I hope you don't mind my asking. The guy's unacceptable pattern of placing artificial orders should have been noticed/ detected for long long time. He should have been warned and stopped this style of orders years ago! Why suddenly now big issue?
It was noticed a long time ago. The CME knew about it. They warned him. The guy ignored them (and made arrogant comments in the process). And the CME dropped it. This was a failure on CMEs part. Why is it an issue now? Your guess is as good as mine. Personally, I think the whistle blower that came forward forced CMEs hand. They had to do something or they'd be made to look like an even bigger fool.
We clearly disagree on this. There is intent on Sarao's part to manipulate the market. Most "HFT" firms are not doing that. The ones using algos to manipulate should be stopped as well. It doesn't matter if that is in a HFT firm, a guy sitting at home, or a lone wolf at a prop firm.
But no HFTs get stopped. Double standard. Either the regulators should let all behavior be valid (and let the market sort it out), or change the market structure so that it is not possible to do "illegal" behavior. Unfortunately, the current situation is that the regulators enforce the rules on a case by case basis, and only when it is convenient to their interests. And this is a long-running theme for all US regulatory agencies involving the markets. I personally have no problem at all with spoofing because it tends to lessen the annoying impact of the HFT firms and also because I think spoofing can be spotted and taken advantage of. It is just another market technique that a trader should be able to adapt to. I wouldn't be surprised if the only reason this Sarao guy is being pursued is because his spoofing is hurting HFT firms and they are trying to make an example out of him. And the regulators are just demonstrating their long history of making the markets more fair for the big players and less fair for the little guy.
Thanks. Now my guesses are: 1st, flesh crashes will happen again and again mainly due to most trading nowadays is done non-stop by robots/ algos, for various reasons. 2nd, even HFT and spoofing can be stopped or rectified, but other new robots/ algos will take place in the future. Traders are creative. Comments?
Q http://blog.themistrading.com/where-were-the-regulators/ Where Were The Regulators? 23 April, 2015 nanexflash “On average, on the Example Price-Impact Days, Defendants used the Layering Algorithm to place hundreds of orders for tens of thousands of contracts that were modified thousands of times and eventually canceled over 99% without ever resulting in a trade.” – CFTC Complaint Against Navinder Singh Sarao, 4/21/15 The numbers in the above statement are astonishing especially since they were done by a single trader. But more astonishing is the fact that Navinder Singh Sarao perpetrated this alleged fraud for years before finally being arrested yesterday in the UK. While the folks at Nanex have spotted and documented these spoofing events numerous times over the past few years (see above picture), regulators let Sarao continue his manipulative behavior. There are at least three levels of surveillance which should have spotted Sarao’s spoofing activities: his FCM (futures commission merchant), the CME and the CFTC. The FCM We know from the CFTC case against Sarao that he switched FCM’s often : “Defendants traded the E-mini S&P at four futures commission merchants (FCMs) during the Relevant Period: FCM A (April 2010 to October 2011), FCM B (November 2011 to January 2012), FCM C (July 2012 to August 2012), and FCM D (August 2012 to June 2014). “ We also now that the MF Global, which went bankrupt in 2011, was his FCM at the time of the Flash Crash which may explain a few things. But we don’t know why these FCM’s didn’t aggressively investigate Sarao. Anybody that has ever sat through a Series 7 or Series 24 Continuing Education exam knows that suspicious activity must be reported to the brokers compliance department. The CME The CME should have easily been able to spot these spoofing orders and they did. They approached Sarao in 2010 but for some unknown reason decided not to pursue him. Yesterday, the CME issued a statement on the Sarao case: “Following the Flash Crash on May 6, 2010, together with other regulators, we did a thorough analysis of all activity in our markets during the Flash Crash, and concluded – along with regulators – that the Flash Crash was not caused by the futures market. If new information has come to light, we look forward to reviewing it with the Commission.” We know the CME has always been a staunch defender of their exchange but this statement is bordering on laughable. The CME has long claimed there vertical silo market is superior to the fragmented equity market but they allowed this level of spoofing to continue for years. We would think that spoofers are much easier to spot in vertical silos as opposed to the fragmented equity markets. We think the CME has some explaining to do. The CFTC Yesterday, Bloomberg published an article on the Sarao case which included some damning statements about the original CFTC/SEC Flash Crash investigation: “It turns out regulators may have missed Sarao’s activity because they weren’t looking at complete data, according to former CFTC Chief Economist Andrei Kirilenko, who co-authored the report. He said in an interview that the CFTC and SEC based their study of the sorts of futures Sarao traded primarily on completed transactions, which wouldn’t spotlight the thousands of allegedly deceitful orders that Sarao submitted and immediately canceled. Spoofing wasn’t even part of the CFTC’s analysis of the crash, said James Moser, a finance professor at American University who was the agency’s acting chief economist in May 2010. The flash-crash review marked the first time that the agency worked through the CME’s massive order book. CFTC officials often needed to call the exchange for help interpreting the data, he said in an interview. “We didn’t look for any sort of spoofing activity,” said Moser, who added that he doubts that Sarao’s activity was the main cause of the crash. “At that point in 2010, that wasn’t high on the radar, at least in our minds.” The CFTC examined trades and not orders when analyzing the Flash Crash. And it took them five months to do this? This explains why they originally blamed a Kansas City mutual fund for the Flash Crash. The mutual fund was actually the victim and not the culprit. The CFTC and SEC are funded differently (the SEC is self-funded and the CFTC is funded by the government) and have different oversight committees in Congress (the SEC is overseen by the Financial Services Committee and the CFTC is overseen by the Agricultural Committee) but they share a common goal of protecting investors. In order to carry out this investor protection goal, we believe it is time for the CFTC and SEC to merge their surveillance methods. Last week ex-Fed Chair Paul Volcker also called for the merging of the CFTC and SEC and said: “The system for regulating financial institutions in the United States is highly fragmented, outdated, and ineffective. A multitude of federal agencies, self-regulatory organizations (SROs), and state authorities share oversight of the financial system under a framework riddled with regulatory gaps, loopholes, and inefficiencies.” The real issue here is that markets have dramatically changed over the past two decades but regulators have not kept up. While technology has increased efficiency and brought down trading costs, it has also changed the way traders access the markets. Many trading strategies can reach across asset classes instantaneously but regulators continue to see the markets as separate asset silos. If the E-mini S&P futures contract price is being manipulated, then maybe other markets around the globe are also being manipulated because of the high correlations that technology has brought to the market. Regulators need to take a more unified view of the markets. UQ
Q http://blog.themistrading.com/the-uk-flash-crash-spoofer-case-brings-more-questions-than-answers/ The UK Flash Crash Spoofer Case Brings More Questions Than Answers 22 April, 2015 flashcrash3 After reading both the Department of Justice and the CFTC cases against the UK Flash Crash spoofer, Navinder Singh Sarao, we are left with more questions than answers. While some in our industry are already debating whether or not Sarao was a high frequency trader, we don’t think this is the important issue in this case. This case is about manipulation and the lack of regulatory oversight which allowed it to continue for five years. We trust by now that you are familiar with the details of the case but if not the CFTC summarized it here: “According to the Complaint, for over five years and continuing as recently as at least April 6, 2015, Defendants have engaged in a massive effort to manipulate the price of the E-mini S&P by utilizing a variety of exceptionally large, aggressive, and persistent spoofing tactics. In particular, according to the Complaint, in or about June 2009, Defendants modified a commonly used off-the-shelf trading platform to automatically simultaneously “layer” four to six exceptionally large sell orders into the visible E-mini S&P central limit order book (the Layering Algorithm), with each sell order one price level from the other. As the E-mini S&P futures price moved, the Layering Algorithm allegedly modified the price of the sell orders to ensure that they remained at least three or four price levels from the best asking price; thus, remaining visible to other traders, but staying safely away from the best asking price. Eventually, the vast majority of the Layering Algorithm orders were canceled without resulting in any transactions. According to the Complaint, between April 2010 and April 2015, Defendants utilized the Layering Algorithm on over 400 trading days.” The headline of the case is that a UK trader helped cause the Flash Crash of May 6, 2010. But the real story is that this particular trader was running the same manipulative scheme for five years before getting caught. The trader, Sarao, was not part of a sophisticated firm that operated microwave networks or paid for colocation services but rather a single individual who tweaked a software program that he used to repeatedly run the same manipulative layering strategies. We have a number of questions/issues about this case: Was Sarao the only person running this strategy over the past five years? Considering the thousands of traders around the globe that have access to much more sophisticated software and hardware, we have to believe that Sarao is not the only person running these sorts of manipulative strategies. Even Sarao admitted to regulators that he knew of another trader doing the same thing. The DOJ case stated: Referring to another trader, SARAO further asked, “I see he continues to do this all day every day, yet you have a problem when I showed someone it for 5 mins?” Is the E-Mini S&P 500 contract the only commodity that was being spoofed over the last five years? While it is the most active instrument, there are plenty of other commodities (oil, for example) that exhibit many of the same characteristics as the E-Mini. We would be shocked if this same type of behavior is not going on in other commodities. Why did regulators take five years to catch Sarao? This is the most disturbing question. The CME was aware of Sarao’s manipulative activities as early as 2009 and sent a letter to his FCM (futures commission merchant) about his behavior. Sarao laughed at this letter and according to the DOJ: “In a responsive email dated May 25, 2010, SARAO wrote to his FCM that he had “just called” the CME “and told em to kiss my ass.” Rather than investigating Sarao more after the Flash Crash, the CFTC and the SEC chose to blame a mutual fund for the Flash Crash. But all they needed to do was examine Tag 50, which is a unique identifying code assigned by an FCM to a trader that must be used to enter an order on Globex, and they could have tracked all of Sarao’s orders. This would have showed that on the day of the Flash Crash: “Over the course of the day, SARAO modified more than 20 million lots, whereas the rest of the market combined modified fewer than 19 million lots. SARAO’s activity created persistent downward pressure on the price of E-Minis. Indeed, during the dynamic layering cycle that ran from 11:17 a.m. to 1:40 p.m., SARAO’s offers comprised 20 to 29% of the CME’s entire E-Mini sell-side order book, significantly contributing to the order book imbalance.” Was Sarao or others operating similar spoofing algorithms during the 2007-2009 financial crisis? We all vividly remember the heart pounding, violent moves of the financial crisis. Multi-hundred point swings were commonplace and were usually initiated by news headlines. But were these moves exacerbated by spoofers like Sarao? The FBI agent quoted in the DOJ complaint stated: “I know that SARAO preferred to trade during periods of high market volatility.” Well, there was no higher volatility periods than during the financial crisis. How could have sophisticated market makers been duped by a guy trading out of his house in the UK? This question baffles us the most. Market makers spend millions on technology and hire the smartest programmers from around the globe to ensure that their strategies are the fastest and most sophisticated but they were duped by a guy trading from his house in the UK? Something here doesn’t add up. Sarao didn’t even try to cover his tracks. According to the CFTC’s case , “he primarily utilized 188/289 lot size spoofing on the sell side ofthe Order Book in conjunction with the Layering Algorithm.” Are we to believe that sophisticated market makers couldn’t spot this activity? Our friends at Nanex have continually pointed out these spoofing patterns over the past few years which makes us believe that other industry participants knew when the spoofing also was activated. Did the CFTC’s new power granted to them under Dodd Frank Section 747 finally allow them to aggressively pursue this case? We have to imagine that the CFTC was aware of Sarao but they might not have been able to bring a case since spoofing was hard to prosecute prior to Dodd Frank. In 2014, the CFTC issued their final interpretative guidance on section 747 which clearly defined spoofing and allowed them to aggressively pursue spoofers. To sum up, we are very concerned by the Sarao case for the facts that it presented and for the questions that it has left unanswered. Actions of spoofers hurt all market participants (retail, institutional, market maker) and shatter investor confidence. How many investors have been driven out of the market over the past six years because spoofers like Sarao scared them away? UQ
yeah, more questions than answers... this is going to be transformative, not only because of the cross border issues and the challenges to the sovereignty of the US Dollar, US Markets, and US integrity, but also as precedent setting and then a further basis for HFT prosecution. the long arm of the law, and of governments are celebrated in the oft told stories of the likes like James Bond (representing the British gov't, at least in the movies) and Juncinda "Jinx" Johnson (representing the NSA of the US gov't, at least in "Die Another Day") will be sent after those trampling upon the sovereign might of those governments and their currencies. who knows, perhaps the HFT's, whether in whole or in part, are next, after this precedent is set. oh, did you realize that when you run an auto strategy, to a very small extent, that is the beginnings of what HFT's do?
This statement is absolutely hilarious since in my 15 years of active trading, neither organization has done anything to protect the individual investor, and has instead made it much easier for the big players to exploit market structure. In fact, the SEC should change its stated goal to something like, "to limit the capability of the individual trader to the advantage of bigger market participants."