Earlier this week a trader was arrested in London and accused of “spoofing.” What’s spoofing and what does it have to do 2010 flash crash? Bloomberg View’s Matt Levine explains
How ‘Spoofing’ Might Have Crashed the Market
The futures trader arrested for alleged manipulation tied to the 2010 flash crash enters a London court today to face extradition to the United States. Bloomberg’s Ryan Chilcote provides background on the accused trader.
Who Is Alleged Flash Crash Trader Navinder Singh Sarao?
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Navinder Singh Sarao, 36, appeared in London court the day after his arrest by British police after being charged in Chicago with 22 criminal counts including fraud and market manipulation. Themis Trading Partner Joe Saluzzi and Bloomberg’s Suzi Ring speak on “In The Loop.”
2010 Flash Crash Case Very Troubling: Joe Saluzzi
It was my understanding that false bids and asks were endemic, that a very large percentage of orders from major and minor players alike were never filled nor intended to be filled and that masking the origin of these orders was often masked as well, so what did Sarao do that was materially different?
Levine gives a clue at the end when he notes that Sarao had been doing this for awhile so its puzzlng it wasn’t detected earlier. It seems more plausible that the big boys, having made and wanting to protect their windfall profits, needed a minor player to become the scapegoat.
A smallish scapegoat doesn’t really help mask the fragility of the system though: How could it fail to handle even the most nefarious minnow engaged in extraordinary trading tactics? Perhaps the whales and sharks were so gullible, so unaware of the spoofing tactic, that a minnow caused them to frenzy and crash the place? Hmmm, let me think about that a bit longer (wait, is that really a gold brick you’re trying to sell me?)
High-frequency trading still uses false bids and asks. It’s how they drive price up and down. Because they actually can see what your bid is before it hits the exchange, and because they are tied directly to the exchange with super fast links, they can pull their bids before your buy order hits. The exchanges (NASDAQ, NYSE, etc) all sell this privilege to HFT traders and charge a lot of money for the service, so don’t expect it to change too soon.
This is why we need to put a tax on every bid and ask – regardless of whether it actually is executed. Non-executed are actually destructive and the easy way to make them go away is to make them more expensive than the profit they create.
Simple: You can’t have more in trades that capital in your account.
Next?
I know, I know, Ted Cruz will go tot eh floor of the Senate to decry this as unAmerican.
P.S. Notice how this clown and the AIG fiasco were both done in “light touch” Britain?