Even when a human's orders are filled, the human may still be subject to prosecution for outwitting a machine. http://dealbook.nytimes.com/2010/10/14/oslo-court-sentences-traders-for-beating-machine/?_r=0
Because a lot of discretionary traders and certainly almost all of the "bots" look at imbalances in the DOM for clues as to market direction. It's as simple as that.
If these market participants can be so easily fooled by orders that have apparently no chance of being filled, what does that say about the sophistication of these participants? Don't they deserve to lose their money?
For discretionary traders, a definite yes. If they could not detect this pattern say after a month or so, then they were not very observant. Now for Bots....it's not so simple. The trading logic usually has been developed over a long period of time and backtested. If something new happens, the bot builders are unlikely to be able to detect it....until it starts losing consistently. That could take months of trading..even years. Then the bot builders pull the plug and start to review both the trades and the market activity in forensic detail to see where the problem lies and to determine "what changed" since they backtested. I think Nav was smart enough not to do this too frequently (turn on his algo) so as to avoid detection.
There is no point. Why they allowed spuffing in CL contract for years. E.g. check here https://twitter.com/nanexllc http://www.elitetrader.com/et/index.php?threads/evidence-of-algo-trading-on-cl.177795/
I worked at the same company as this guy... although not at the same time. But know plenty of his friends. I have also been a prop trader for 10 years so feel I can talk with some authority on this. Firstly spoofing happens all day every day in every market. Why people have such an issue with it I have no idea, there is no such thing as a "fake" order. If you put an order in the market (whether you intend to get filled or not) you are still at risk of getting filled. If you don't believe me go and get 10,000 lot limits and see how much money you make spoofing a market. Chances are you will end up owning a ton of S&P contracts you never wanted. It isn't the free money printing machine the media try and make out. Secondly, Nav isnt some computer programming whiz kid. He traded on TT (as do 70 of the prop trading industry in the futures market). The "algo" he created (was created for him) was just a more efficient way of entering and pulling large blocks of orders, if you gave this algo to 99% of people on this forum it wouldnt enhance their trading at all. Thirdly, ive made a lot of money off of spoofers, if you can spot them they are free money, they mostly take money off of front running algos (but nobody is calling for them to be banned). Trading is about evolution, and spoofers evolved to take money away from front running algos. Ban spoofing and you will have more front running algos. Simple. As for whether this guy caused the flash crash... utter madness to think that. If spoofers caused crashes there would be several crashes a day! To be honest I think the guy involved in this story is a trading hero and an inspiration to everyone out there. 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 (up until a year or so ago) software and brokers any one of you can get access to... thats what we all dream of
Q http://www.bloombergview.com/articles/2015-04-22/why-is-spoofing-bad- Finally, what about spoofing and the flash crash? I obviously don't think that Navinder Singh Sarao caused the flash crash. For one thing, he turned off his spoofing algorithm a few minutes before the crash. Also, as Craig Pirrong puts it, "The complaint alleges that Sarao employed the layering strategy about 250 days, meaning that he caused 250 out of the last one flash crashes." But it's certainly possible that he contributed to it. I've heard a couple of theories on that. One, which I mentioned yesterday, is that his spoofing might have interacted badly with the algorithm that Waddell & Reed -- a big fundamental investor -- was using to sell E-mini futures. This is a story of spoofing tricking fundamental investors, with bad results for everyone. Another theory, which I heard from a high-frequency trader today, is that by spoofing high-frequency traders out of $879,018 -- Sarao's alleged profits on the day of the flash crash -- he might have caused them to hit their loss limits and shut off their own trading algorithms. Without the usual market-makers to provide liquidity, the market would have been more easily spooked than usual, and it would have been a lot easier for it to produce the wrong price. Which, for a few minutes on May 6, 2010, it definitely did. UQ
Who says it was the wrong price? Clearly whatever price the market traded at, then that is the correct price that the market traded at. So the real problem here is that HFTs are so stupid that they will abandon the market due to a kid spoofing them. How about we go after the HFTs for being idiotic?
This is the elephant in the room that myself and a lot of others have been continually bringing up. Spoofing, while fundamentally annoying to others, is the unfortunate real world arbitrage against HFT front running. Get rid of, or significantly limit, HFT effectiveness and the spoofing will naturally just die. Big banks and HFT firms are the exchanges' masters and with the current conflict of interest expect to see a "solution" whih screws independent traders the most. Why the hell are we even concerned about the welfare of bots anyway? If they're getting gamed then improve the algorithm or leave.