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Accused British "Flash Crash" Trader to be Extradited to the US

posted by martyb on Sunday October 16 2016, @12:53PM   
from the where-were-the-air-bags? dept.

Whoever writes:

Navinder Sarao has lost his appeal and is set to be extradited to the USA, where he faces charges with a possible maximum sentence of 380 years. He is accused of causing the "flash crash" in 2010, when the Dow Jones index dropped by 1000 points. He ran his trading from his bedroom in his parents' house and it is claimed that he made more than £30M (approximately $40M) in 5 years. His parents had no idea what he was doing, nor the scale of his income. He is accused of placing trades that he never intended to fill, so, to this naive person, it's hard to distinguish what he did from that of the large high-speed trading firms.

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Original Submission

• Re:Easy cure, of course (Score: 1) by khallow on Monday October 17 2016, @04:06AM

  by khallow (3766) on Monday October 17 2016, @04:06AM (#415084) Journal

  You claim that HFT is what brings enough liquidity to the market to enable you to trade.

  No one has claimed that. But HFT provides liquidity to traders who operate on the subsecond scale.

  Any normal investor, or even any serious investment fund, does not need liquidity on a millisecond scale.

  I agree. But there are plenty of traders who do. They aren't normal and they aren't "serious investment funds". But there's a variety of such players including arbitrage traders between markets, day traders, and regular market makers (who do provide liquidity to normal traders and serious investment funds).

  The argument against HFT is deceptively simple: it makes money.

  I agree that argument is deceptive. It still isn't a zero sum game.

  Specifically, it comes from influencing prices (with bids retracted before they can be executed) and then reacting before anyone else can.

  And the problem is? Are you sitting on your computer trying to put in orders as fast as you can? Are you computer trading? If not, then you aren't threatened by such games.

  It makes money from front-running.

  There are very limited situations where that matters. Front-running is not magic. Basically, it only occurs because a big trader engages in an obvious pattern that can be exploited.
  
  For example, there was a Canadian example where an investment firm had a program that would calculate best prices across a fair number of trading pools associated with the stock market and issue buy/sell orders simultaneously across these markets. They found in recent years that a rather high percentage of their orders were getting sniped. When they analyzed what was going on, it turned out that the orders which took the longest to go to a market were getting anticipated and they ended up with higher trade costs than expected from the analysis of the initial book orders. They finally figured out that someone had an HFT program that would pick up on their earliest trades and issue trade and book orders faster than their own orders would propagate to the most distant markets.
  
  The programmers then put in timing delays so that all the orders would hit their respective markets simultaneously. Then the HFT front-running disappeared since it no longer was physically possible to front-run these orders.

  In all cases, this money is coming from other people's trades, by making the spread just that little bit larger.

  Or by creating trades at the subsecond frequency level that wouldn't have happened before (the providing of liquidity).

  In all cases, this money is coming from other people's trades, by making the spread just that little bit larger.

  Except of course, when it makes the spread that little bit smaller.

  We are not only talking your trades as a private person, but also trades made by any funds that you may own, by any retirement funds that you might benefit from, etc.

  Sorry, it's not making money from individual trades. You're too slow to be a good profit source. It might be making money from your retirement fund. But in that case, your fund is engaging in bad investing and throwing your money away. Maybe you should switch to a new retirement fund or perhaps plan on your retirement using funds that aren't tied into an incompetent fund?

  Now, maybe my proposed cure is too extreme. Either part would do: Either you prohibit retracting orders (or, at least, more than some very small proportion of your orders) - thus preventing the influence on price. Or you prohibit the fast trading itself, requiring positions to be held for a minimum amount of time. Probably either of those would be sufficient. However, I'm for nuking it from orbit - it's the only way to be sure.

  And the obvious rebuttal is that you haven't shown there is even a problem with HFT.
  
  You later wrote in the thread:

  Have I understood your position correctly? If so, then I challenge you to explain these two points in any sort of clear way. There are articles out there that agree with you [forbes.com], but they seem to omit any explanation of just *how* HFT performs such miracles. Meanwhile, there are also articles that disagree with your premises [economist.com] - generally, these seem to include more information on the mechanisms.

  Notice that both articles agree that the spread is reduced. The Economist goes on to assert without proof that HFT instead increases the spread. That seems opposite the pattern you asserted exists.

  I find point 2 above particular difficult to accept. HFT as a whole makes bags of money, else it would not exist. Hence, the money is not only being made by one HFT company at the expense of another. Since HFT traders aren't printing money, and since spreads are, in fact, smaller today than previously...the only place that money can come from is non-HFT traders.

  Again, it's not a zero sum game.

  Parent