
'Flash crash' trader loses US extradition battle - hanoz
http://www.bbc.co.uk/news/business-37656303
======
Mikeb85
This is insane.

How could a small trader like that possibly move enough volume to even budge
the market as a whole, never mind crash it?

They claim he was spoofing trades... That's more the domain of HFTs, where you
can automate the process, not a lone trader, however sophisticated.

And finally, let's suppose this trader is guilty of everything they allege...
He still couldn't have crashed the market, it would have been a chain reaction
of algos dumping stock at the same time, which he can hardly be blamed for...

~~~
cloudjacker
Okay, there are problems with the case but not the problems you mentioned.

He had negotiated a credit line from Credit Suisse to the tune of 30million.
He would then use 30 million to open futures trades with a much much greater
notional value.

His real positions would be in the hundreds of thousands long/short the
market.

His credit positions would be a little deeper in the order book, knowing that
other people and algorithms would front run his order because they think it is
an indication of a big buyer or trend happening.

He'd close his real position at the better price to the people trying to front
run him, for a profit. And simply remove the super big order from the order
book.

This is spoofing

and yes this is what everyone else does.

He is being prosecuted for it.

During the flash crash, liquidity dried up and spreads got super big, front
running algorithms were still responding to the spoofing and matching orders
at really bad prices with wide spreads. It doesn't matter who "caused" it.

~~~
akhatri_aus
Do you have any news articles pointing to the Credit Suisse credit line? I've
been following this story since last year but didn't catch that one.

~~~
cloudjacker
"nav sarao credit suisse" first result

[http://blogs.wsj.com/moneybeat/2015/04/22/flash-crash-
trader...](http://blogs.wsj.com/moneybeat/2015/04/22/flash-crash-trader-
struck-agreement-with-credit-suisse/)

I recall reading the charges from the government though, and I believe there
it mentioned the size of credit line from Credit Suisse

~~~
akhatri_aus
They don't mention the figure of 30 million on there, is that from somewhere
else?

~~~
cloudjacker
> I recall reading the charges from the government though, and I believe there
> it mentioned the size of credit line from Credit Suisse

------
Miner49er
Correct me if I'm wrong, but I thought this was a tactic employed by HFTs?
Don't they regular place market orders and immediately cancel them to
manipulate the market and slow down other HFTs? How is this illegal?

~~~
smcl
I'm not sure how widespread it is, but Nanex have a breakdown of a single case
where Citadel were using this strategy:
[http://www.nanex.net/aqck2/4670.html](http://www.nanex.net/aqck2/4670.html)

~~~
evanpw
Very bizarre reasoning: a misconfiguration can cause the strategy to do X =>
the strategy was designed to do X. Seems more like evidence for "quote
stuffing is a bug":
[https://www.chrisstucchio.com/blog/2014/quote_stuffing_is_a_...](https://www.chrisstucchio.com/blog/2014/quote_stuffing_is_a_software_bug.html)

~~~
smcl
That article is extremely bizarre. Nanex make a pretty clear argument that
Citadel fired out a set of orders it didn't intend to get filled to introduce
a delay between SIP and Nasdaq and intended to take advantage of the delay.

The Chris Stucchio article opens with a cute take on the South Park underpants
gnomes list ("2\. ???") and suggests that nobody has outlined why this
strategy would be profitable ... which is weird because this is _exactly_ what
Nanex did:

"What is the benefit of a feed delay? For one, latency arbitrage is enhanced,
especially if the delay is predictable, which it would be for someone running
a Quote Stuffing trading strategy. The type of firm that would benefit the
most from latency arbitrage would be an internalizer - someone that matched
retail stock trades based on the slower SIP, but could buy and sell the same
stocks on the faster direct feed, a strategy that became visible during the
Nasdaq Blackout. By the way, Citadel's bread and butter is internalizing
(matching) retail stock trades"

This is extremely easy to understand. Reading on there are a number of xkcd-
style graphs that basically say "testing is hard!" but still don't really
provide a solid rebuttal. I stopped reading at that point, I'm afraid :(

I'm far from an expert on this, and my opinion really doesn't matter - but I'm
far more persuaded by the Nanex explanation.

------
dschiptsov
Ridiculous. No single trader could affect the whole market - it does not work
that way.

This is another example of how wrong the current models based on traditional
assumptions and academic theories are.

If a market could be nearly destroyed by one single trader, there is no market
at all, but a fraud, smoke and mirrors.

------
klodolph
The headline is a bit of click-bait. The charges apparently include wire
fraud, commodities fraud, market manipulation and spoofing. This is relatively
boring stuff, if you omit the connection to the flash crash, which everyone
agrees is tenuous at best.

It doesn't seem unusual at all to me that someone charged with fraud in US
markets would get extradited to the US.

~~~
ConfuciusSay02
All of those charges relate to the flash crash, so not sure why you would omit
it.

Since most everything we do today involves computers and the internet, wire
fraud has become a catch-all charge that can be selectively enforced (see
Aaron Swartz) to suit a prosecutor's needs.

Despite the fact that many large players spoof on a regular basis, only this
guy has been actually criminally charged. When a government anointed HFT firm
does it, they only get a small slap on the wrist. Ironically, this guy pointed
out to regulators how everyone is spoofing, and only after they did nothing to
stop the spoofing did he say "well if everyone is doing it, I will too".

The corrupt financial elite have found their scapegoat, and the message is
clear: if you're a connected Wall Street firm, the laws do not apply to you,
but if you're a regular guy day trading from home, the book will be thrown at
you.

~~~
drakonandor
Can you show evidence that spoofing is common?

~~~
ConfuciusSay02
[http://www.nanex.net/aqck2/4555.html](http://www.nanex.net/aqck2/4555.html)
summarizes a study here:
[https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1955965](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1955965)

Key quote: "This manipulative practice [spoofing] is illegal under the U.S.
securities law, yet it has been frequently discovered in both equity and
futures markets."

Here's an example of the penalty a middling HFT firm sees:
[http://www.reuters.com/article/us-sec-enforcement-
spoofing-i...](http://www.reuters.com/article/us-sec-enforcement-spoofing-
idUSBREA331DD20140404?feedType=RSS&feedName=businessNews)

$1.9M in fines - no jail. By contrast Sarao is facing up 380 years in prison.

Others faced fines of only several hundred thousand dollars:
[http://www.wsj.com/articles/how-spoofing-traders-dupe-
market...](http://www.wsj.com/articles/how-spoofing-traders-dupe-
markets-1424662202)

Note that the most connected HFT firms (Virtu, Citadel - oh hey, Ben
"Revolving Door" Bernanke works there) don't even get fines, despite engaging
in spoofing, and even being banned from China for spoofing:
[https://www.ft.com/content/d4b61458-398d-11e5-8613-07d16aad2...](https://www.ft.com/content/d4b61458-398d-11e5-8613-07d16aad2152)

Also note that there have been many "flash crashes" triggered by spoofing
HFT's. There's nothing special about the Sarao one, other than the fact that
he was an individual operating out of his home.

~~~
evanpw
That paper uses simulated (i.e., fake) market data. The quote is just a bare
assertion, not a conclusion. It's very difficult to identify spoofed orders in
market data unless you're the exchange and know who sent all of the orders.

~~~
ConfuciusSay02
The paper uses "fake" data to develop a baseline for their model, which they
then compare to real data to test its accuracy, which they claim is 90%.

Furthermore, the study is based on the premise that there is lots of spoofing
going on. That's because EVERYONE knows that spoofing is rampant. Everyone has
acknowledged it, including the SEC and the Fed, so to dismiss the study by
simply saying "it used fake data" with no other context is not a forthright
appraisal of the situation.

~~~
evanpw
> the study is based on the premise that there is lots of spoofing going on

That's fine, but you can't then claim the study as _evidence_ of spoofing,
since it was injected into the simulations explicitly.

> which they then compare to real data to test its accuracy, which they claim
> is 90%

The validation with real data was just comparing things like trade volume,
volatility, autocorrelation, etc. They didn't put a specific number on it (the
90% accuracy mentioned in the abstract is about detecting HFT in simulated
data). And they added in the spoofing after the validation.

There definitely is spoofing going on (some of my job involves trying to
detect it), but I'm deeply skeptical of anyone who claims they can detect it
accurately or quantify the amount. 92% accuracy for detecting spoofers in
simulated data is insanely high, and makes me doubt the applicability to the
real world.

------
hood_syntax
We've seen it before: expect to see more of it as Britain tries to keep its US
ties strong in the wake of 'Brexit'

~~~
fixxer
Well, that and also that he was one (of many) doing something that adversely
impacted the markets.

As a former trader, I think it is bullshit and he is a scapegoat, but I think
he'll get due process.

~~~
soVeryTired
He won't get due process. He's being charged with offences that carry
sentences totaling up to 380 years. He'll plead out to ten years in jail.

~~~
ghurtado
A plea bargain is still part of due process.

~~~
nitrogen
Much of HN would disagree. Search HN's history for arguments.

~~~
ghurtado
It would seem so from the downvotes. I think it would be much more fruitful to
explain those arguments, even if briefly. I'm certainly interested in hearing
them.

Unfortunately, the search you suggested yielded no obvious results.

~~~
bryondowd
I've seen it argued mostly in relation to drug charges. Essentially, when
faced with charges with a potential penalty in the decades and offered the
option to plea guilty for a sentence orders of magnitude more lenient, nearly
everyone will plea rather than fight their case, even if they have a strong
case. Unless they know with absolute certainty that they will win, it makes
more sense to take a slap on the wrist than to risk losing your life as you
know it. Then there's the information asymmetry, where you don't have enough
information to know if you have a guaranteed case, and aren't given the
opportunity to find out before the plea bargain is taken away. So,
essentially, instead of a court determining your guilt based on evidence, you
have a game theory scenario what forces you into a guilty plea with no regard
for the evidence.

I would expect that a savvy financial type who can afford to pay a competent
lawyer would be significantly less impacted by this phenomenon (if at all)
than the typical person charged with a drug possession offense represented by
a public defender who has too many clients to properly serve each one.

Really, it seems to me that the issue isn't necessarily with plea bargains in
general so much as with plea bargains with massive differentials to the
original charges.

~~~
ghurtado
Thank you for explaining that.

> Really, it seems to me that the issue isn't necessarily with plea bargains
> in general so much as with plea bargains with massive differentials to the
> original charges.

I agree with you. I think the root cause is completely unreasonable penalties
for certain charges (which is especially true of drug charges). With a smaller
differential, the bargaining power of the prosecution is drastically reduced
(as it should be).

~~~
EdHominem
Well, the root problem is prosecutorial misconduct which is how they get their
success rate so high that you're forced to plea-bargain.

As proof of misconduct, note that when evidence is proved systematically
unreliable, prosecutors argue that the rulings should remain. (eg, hair
testing, etc) There's no desire to get the right answer, just to get the most
convictions.

------
gabriel34
I live in a country which doesn't extradite its own citizens and the concept
of my own country extraditing me to another one seems very strange and
ungrounding.

~~~
kintamanimatt
Which country is that?

~~~
gabriel34
A few countries have such laws. Wikipedia has a (seemingly complete) list:

    
    
        Austria, Brazil,the Czech Republic,France, Germany, Japan, the People's Republic of China, the Republic of China (Taiwan), Russia and Switzerland [1]
    

1\.
[https://en.wikipedia.org/wiki/Extradition#Bars_to_extraditio...](https://en.wikipedia.org/wiki/Extradition#Bars_to_extradition)

~~~
Lio
Not trying to shout "think of the children" but for the sake of discussion
would it still seem strange if the crime was hypothetically murder?

To me it seems clearer cut in a case which is more obviously criminal.

Now unbalanced extradition, which is the case for us in UK with regard to the
US, seems odder to me. Our politicians should sort that out.

------
smrtinsert
I have to think parties that are actually more responsible for the flash crash
pointed fingers.

