https://www.smh.com.au/business/mar...-centre-of-us-fraud-bust-20180716-p4zruh.html New York: It's hard to imagine how an ambitious young trader from Sydney's northern suburbs could be linked to a trillion-dollar stock market crash and a landmark US white collar crime case that has the eyes of the financial world on it. But as Jim Zhao sits in a cell at Silverwater prison awaiting extradition to the US to face federal charges, that is the allegation being levelled at him. The 31-year-old was arrested on a Monday morning in January in a US operation that has spanned four continents, netted 11 individuals and implicated at least four of the world's biggest banks in a seven-year conspiracy to manipulate commodities markets in Chicago He was one of eight men charged in January with manipulating futures contracts, which traders use to wager on anticipated price changes in those assets. They are accused of spoofing - the practice of placing fake orders and quickly cancelling them, in order to artificially raise or lower prices, then capitalising on it by concurrently placing genuine orders to buy or sell. Deutsche Bank, UBS AG and HSBC have agreed to pay $US46.6 million ($63.3 million) in penalties while Bank of America Merill Lynch, although implicated, was not sanctioned. All four received reduced penalties for providing significant assistance to investigators. The case - only the fourth, and by far largest, prosecution since the US outlawed spoofing in 2010 - is being watched closely in legal and financial circles, even more so after the first defendant in the group was sensationally acquitted in April. The aftermath of the 'Flash Crash' Zhao's predicament can be traced back eight years to a bedroom in a modest family home in the west London suburb of Hounslow, where UK trader Navinder Sarao would stay up during the night to trade US markets. Sarao, somewhat contentiously, has been fingered as the cause of the 2010 "Flash Crash", in which the Dow Jones Industrial Average plunged almost 1000 points in minutes, making $1 trillion temporarily disappear from US equity markets. Almost 1000 points were wiped off the Dow Jones Industrial Average on May 6, 2010. A US court found his aggressive trading was to blame; just prior to the crash he used an automated program to place thousands of futures contracts, known as e-minis, on the Chicago Mercantile Exchange which, at different times of the day, presented more than 20 per cent of all visible sell orders. He generated large sell orders, cancelled them and then bought at the lower market price, an illegal practice he later admitted to doing hundreds of times between 2010 and 2014. Sarao pleaded guilty in 2016 to spoofing and agreed to help investigators in an attempt to reduce his as-yet-undetermined sentence. That cooperation led investigators to Chicago tech entrepreneur Jitesh Thakkar, who was charged in January with building the program, dubbed NAVTrader, that helped Sarao place his orders. Sarao made $US40 million in profits from the program but Thakkar, the founder of Edge Financial Technologies, allegedly charged him just $US24,000 on the proviso Sarao would sell it to others. "Mate, I remember we did this project for very low cost, and you were suppose[d] to help me sell to other traders so that we can make some money," he said in one terse email to Sarao in late 2014, contained in hundreds of pages of court filings collated by Fairfax Media and cross-checked to de-anonymise key players. Since Sarao's arrest, US authorities have probed futures contracts traded on the Chicago Mercantile Exchange (CME), Commodity Exchange Inc (COMEX) and Chicago Board of Trade using high-tech data analysis to detect irregular patterns. It led them to David Liew, a young trader on Deutsche Bank's precious metals desk in Singapore, who pleaded guilty last year to spoofing gold, silver and platinum futures hundreds of times over three years. In exchange for a reduced sentence, Liew revealed that his colleagues James Vorley and Cedric Chanu, two party-loving London traders who holidayed in Dubai and Las Vegas together, had shown him the ropes. The trio were allegedly aided by Wall Street colleague Edward Bases, 55. Former Deutsche Bank trader David Liew. Astonishingly, at the same time he was allegedly manipulating COMEX precious metals futures, Vorley, 37, was the director of London Silver Market Fixing Ltd and London Gold Market Fixing Ltd, which set the world benchmark prices for precious metals twice daily. He left in 2014 when Deutsche Bank dropped out of the daily auction. The bank was later sued by US authorities for conspiring to fix silver prices during Vorley's tenure. They paid $US38 million in 2016 and agreed to hand evidence over to prosecutors. 'Tricks from the master' Chat logs, taken from indictments unsealed in the US District Court for the Northern District of Illinois, allegedly reveal a brazen culture of spoofing. "That was alot of clicking," Bases wrote to Chanu on Deutsche Bank's internal chat system shortly after he placed false orders for COMEX gold futures to help Chanu fill a genuine order. "I know how to 'game' this stuff," he added. THAT IS BRILLIANT," replied Chanu, 39, who later moved to the bank's Singapore office and was appointed director of Asia precious metals trading. Former Deutsche Bank trader Cedric Chanu. " f..k the mkt around a lot... not alot of people had it figgied out... thats why i love electronic trading," Bases wrote. In another instance on November 3, 2010, Liew attempted to sell 400 gold futures contracts but was not getting all of his genuine order filled. Vorley and Chanu allegedly placed a series of spoof orders to help him out. "Classic jam it," Liew wrote to Vorley. "Tricks from the master." Their efforts had significant impact; before Vorley and Chanu placed one alleged spoof order in January, 2013, the market was relatively balanced with 13 per cent more offers than bids. After their order, there were 96 per cent more offers than bids. All the men have since left the bank and a Deutsche Bank spokesman said they have "enhanced controls and surveillance to help ensure that the underlying conduct does not occur in the future". While in Singapore, Liew met another junior trader, Mike Chan, at a bar, the pair bonding over their fledgling careers. Coincidently, Chan would later tell a court, he had also been taught how to spoof by Andre Flotron, a UBS veteran who trained Chan in the bank's Stamford, Connecticut, office. Liew, 33, and Chan, 35, started a separate spoofing scheme, referring to each other as "bandits". "We are f---ing gambling addicts. Sigh," Liew wrote to Chan one day, according to Bloomberg's report on the court hearing. "You bring it out in me," Chan replied. "I never thought I had it in me."
Jim Zhao bank accounts will be frozen, house raided (computers confiscated), accounts of family and close friends looked into, he'll sit in jail for awhile... In the mean time, the banks involved will get a penalty (fine) that they'll just write-off as business as usual. Worst case, those at the banks that were specifically ID as being involved in the spoofing (fake orders and quickly cancelling them, in order to artificially raise or lower prices)...they may only lose their job titled (demoted) or transferred to another office so that the bank itself will not be sued in court by an employee that was fired. Thus, the bank will just close the can of worms...release a statement to the media that they will put further controls in place. Funny thing is that these are the same banks involved in other corruptions in the financial communities. Yet, it does makes me wonder what other manipulation of prices in the markets have not been uncovered while we retail traders trade in the same markets. In the mean time...retail traders that are scalpers or designing their own custom algos are trying to figure out why trading via the DOM or market depth is so difficult. It's the primary reason why I will never be a scalper and will never use the DOM for trade decisions...the data has too much control by those that know how to manipulate it for their advantage...disadvantage for the retail trader viewing the same data. wrbtrader
The article explained everything, except: How a Sydney trader landed in the center of US fraud bust How did he know the other guys, etc. Well, he didn't, absolutely no connection to them, except he used a similar spoofing strategy. A guy similar to him was already acquitted by US courts: "But the landmark case was dealt a major blow when Flotron, who was arrested earlier than the other seven when he entered the US to visit his girlfriend in New Jersey last year, was acquitted. Like Zhao's, Flotron's case contained no internal chats or overt statements about spoofing, and his lawyer argued he had legitimate reasons for placing and cancelling orders." Related article to Flotron: https://www.nytimes.com/2018/05/03/business/dealbook/spoofing-prosecuting-andre-flotron.html "The crime of spoofing was added to the criminal lexicon in the Dodd-Frank Act in 2010. The law prohibits “bidding or offering with the intent to cancel the bid or offer before execution.” Well, this became a law in July of that year, but the Flash Crash happened 2 months earlier. Hm...