
UK trader in fraud arrest over US 'flash crash' - goodcanadian
http://www.bbc.com/news/business-32406056
======
joshstrange
Ok, maybe I'm horribly misinformed but I thought this was commonplace on wall
street (trying to trick other algorithms and the like). Are we really going
after this guy because he is just a guy and not some massive corporation? I
mean it wouldn't be the first time the single person doing something is made
an example of while corporations do it without repercussions but surely I'm
missing something here...

Edit: ok this article (posted in new right now)
[http://www.businessinsider.com/what-is-spoofing-the-
market-2...](http://www.businessinsider.com/what-is-spoofing-the-
market-2015-4) seems to have a lot more information. Relevant bit:

> The tactic [Spoofing] was outlawed in the 2010 Dodd-Frank regulation, but,
> as with other forms of fraud, it's hard to prove the trader's intent – in
> this case, the trader's intent to cancel the order. Prosecutors must prove
> the trader didn't change his or her mind for legitimate reasons after
> placing the trade.

Edit 2: Ok looks like regulators are just now starting to really go after
these people. Who wants to take bets on the chance that ANY major financial
orgs get in trouble (and no, fines that are pennies on the dollar for what
they are making is not "trouble", I want to see people in jail seeing how we
are trying to extradite this UK guy.)

~~~
tptacek
It is unlawful to place orders deliberately intended never to trade.
Obviously, every market maker has to place and cancel orders, but every one of
those orders is submitted with the knowledge that they _might_ trade, an
eventuality the market-maker has to be prepared for.

In a layering spoofing scenario, the trader is deliberately structuring their
orders to make it virtually impossible for them to trade. The point of doing
that is to create the illusion of volume; the orders the spoofer places with
actual trading intent will probably be in the opposite direction of their
giant spoofing orders.

Obviously, lots of legitimate trading strategies rely on forms of deception
(most often: "These piecemeal trades are not part of a concerted effort to buy
a zillion shares, I promise"). Where the line is seemingly drawn is, your
orders can conceal information from the market, but they can't directly inject
fake information.

Here's a detailed SEC complaint, which accompanied a settlement, that does a
decent job laying out how regulators establish someone's submitting orders
with an intent to deceive rather than trade:

[http://www.sec.gov/litigation/complaints/2015/comp-
pr2015-4....](http://www.sec.gov/litigation/complaints/2015/comp-pr2015-4.pdf)

~~~
minimax
I think what he will claim is that his orders were not "virtually impossible"
to trade with. The so-called "layer" orders were in the book for a reasonable
length of time. His trading program was modifying the orders to keep them a
few ticks from the inside, but they could have been hit by any contra side
order that was big enough to trade through all of the orders in front of his.
It's not unheard of for big trades to sweep multiple price levels in the ES
book.

They will have to prove that his intent was to use the spoof orders to signal
other participants to trade and I'm not sure that is as much of a slam dunk as
all these news articles are claiming. I.e. there is no email where he just
comes right out and says "these here are the spoof orders meant to move the
price etc etc etc."

~~~
tptacek
They're got something like 400 trading days worth of data to make the case
with. If this spoofing case is like the last one I read, the spoofed orders
aren't going to make any sense relative to the guy's assets, and his actual
profits are going to contradict any thesis he proposes about the intent behind
the spoofed orders. But we'll see, I guess.

~~~
bd_at_rivenhill
Actually, what they've really got him on is him explaining the scheme in
detail to a broker-dealer, describing it as, essentially, a conspiracy to
manipulate the market and defraud other investors. This is much different than
a case where all you have is trading records which might represent an
algorithm detecting a reversing trend with no intention to manipulate. On the
other hand, the CFTC is quite aggressive recently to deter behavior that
doesn't seem particularly bad. Feels like a slippery slope from here to a
place where breaking up large orders and routing to separate venues might be
viewed as intent to defraud by concealing intentions.

------
mike_hearn
This sounds like it may be possible only because of the exceptionally weak US-
UK extradition treaty, which gives the USA unusually strong powers to grab
people from the UK without any equivalent ability for the UK to extradite
people from the USA. The one-sidednesss of this agreement has caused political
problems before as it is seem as epitomising the slavishness of British
politicians to Washington.

If "spoofing" was really only outlawed in the Dodd Frank act then it seems
likely that most countries wouldn't have any laws against it, and an
extradition would fail on the grounds that what Sarao is accused of would not
be a crime in his country of origin.

I'm sure the UK Government will love the idea of sending a trader to the dogs
in America regardless of whether or not this is actually illegal in the UK
itself, just because it's election time and like all politicos everywhere they
want to be seen as whacking financial types. But it seems to lead to a bad
precedent. If trading strategies can be simply made illegal in a law so large
even the people who voted on it didn't read it, then how can anyone really
know if their trades are illegal or not?

~~~
tptacek
The last time this was hashed out on HN, all the available documentation
seemed to establish that the UK-US extradition treaty _had_ recently changed
--- to correct an imbalance that had historically favored the UK, and is now
more equitable.

~~~
learnstats2
Equitable? Why does it matter if this is equitable?

In practice, UK citizens now have to obey US law or risk being extradited - in
this case, for conducting their work legally in their home country.

This is not right.

~~~
tptacek
You cannot be extradited from the UK to the US for things that aren't crimes
in the UK. Check out the treaty.

~~~
learnstats2
This doesn't seem to me to be true in practice, e.g.

Not a crime in the UK at the time
[http://www.independent.co.uk/news/business/news/norris-
loses...](http://www.independent.co.uk/news/business/news/norris-loses-us-
extradition-battle-but-says-he-will-appeal-877866.html)

UK citizen entrapped by US agent (entrapment would likely be thrown out of a
UK court, but is now being tried in the US...):
[https://en.wikipedia.org/wiki/Christopher_Tappin](https://en.wikipedia.org/wiki/Christopher_Tappin)

Even if the treaty is applied in this way, which it doesn't seem to be, US
penalties are still not appropriate for UK citizens.

The UK has abolished the death penalty on human rights grounds - and yet the
UK government can send someone over to the US for this punishment.

If you commit a UK crime on UK soil, you should be subject to UK punishment,
and you should not be the subject of the law and punishment of any and all
nations of the world.

~~~
tptacek
Can you be clearer about what crime Norris is being charged with that is
illegal in the US but not illegal in the UK?

Every European country extradites only on the provision that the death penalty
will not be sought. It's also part of the ECHR.

Your last sentence suggests that your problem isn't the specifics of the
extradition treaty, but rather the concept of extradition in general.

~~~
learnstats2
> Your last sentence suggests that your problem isn't the specifics of the
> extradition treaty, but rather the concept of extradition in general.

You misrepresent what I said. I don't particularly object to extradition for
crimes committed in US law on US soil, although I do think countries have a
responsibility to protect their own citizens first and foremost (which is
surely the primary purpose of nations).

If an extradition treaty means I am effectively subject to inter-national law
while in my home country, then I object, yes, very much.

------
fennecfoxen
Here are some copies of the complaints from our friends at the WSJ:

[http://online.wsj.com/public/resources/documents/SaraoDOJ04-...](http://online.wsj.com/public/resources/documents/SaraoDOJ04-21-2015.pdf)
(DOJ complaint)

[http://online.wsj.com/public/resources/documents/saraoCFTC04...](http://online.wsj.com/public/resources/documents/saraoCFTC04-21-2015.pdf)
(CFTC complaint)

~~~
bobcostas55
Reading through these it's fairly obvious that Sarao's layering was
manipulative and illegal (it boggles the mind that they only caught up with
him now), but blaming him for the flash crash is ridiculous over-reach.

~~~
icu
Another factor to consider is Sarao's internet speed limitations. It seems
that news outlets are reporting that Sarao "worked out of his house in
London"... well I lived in that part of London and in 2012 it was hard enough
getting anything near 60 Mb/s downstream, 10 Mb/s upstream and 15ms ping, so
how the heck could he run a HFT operation?

Even if we consider the possibility of co-location it costs millions for this
sort of access, and the capitalisation of his firm looks like it is sub £20mil
between 2010 and 2011.

I just can't see how this adds up.

~~~
kasey_junk
Colocation cost a couple grand a month. Its almost exactly the same price I
paid for tier 1 internet colocation during the first dot com boom.

~~~
icu
Well since we're talking about the e-minis lets assume the CME GLink...
according to CME Group it would cost $12,000/mo with a one-time install of
$2,000 and a minimum commitment period of 12 months. [Source:
[http://www.cmegroup.com/globex/files/connectivityoptions.pdf](http://www.cmegroup.com/globex/files/connectivityoptions.pdf)]

You then need the hardware and technical expertise to pull off the install...
so lets say another $20,000 to $25,000 for hardware and I'd estimate $2,000 to
$5,000 in technician charges.

So total outlay just to get the hardware set-up would be about $168k to $176k.
Then there is the dev costs and I shudder to think about what is actually
required here bearing in mind I think I do some pretty advanced retail trading
in LISP.

Now, my point to all of this is when I step back for a moment and ask myself
would someone outlay circa $150k on what is clearly a strategy that is blatant
market manipulation, it defies belief that someone smart enough to pull it off
would be dumb enough to try. I would even go further that this is especially
true since there are many other opportunities to make honest money from the
market trading legally.

~~~
kasey_junk
You are assuming he is using the full connection and not using a hosted one.
There are lots of options for spreading the cost of that around. See
[http://www.cmegroup.com/globex/trading-cme-group-
products/tr...](http://www.cmegroup.com/globex/trading-cme-group-
products/trading-applications/isv.html)

If you read the actual complaints you will see it is explicitly outlined that
he was using FCMs and was buying the trading platform. In fact one of the
pieces of evidence that is mentioned are emails asking for feature requests
from the software vendor.

Even if you grant the 150k capital outlay, the complaint alleges that this was
a scheme worth 40 million dollars, a business opportunity many people would
jump at. Further, the amount of orders he was placing would put a much higher
capital constraint against his margin and clearing risk management than on the
colocation.

My main point is that people act like getting colocation is the big barrier to
entry for HFT and it simply isn't. Quite the opposite it is a business where
most of the technology has been commoditized and the margins are razor thin.
The barrier to entry is coming up with a trading strategy that works well on a
risk adjusted basis, and spoofing may be one way to accomplish that.

Firms much larger than this one have been accused of similar behavior in the
past.

------
nostromo
I'm amazed that "spoofing" is illegal.

If your high frequency trading algorithm is so dumb that it can be tricked by
an order that is then canceled, you deserve to lose money.

Anyone doing actual analysis of companies and trading accordingly would be
completely unaffected by a spoofed order.

~~~
kasey_junk
What sort of analysis are you suggesting? Because common analysis of supply
and demand for instance is very much affected by a spoofed orders. If an
exchange says that 10000 people want to sell at X and 2 want to sell at X-Y
that is a pretty good mechanism for price discovery (something we want the
markets to enable). That means nothing in the face of rampant spoofing. You
might as well get rid of public price feeds at that point.

I think that there is an argument that spoofing should be legal, but we would
need to de-anonymize the trades so that you could develop some digital analog
for reputation. That way if I see an order from a known spoofer, I can
discount it.

~~~
nostromo
You can still gauge supply and demand -- but you would do so using actual
trades, and not unfulfilled orders. This is how pricing works in most markets,
by analyzing transactions, not offers.

It seems to me that a law that hinges on proving the intent of the trader
seems destined for failure. It looks like this guy got caught by his
incriminating emails and not based on his actual trading.

I like your idea of de-anonymized trades. Perhaps it could be something like
the blockchain ledger.

~~~
kasey_junk
> You can still gauge supply and demand -- but you would do so using actual
> trades

This actually happens a lot in some venues, especially dark pools. This leads
to pretty high bid/ask spreads and lowered liquidity.

> It seems to me that a law that hinges on proving the intent of the trader
> seems destined for failure.

Which is the primary argument for making it legal in my mind, because a law
that is unenforced only penalizes honest market participants. Another option
would be to dramatically increase the cost of the punishment.

Another big problem is that even the idea of "intent" is in question when it
comes to algorithmic trading. Absent a code comment //spoofing goes here or an
email it seems like you are getting into deep philosophical territory.

> I like your idea of de-anonymized trades.

To be fair, there are lots of problems with it. Big block traders would
absolutely hate this as it would give market makers such an advantage.
Tracking reputation would become yet another advantage of sophisticated market
participants that would be largely unavailable (or expensive) to other
participants. Further, nothing would prevent reputation gaming, and detecting
it may be even harder than spoofing.

Basically anything that increases the bid/ask spread is likely to benefit
market makers at the expense of the rest of the market and simplicity is a
huge virtue.

------
lmg643
The criminal complaint states that the trader was using an excel spreadsheet
trading product, from a vendor, that was specifically augmented with order
types that would automatically place orders for him at price points away from
the market.

Does anyone know what vendor he was using to build this product?

~~~
cheatdeath
He paid a company called Edge
([http://edgefinite.com/](http://edgefinite.com/)) to extend the functionality
of TT ([https://www.tradingtechnologies.com/products/trading-
analyti...](https://www.tradingtechnologies.com/products/trading-
analytics/api/xtapi/)).

Page 49 of full CFTC document -
[https://www.dropbox.com/s/ego1blhnylgs7sx/Appendix.pdf](https://www.dropbox.com/s/ego1blhnylgs7sx/Appendix.pdf)

"I asked Edge to design 3 more functions specifically to help try and hide my
orders from these people. I do not know if this can be described as HFT, to me
it is just giving me the ability to have some extra functions that my base
trading software (TT) does not give me..."

------
tptacek
From the actual complaints, it's not clear to me that Nav Sarao is being
charged with helping _cause_ the Flash Crash, but rather for flagrantly
executing a spoofing strategy during the Flash Crash.

~~~
nissimk
From the complaint:

35\. According to Consulting Group analysts and the expert, that day, SARAO
was active in the E-Mini market on the CME, and contributed to the orderbook
imbalance that the CFTC and the Securities Exchange Commission have concluded,
in a published report, was a cause, among other factors, of the Flash Crash.
Among other activity, SARAO used the dynamic layering technique extensively.

...

36\. SARAO's use of the dynamic layering technique was particularly intense in
the hours leading up to the Flash Crash. SARAO used the technique continuously
from 11:17 a.m. until 1:40 p.m.

~~~
tptacek
Huh. And, from a much earlier source:

 _High frequency trading did not cause the flash crash according to a joint
report by the CFTC and the SEC. The staffs of the two agencies concluded that
a large fundamental trader 's order to quickly sell 75,000 CME S&P 500 mini
contracts (with a notional value of over $4 billion) created a "liquidity
crisis" in the CME E-Mini futures that caused the price to drop more than 5%
in four-and-one-half minutes during the most intense part of the episode._

------
padmanabhan01
Seems like an open glaring flaw in the trading systems if it can be
manipulated in such ways. Why not focus on fixing such flaws instead of
legislating against such trades?

So, the law says it's legal to place order and then change one's mind and
cancel it, but is not legal to place order with the intent to cancel later?
Seriously?

~~~
bpodgursky
Seriously. It seems like there are many very easy technical fix the markets
could implement --

\- hard-cap the number of cancellations a trader can order

\- penalize traders if they have too many cancelled orders (delay further
transactions)

\- add a cost to cancellation

Why does this require police action? Is the exchange just using the police as
a bulldog to avoid having to implement technical fixes for these problems?

~~~
kasey_junk
Most of those do exist on exchanges. The mechanics usually involve a fee
attached with your fill ratio (ie the number of orders/number that actually
trade).

The thing about spoofing is that it doesn't require tons of cancels. Done
right it falls well within the bounds of normal trading ratios.

------
nissimk
Zerohedge gloating:

[http://www.zerohedge.com/news/2015-04-21/step-step-guide-
how...](http://www.zerohedge.com/news/2015-04-21/step-step-guide-how-crash-
entire-market)

Is there a difference between Layering/Spoofing and "quote stuffing?" I
thought quote stuffing was a technique intended to overwhelm analytics
software with volume of ticks rather than manipulate interpretation of current
supply/demand dynamics. I suppose they are variations on the same theme.

~~~
tptacek
I'm not sure I even see how layering and "quote stuffing" are related. Here's
what Zero Hedge says:

 _In other words, 5 years after Zero Hedge first explained precisely what
happened on May 6, 2010, the CFTC finally admits that the flash crash was not
due to Waddell & Reed, but due to HFTs and quote stuffing._

That doesn't sound true at all. The point of the layering strategy is entering
huge orders (not lots of little ones) that can't trade, and that's what
SEC/CFTC said years ago as well. Immediately and automatically canceling the
orders isn't required for layering to work; the layered orders are several
price levels away from the clearing price. The point is to sustainably
convince market makers of a change in the market's direction, and then profit
from its correction.

As I understand it, the point of "quote stuffing" is literally to disrupt the
market; it's akin to DDoSing the exchange and profiting from the change in
behavior.

It's tricky, however, to nail this down, because the term "quote stuffing" was
invented by people examining trading artifact data to explain anomalous
graphs; the effect and even intent of "stuffing" is all supposition, and I
guess the term can mean whatever Zero Hedge wants it to mean.

~~~
kasey_junk
Layering does not have to be done with huge orders, lots of little orders work
fine as well, as long as you can cancel them quickly (in some ways that is
better because on some exchanges you get fills before public feeds).

Other than that I completely agree with you. Some people used quote stuffing
to mean a DDoS style attack with orders (which if it ever happened was never
wide spread and is trivial to prevent on the exchange side). Others do use the
term for spoofing or layering.

------
arthurcolle
How was he able to single handedly build up the volume necessary to affect
what is literally the most highly traded futures contract?

I imagine he wrote some awesome C++ code plugged into MetaTrader or
TradeStation, but certainly they have checks in place to ensure that he can't
just place tons of orders that fake the volume of a whale without having lots
of proxy servers that also place orders (which would also require proxy
accounts). If so, wouldn't he have to have multiple accounts with his broker
(I assume Interactive Brokers, given they have the only reasonable rates of
all the retail brokerage firms).

Can someone shed some light? I know a little about finance and I'm genuinely
curious how some random guy could possibly pull this off without some
complicity with his broker.

------
1971genocide
Wait. So the apparent "crime" this person committed is the literal definition
of playing bluff.

How is that even a crime ??

It seems the financial system is screwed up if someone playing bluff can crash
it.

~~~
bbcbasic
Every one of us has a vested interest in stable financial markets.

I am for any law that helps make financial markets serve businesses and
society and not high-stake casino players.

We need laws like this because of the endless supply of greedy assholes who
want to game the system. This extends to other areas like systematic tax
avoidance used by rich individuals and large corporations.

~~~
1971genocide
Wait.

So you are saying to solve the problem of rich individuals and large
corporations from using tax loopholes, we need to implement more laws ?

Do you seriously think that solution will work ? When was the last time you
though looking at shitty code "hey ! do you know how to solve the problems in
this shitty code, write more shitty code !"

I do not think the problem is as complicated as it is made out to be. The tax
code is already freaking huge ! no human nor even the people making them can
read all of it.

Every time you try to "fix" the problem by introducing more laws you make it
easier for rich ppl to find new loopholes.

Its the same thing with MPAA trying to stop ppl from torrenting, or ISPs
trying to block websites.

~~~
bbcbasic
Interesting, but I can't see a solution in your reply.

Unless you are saying we should let the market be free, so we can have insider
trading and big corps that pay less tax than a janitor (in $ terms not just
%)?

Laws can be reformed. Ideally laws are tidied. To reuse your analogy: "hey !
do you know how to solve the problems in this shitty code, <<refactor>>"

~~~
1971genocide
yes ! refactoring.

I am not going to talk about my solution since its way too radical for HN. I
do not think a libertarian approach will work.

What you want is to prevent having any single subset of the human population
from having too much power. Any single government ( cough US, China, India )
or company.

We want the capacity to dynamically react to events much quicker.

Look at the largest companies on the planet, Its almost impossible for them to
react to changes in technology etc.

And companies are not even that big compared to countries.

How long do you think its going to take the US,Indian,Chinese govt to
implement a voting system that takes the same effort an facebook like ?

I know it sounds crazy, but its technically possible to do it.

If you break up all these large countries into small countries it wont be
possible for things like wall-street to exist in the first place. Local voters
can see their elected representative rather than have someone 1000s of miles
away making decisions for them.

I derive these types of thinking from my experience in software and algorithm.
when was the last time you saw a algorithm that does everything ? the best
ones are small.

It also doesn't take away the capacity for humans to embark on large projects.
If you can get concussion you can do all sorts of cool projects.

Anyway My thinking is really radical and its going to be 100s of years before
we are there.

~~~
bbcbasic
>> I am not going to talk about my solution since its way too radical for HN.
I do not think a libertarian approach will work.

Libertarian seems to have different definitions depending on what I read about
it, so I will just have to imagine what you mean :-o.

------
Someone1234
akhatri_aus's post has been incorrectly flagged as a dupe. If a mod is reading
they may wish to look into that.

~~~
MarcScott
Check the comment history. Dupe is from another thread.

~~~
Someone1234
Fair point. It is a thread about the same topic (one that didn't receive a lot
of activity). So I don't really blame them for trying to post it here.

~~~
MarcScott
Also a fair point. I guess the HN dupe algorithm is imperfect.

