about using data to predict the future, so to describe entities that were particularly adept at it as front-runners was, to his mind, a “gross misuse of the term.” Rogers also rejected Arnold’s contention that only HFT firms were impacted by spoofing, arguing that all participants had an interest in the integrity of the marketplace.
Among the independent trading community, Nav’s reputation didn’t turn on whether he caused the Flash Crash or the ethical merits of spoofing. To the dwindling army of day traders, Nav was nothing short of a god, the lone trader who took on the machines and won. For years, human scalpers had been squeezed out by the “HFT geeks” and Wall Street traders, with their innate advantages and connections. Now somebody on a home PC had found a way to fight back, all while sticking two fingers up at the establishment. Who cares if what he was doing was legal; Nav Sarao was a rock star. “To be honest I think the guy involved in this story is a trading hero and an inspiration to everyone out there,” wrote one forum poster. “To think he started trading 1 lots 10 years or so ago and is now one of the biggest S&P traders in the world using…software and brokers any one of you can get access to…thats what we all dream of.”
This, more than anything, was the motive behind the CFTC and the CME getting the DOJ after Nav.