
How the Flash Crash Trader’s $50M Fortune Vanished - walterbell
https://www.bloomberg.com/news/features/2017-02-10/how-the-flash-crash-trader-s-50-million-fortune-vanished
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chollida1
This guy isn't the first person to make money in one arena and extrapolate
that he could do it in others only to get his ass handed to him.

I'm Canadian so the wealthy people AI know are either in finance or hockey
players, and those that have lost money in areas outside their wheel house
have all followed the same path.

1) Give money to a person they don't know very well to invest in a business
idea they aren't an expert in.

There is no step two.

As a side note, i found this interesting....

> It wasn’t until Sarao left Futex in 2008 and struck out on his own that he
> started to make serious money. Public filings show his assets popped to 14.9
> million pounds from 461,000 pounds in the 12 months ending in June 2009,
> long before he enlisted a programmer to build a system that authorities say
> was designed to cheat the market.

Not sure what helped more in his rise:

The 6 years he spent learning at another trading firm or the fact that on his
own he probably had alot less risk oversight that allowed him to lever up more
than he would have in side of an investment house.

> That near-obsessive drive to hold on to as much of his wealth as possible
> can also be seen in the way he conducted his business affairs. Looking to
> minimize his tax bill, he was introduced by his accountant to John Dupont, a
> director at the London arm of an Isle of Man-based financial advisory firm
> called Montpelier Tax Consultants

The best investment adivce I ever got was from my father. and I quote....
"Don't fuck around with your taxes any more than an H&R block adviser would
let you. Getting a million dollar tax bills 7 years after you earned the money
isn't worth it."

~~~
myotherother
It's really common for people to criticize professional athletes for trusting
unscrupulous business managers, but I've always wondered how many of those
people fully understand their own investments. Do they trust a CFA's word? Do
they have there entire 401k invested in a vanguard target date fund but do
they comprehend what its composition is?

~~~
bradleyjg
You don't need to fully understand what is in a Vangaurd target date fund to
have high confidence that it isn't a ponzi scheme that's going to go to zero.
You can't say the same thing about the ultra-exclusive off the market
opportunity that some business manager wants to put you in.

For a pro athlete looking at making millions for a few years and then facing a
sharp drop-off thereafter, a Vanguard target date fund is probably not close
to optimal. But you could do far worse and many do!

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nstj
Call me a skeptic (and this is an active board right now, I'm surprised I'm
the first to say it) but this doesn't really add up. Guy is smart enough to
fool the brightest HFT minds around the world and wipe out trillions of
dollars in market cap from and make a lot of money 'from his investments' yet
he loses all of his money 'from his investments'.

~~~
hermitdev
Trading and personal finances are different animals. Most traders are very
specialized, and it reads as if his personal investments were outside of his
expertise. And...he got owned, or taken, depending on your outlook. Reading
the article, it seems that he got taken by a Ponzi scheme (although that
wasn't mentioned, but I extrapolate that from the lack of being able to get a
single cent back).

~~~
nstj
3 different Ponzi schemes though? And not a cent out of any of them? (He had
to mortgage his parents house for $50k). Something smells off.

And if the guy was such a frugal person focused on capital
preservation/building his bankroll why did he take $ out of his 30x trading
account and put them into 11% safe "real investments"? Just all smells pretty
off to me (reminds me of the MF "vaporized" moment).

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KKKKkkkk1
I don't get it. This guy's crime is placing offers with the intention of
canceling them before they are executed. Why is this a crime, and what does it
have to do with the flash crash?

~~~
gt2
Honest questions from someone who is only slightly educated on market making:

Is there a law that stated/states all trades need to be with real intention to
buy?

How can they prove that intention? Even if an indicator is actually having the
amount of cash to finance the trades, that could be covered as well.

Lastly, is it not the responsibility of the people receiving the trade orders
to not let the new trade information out or do anything with that information
themselves which would affect the market until the actual trade takes place?

~~~
hellofunk
> Is there a law that stated/states all trades need to be with real intention
> to buy?

We're not talking about trades, but rather the illusion of an intent to trade,
when really there is no intent, and pushing that illusion onto the world to
give the market the impression you will trade that amount, causing other
market participants to react accordingly, which causes the market to move in
the direction you wanted. Then you cancel your planned trade and profit off
the move you manipulated.

That's the gist of it, and yes there are laws against it.

~~~
csomar
You didn't answer the Parent Poster. He's asking how can the law determine if
the trader was spoofing or legitimately trading. What are the criteria for
that.

~~~
usrusr
Repeatedly following through with a second batch of orders just right after
cancelling a large batch of offers in the opposite direction will do wonders
to put the sincerity of the first batches into question.

I think it's safe to assume that this is not a "one daring bet" kind of
manipulation, like e.g. badly disguised insider trading could be, it is rather
wealth by a thousand papercuts. The pattern is very unlikely to be worthwhile
without excessive repetition and there are only so many million times where
you can believable claim that you wanted, then you didn't, and than you wanted
the opposite, all in carefully timed lockstep.

~~~
drkstr
What if what you described was done by an algorithm rather than by human
trickery? What if that action was discovered "per chance" through machine
learning? I myself don't feel there is anything morally wrong with that. Why
should I feel differently when a human does it rather than an algorithm at an
HFT firm?

Genuinely curious of your thoughts!

~~~
usrusr
Late reply, but the question is too interesting to resist:

Posting an order is a statement of intent. If you allow a machine to post
those in your name you take responsibility for the claims made by that
machine. Discovery of that "one magic trick" by ML reminds me of the way
toddlers learn all kinds of mischievous "life hacks" like "I can reach goal X
by dropping object Y" before they start to respect more cooperative forms of
interaction. I am skeptical of allowing toddlers on the trade floor. And if
you did allow then, you would want to have mechanisms to make their parents
take responsibility while their children are not yet able to.

If the decision-makers at the exchanges running the show were not so much
closer with those trading for trade than with those trading for actual
ownership, they would have curbed this abuse very early. Maybe by introducing
a sufficiently low upper limit to the volume of offers that can be cancelled
(relative to the volume of offers that are followed through), or some form of
progressive cancellation fee that would protect the market from this form of
abuse. The observation that only external supervision put an end to it
(instead of the "house rules" of the exchanges) makes it difficult for me to
dismiss as paranoid the claims made in the discussion here that he just lacked
the right friends to pull this off.

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greenwalls
Implementing something like Andrew Lo's encryption algorithm to avoid future
flash crashes is a great idea [https://www.technologyreview.com/s/512291/how-
to-avoid-anoth...](https://www.technologyreview.com/s/512291/how-to-avoid-
another-flash-crash/).

It's also interesting the article refers to Sarao as frugal. If he was really
frugal it seems like he would have said that X amount of money is enough and
stopped risking it all. Scary stuff!

~~~
jonwachob91
He wasn't being frugal to be frugal, he was being frugal to maximize the
amount he could invest TODAY and earn TOMORROW.

~~~
csomar
In my opinion, this kind of frugality happen when you have a small (or non-
existant) social circle. The main reason to spend (clothes, cars, etc..) is to
impress the people around you. If they don't exist, you are not that much
pressured to spend.

~~~
noir_lord
This describes me though I have a reasonable social circle I pretty much don't
care about any of the things on your list.

I rent a flat (apartment), I only own jeans, t-shirts and pullovers, don't own
a car, own second hand (but good) furniture.

I'm trying to remember the last time I spent over £50 on anything that wasn't
a gift for someone else and I really can't, perhaps my weight set about 18mths
ago.

I'm just not attracted to stuff or to signalling via it.

Social pressure is often largely self-inflicted.

------
csomar
Is it (-)safe to say that Sarao was a randomly lucky trader rather than a
genius?

-By safe, I mean probabilistically possible in a sample of _x_ traders.

~~~
rwmurrayVT
No. He was spoofing orders. You too can have success if you follow his method.
It's been claimed there are rooms full of people in Asia who do nothing but
make/cancel orders.

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elastic_church
Just stick with bonds for wealth preservation. Keep your target yield around
5.5% and you'll be okay, even with a bit of leverage.

~~~
h4nkoslo
Given current interest rates, even a long-term bond at 5.5% will have
significant default risk priced in. Vanguard's non-junk long-term corporate
bond ETF presently yields ~4.4%.
[https://personal.vanguard.com/us/funds/snapshot?FundId=3147&...](https://personal.vanguard.com/us/funds/snapshot?FundId=3147&FundIntExt=INT)

~~~
elastic_church
yep which is why their junk ones yield ~5.5

just change the weights closer to lower B's and some C

or sprinkle a little leverage on Vanguard's non-junk fund for the same yield

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VT_Drew
Article was sort of interesting, but I think it glossed over the most
interesting part.

>long before he enlisted a programmer to build a system that authorities say
was designed to cheat the market.

What exactly was the system doing to "cheat the market"?

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Shalhoub
Yes I have read the article, but I'm still confused as to the who and the how
of his $50 million fortune vanishing. Could someone please put the salient
details into a single paragraph.

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u_wot_m8
HFTs do this all day long. Every flash crash is due to HFTs pulling out of the
market when and liquidity vanishing. Nav's problem is that he didn't buy any
politicians

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voiceclonr
Still have hard time believing he's going to be in jail for life. Also hard
time to believe he was doing what HFTs don't do already.

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soniman
It sounds more like this guy was a front for somebody else, and all of these
shell companies are hiding whoever it is that's behind this.

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walrus01
It's like the traditional model of the universe and solar system with the
world balanced on the back of a giant turtle, which is standing on several
more turtles, and other turtles underneath that, all the way down to the base
of the universe.

Except that it's scams and assholes all the way down.

