It's crazy that this kind of thing is tolerated in financial markets. It should be criminal to manipulate markets like this.
Time and again I'm convinced that it is extremely difficult to succeed as a retail trader. The odds of you succeeding given false signals like this are just depressingly low. And this is just one instance where the prosecution was able to prove wrongdoing.
You shouldn't need any convincing. The only way any trader (retail or otherwise) can consistently achieve above market risk-adjusted returns is by exploiting an information asymmetry. Essentially you would have to do your own proprietary research to find information that other traders don't have.
The vast majority of retail traders who have better returns than an index fund are just lucky, not skilled. Sometimes you can flip a coin ten times and come up heads every time.
which is absurdly high of a percentage to have people think they are skilled when they are lucky.
if there are 10 million robinhood "traders" doing their tenth big trade today, then 9,765 of them could make a fortune by luck and think they are geniuses.
Retail traders are simply not affected by things like this. It's the HFT/market making firms that would be most damaged.
The reason why retail traders rarely succeed is because the ones that are good move to the institutional level (as it is almost impossible to support yourself by trading alone). The bad ones invariably trade down their portfolio until they are forced to get a real job.
This isn't to say that you shouldn't retail trade, but rather, don't rely on it as your sole source of income (unless you have at least 2mm-5mm dollars to trade with).
> Retail traders are simply not affected by things like this. It's the HFT/market making firms that would be most damaged.
I won't believe this without a citation to an academic study. This affects the underlying price of raw materials, which has a direct impact on the stock price of companies using those materials. The stock price of many of those companies has a direct impact on people's retirement and the solubility of pension funds, among other things.
Indirectly it has a small effect, and the biggest effect is on short term speculators. This becomes clear if you dig into the specifics of this particular spoofing operation
If orders are spoofed during the start of day or end of day auctions or during other specific times when indexes are calculated then this impacts the settlement prices which has a knock on impact to other features of the market. It’s like the LIBOR rigging and the FX manipulation.
it is criminal. if you did it, you would be thrown in a cell for 30 years for wire fraud. remember that in america, the rules are different for corporations as there is plausible deniability for the board... as such, only fines are ever enforced which are taken into consideration when making such moves. jpmorgon might have to pay a 1B fine, but they might have made more than 5B in the transaction.
"The accord would end probes by the Justice Department, the Commodity Futures Trading Commission and the Securities and Exchange Commission into whether traders on JPMorgan’s precious metals and treasuries desks rigged markets, two of the people said."
So $1B paid will stop further investigations? Meaning it can continue to manipulate and the fee is just the cost of doing business?
that's what they are claiming. i'm sure they are not reporting everything they made. companies who do these sorts of manipulations know what they are doing and hide as much as they can.
But where's the law and order? Do the executives and traders get tackled, beaten, strangled and shot a dozen times in the back? Nope. Their employer gets fined and they keep their paychecks and bonuses.
Did you read the bit in the article where the former head trader of the precious metals desk is being prosecuted for RICO violations? Along with several other traders from the desk?
The guy involved has left JPM, most of his team will have left too, they will have bonus payments clawed back, they will be banned from the industry, and are being charged criminally. Afaik, two people from this team are currently in prison.
The shareholders are part of the bad actor, because the shareholders control the board, and it's the board's job to police the company, and to make sure that it's actually ran well, and isn't just a free-for-all frat party.
If the shareholders cared to avoid these sorts of judgements, they'd require that the firm operate more conservatively.
JPM probably made a lot more than that fine. First week orientation in my friend's MBA program before classes started was a session about ethics. He thought it would be about being ethical, but the professor said as businesses for any risky decision they should weigh potential profit versus penalty/punishment, because if it makes financial sense to pursue something, even an unethical endeavor, any penalties/fines are justified.
I don't know, I usually do pretty well as a retail trader. I do it on the side and stick to areas I know well, like tech. I usually make 10-15% of my total yearly income trading medium term. But that being said, stuff like this stacks the deck in the favor of big players. My personal frustration is activist investors/large short sellers who make a large short and then come up with a erroneous article to drop the stock and reap the benefits(Andrew Left - "Citron research") comes to mind.
Isn’t this evidence that it isn’t tolerated? The bank is paying a billion dollars and three of the traders involved, including the executive, are facing criminal fraud charges in a RICO case.
Maybe I'm misunderstanding the case here, but why is spoofing orders a crime? If the answer is: because algorithmic trading computers get screwed up and try to front run and buy the asset when they think there are buyers - I just can't feel sympathetic. Who exactly is the victim here?
Spoofing distorts the market by making it appear that there is much more liquidity and demand or supply. Distorted markets are, theoretically, bad for various reasons. Commodities markets are underpinned by the idea of real price discovery happening: supply meeting demand at an agreeable price. Fake supply or demand undercuts this goal.
Algorithmic traders just happen to be the ones taken advantage of here because they move fastest. If there were no algorithmic traders and everything was done manually the distortion in the market would still exist. An imperfect analogy: imagine you go out to the gas station to buy gas and see that there is a line of cars at the gas station charging $2.00/gal but there is no line of cars at the gas station charging $2.01/gal. You go to the $2.01/gal gas station, because you see that there's huge demand and you need gas now. As you drive back, you pass all of the $2.00/gal cars and realize they are all empty. You've been cheated by spoofing.
Whether this is paternalistic or not is up for debate.
>Spoofing distorts the market by making it appear that there is much more liquidity and demand or supply. Distorted markets are, theoretically, bad for various reasons. Commodities markets are underpinned by the idea of real price discovery happening: supply meeting demand at an agreeable price. Fake supply or demand undercuts this goal.
Does this logic apply to non-financial field? If someone (person X) creates a fake demand for a SaaS service Y and company Z builds service Y, should X pay money because Z decided to build Y, without a written contract between X and Z?
I don't think that line of thinking will get you very far. You can pick up the ball and run with it in American football but not soccer. You can insider trade in US commodity markets but not US equity markets. Spoofing is illegal in US equity markets because that was the result of the rule-making process. I'd argue that banning spoofing is a good rule for equity markets, but it's not necessarily a good rule in other contexts.
That is exactly my point, see parent comment - "Spoofing distorts the market by making it appear that there is much more liquidity and demand or supply. Distorted markets are, theoretically, bad for various reasons." banning spoofing in different markets/fields isn't necessarily a good thing.
This will vary between jurisdictions but my understanding is that, yes, you can be sued for making a false promise to buy from a specific seller even if you don't get to the stage of a formal contract.
Putting out a press release, or RFP, saying 'we want to buy X quantity of Y' without the intent to follow up isn't illegal. However, getting to the point of a handshake agreement with a specific vendor but then backing out means that you will be expected to pay compensation even though no formal contract was signed.
>"This will vary between jurisdictions but my understanding is that, yes, you can be sued for making a false promise to buy from a specific seller even if you don't get to the stage of a formal contract."
Absolutely but simply stating interest or saying "We want to buy X quantity of Y", without having any agreement with a company or stating company name isn't agreeing to purchase nor should be seen (except certain situations) as bad
I follow a bit the Magic the Gathering trading market (but stay away from it myself): being unregulated spoofing, market manipulation and insider trading are rampant and blatant. Also it is not a very efficient market, so the effects linger for a long time affecting people that just want to buy the cards to play.
I unfortunately do not know much about the Magic the Gathering but from I read online you collect cards and they vary in terms of power. Is it in some ways similar to Hearthstone?
If yoy want to buy the cards to play, are you affected by the unregulated spoofing, market manipulation? Are you allowed to print your own?
It is similar (well, except that it precedes Hearthstone by a decade or two). Also Hearthstone is digital only, while Magic is played both in paper and on a couple of digital platforms.
There is a thriving second hand market (both paper and digital) with prices going from a few cents (or less) for bulk commons to ten of thousands for first edition power 9. The cheapest (but still very expensive) way to play the game is to buy the cards you need on the market instead of opening up packs and hoping to find what you need.
Speculators are known to buy up less liquid (printing of) cards to simulate demand, then unload them when the price is up. Not all (or even most) price spikes are due to speculators of course.
Also there are often spikes of certain older cards before new sets are released which happen to contain new cards that work well these old cards, suggesting that insiders of Wizard of the Coast or retailers are leaking and/or trading on non public information.
You can't print your own cards to participate in sanctioned tournaments, but of course, when playing with friends you can do whatever your playgroup allows.
> Also there are often spikes of certain older cards before new sets are released which happen to contain new cards that work well these old cards, suggesting that insiders of Wizard of the Coast or retailers are leaking and/or trading on non public information.
This obviously sucks
> You can't print your own cards to participate in sanctioned tournaments, but of course, when playing with friends you can do whatever your playgroup allows.
If you are a casual player, planning to play with friends only, are you actually hurt in any way by the speculators?
These days, the most common casual format is Commander. While it is often the case that you just build with what you have, casuals playing commander are a significant driver of the price of cards (for old cards, often even more than competitive play).
At the end of the day Magic is also about collecting, and even if your playgroup allows playing with proxies, I would say that most players do at least desire to actually own the cards they play with; in fact many players are willing to even pay (often significant) extras for specific editions (foils for example) of cards for their pet deck.
Would not requiring every order to have validity duration attached (and not cancelable) be a better solution, than creating legal limitations, that can not be automated?
There are plenty of times when someone puts in an order with every intent to enter the position (i.e. - not to spoof) where something makes them change their mind and kill their order. Why would we punish the sincere actor who changes their mind rather than go directly after the fraudster? "Better to let 10 guilty go free" and all.
Why is it punishing? It is just a rule, and you'd know in advance you have to abide by it when placing your order. If you think it is risky, do not place your order in the first place.
It reduces liquidity in the market. If I can enter an order in a market and cancel it when I want then I can enter it at my fair value. If I know that once I enter the order I must wait 5 minutes before cancelling then I need to consider how far the market can move against me in those 5 minutes and adjust my price to account for that risk. So I would have to put in an order for a considerably worse price. This means that anyone who wants to trade against me has to pay the premium. I would also likely put in a smaller order to limit my risk exposure. This results in a wider market that is less liquid, meaning the people who want to trade in this market will be paying a higher premium for their trades.
> how far the market can move against me in those 5 minutes and adjust my price to account for that risk. So I would have to put in an order for a considerably worse price
I lost you here probably due to my unfamiliarity with some financial instruments. I am only aware of two types of an order: market and limit. The first one is unaffected for obvious reason.
In case of a limit order, let's say you are trying to sell. You think fair price is X, while currently market only offers (X-a). So you put limit sell order at X. What do you mean in this situation by "market moves against me"? The price goes further down? If that is the correct interpretation, when putting your order you actually have to reduce the limit price in order to increase the chances of your order to succeed, thereby increasing liquidity.
It only succeeds at manipulation, for the most part, because of assumptions created by the prohibition that the apparent liquidity is genuine liquidity. I trade crypto on unregulated exchanges where spoofing is such a familiar phenomenon that traders and their algorithms assign little or no meaning to it, and it has no observable effect. The prohibition is what makes it work.
But the point of the commodities market is, at its core, for hedging, not speculation. The point of the crypto market is, at its core, speculation. Many will disagree with this assertion, but it's true.
You grow wheat. You want to make sure that you can get $X for your wheat in 6 months and you are willing to risk the upside of a wheat shortage for protection against the downside of a wheat glut. Your counterparty makes bread. They're willing to lock in a price of $X now for wheat delivered in 6 months at the inverse cost of your reasoning. You've both hedged. The world is better because I can buy bread made from wheat in 6 months at a reasonable price. Traders and Wall Street came along and perverted this, but it is still a primary purpose of the market at its bedrock. If the bakers and the farmers disappear, there is no wheat market for the traders to pervert. It is the foundational hedger that the prohibition protects.
Compare: you trade crypto. You want to sell your crypto for dollars. Later, you want to buy your crypto for dollars. When the hell does anyone else care about your crypto? Why would we care about the integrity of price discovery in the crypto market when it has (or should have) no impact on the real world outside of your economic gains/losses? If we don't care about price discovery and its integrity, we have no need for the prohibition.
I think the commodities market is by far used for speculation. Same with options, supposed to be an insurance policy for portfolios, it's now a vehicle for speculation. Thinking that at its core it's for hedging is a very naive position. All you have to do is look at the volume of transactions and you'll realize that most activity is purely speculative.
You are correct. This was semi-frequent before 2008 but the spoofers were often individuals, and the exchange operators usually tolerated them because they did so much volume (Paul Rotter being the most famous).
After 2008, the big algo traders got involved and spoofing was a huge issue because algos are often based on market depth. And the law was changed overnight (and the heavy-handed way that the federal govt came down on individuals, often at the request of algo traders, is unusual).
Just generally: "spoofing" was always seen as unethical but it rarely mattered before 2008 because humans learned fairly quickly that when someone piled in orders around the price, it wasn't necessarily real. Equally, what we have also seen is that certain order types that were being used to conceal intention from algos (concealing your intention is a fundamental part of how markets operate) were also being lumped in with "spoofing".
On JPM specifically, everyone knew they were spoofing for decades before this. I am not aware of an IB that did spoofing like JPM, and the reason why is that they did a ton of volume in these markets and used spoofing to control the price.
It's similar to questioning the morality of a scam artist who hires his friends to pretend to bid on something in front of the victim to influence them or drive up the price.
It's worth pointing out that this holds true for the inverse scenario: dark pools (trading between large firms off-exchange) are legal. The metaphor would be an artist selling only to his friends, and not putting every piece for sale for everyone.
It's illegal because the exchanges are the victims. If this was being done to retail traders there would be no crime. The message here is that it's illegal to mess with the algos but not illegal for algos to mess with your order.
Wow - Don't mess with the high frequency traders! There must be some big money behind these types of enforcement actions! What's crazy is the algos try to push around the price themselves but I suppose it is legal because it is a computer? Remember flash orders? Quote stuffing to generate delays for arbitrage?
To be clear the biggest losers from spoofing are HFTs and other market makers. This action is not to directly protect retail traders or normal 401k investments. By protecting the HFTs and MMs they make the market more liquid for everyone, which is good for big investors but still not important for retail traders.
The sick thing about these kind of scams is how much top-tier human talent has been sucked up by the financial sector, essentially to find ways to scam people legally (or at least without getting caught).
It doesn't say much for society's conception of value that there's more money to be made through finding ways to squeeze more revenue out of socially useless financial transactions rather than by solving real problems.
But we don't know if that is true. The old societies that didn't have those financial transactions were objectively pretty terrible and not the sort of place any of us would choose to live. We're using the same people as back then the only changes are systems and research. Writing off the major control system is hasty!
It isn't always good, but having the smartest people choosing what does/doesn't get financed and what amount of effort to dedicate is, fundamentally, extremely socially valuable. Notwithstanding that this particular case which is a scam in anyone's books.
Yes, the early 90s, back before HFT, was an objectively terrible time. I shudder to think of having to live through them again. Imaging having to pay $5 for a stock trade instead of $0. Life changing.
Are your gadgets what make your life good? Seems bizarre to me. I kind of liked the days before mobile phones when you would arrange to meet someone and they would turn up on time.
Stock trades still cost $10-15 in most of the world. It onyl affects HFT below a certain threshold. That is, only trades of substantial gain or volume make sense to operate on.
The overwhelming majority of talent in financial services is working to serve paying customers and to trade legitimately and legally on financial markets.
There are occasional scams like this in financial services, just as there are occasional scams in any industry. To uniquely demonize financial services as a result is not fair.
It was not my intention to malign the huge numbers of rank-and-file FIRE-sector people, like customer service agents across the entire sector, who are just working to put food on their own tables.
I'm thinking more of things like hedge funds, HFT outfits, and the groups that devised synthetic mortgage-backed securities, that put ivy league-level talent towards socially useless and/or economically dangerous activities.
We'd all be better off if the people with the quantitative and social skills to be effective in these spaces put their talents towards things like carbon capture or battery R&D rather than e.g. finding ways to con people into pouring money into hedge funds that under-perform the markets.
I don't agree that these are socially useless activities. They need to be done and therefore should be done at scale with the efficiency of automation and the leverage of capital behind it.
The alternate reality you imagine, with no hedge funds etc, can not exist. The only alternative reality that can plausibly exist is a significantly more inefficient investing and trading sector that sucks more talent from the economy than it currently does.
Their business model is to draw in investors who are willing to pay extremely high fees in exchange for the hope of beating the market. In practice, hedge funds underperform the market, so their investors are paying fees for nothing. The only winners are the hedge fund managers. Enriching people for providing negative value to their customers isn't socially useful.
Along similar lines, the crowning achievement of the synthetic asset quants was the creation of a mountain of toxic three-card-monte mortgage debt that exploded in 2008, bringing down the global financial system, crashing the world economy, impoverishing hundreds of millions of people, and creating the political environment that lead to both Trump and Brexit. Blowing up the world certainly isn't socially useful.
I don't see any downside to reducing the FIRE sector's share of GDP back to what it was in 1960. The economy worked for the median person then; it doesn't work for the median person now, and the amount of wealth the FIRE sector sucks out of the economy to pay for these kinds of games has a great deal to do with that.
Hedge funds underperform the index because hedge funds exist.
I'm going to circle back to what I originally said. The alternative reality of zero hedge funds is not a reality that can possibly exist. The reason it can't exist is because the lack of hedge funds will create edge in the market, which will incentivize the creation of hedge funds (or other trading companies). So, given that zero hedge funds is not possible, then what is the best thing for society? The answer is that we want the best and most efficient hedge funds to extract all available edge with the minimum possible resource input. Once this happens, we achieve perfect competition and new talent no longer had an incentive to perform this activity and can go and do more useful things for society. This is the value add of hedge funds in our society. If we have one good hedge fund that extracts all edge, then the thousands of other would-be investors and traders can now go off and be scientists or engineers.
It is an unfortunate aspect of capitalism. Making investments is much easier than making actual things, so more people do it. Lucky there is a counter ballance in the system . If 100% of the population started investing only, the one person to start building would get all the investment. You can see it now with TSLA and NKLA. All these "professional investors" realized that sustainable transportation is a real thing and it is our future. At the end of the day Elon could be far richer than any investors.
Yes, you're right. The point is that there are too many "professional investors" out there and they are chasing fake companies like NKLA as well as real companies like TSLA. But at the end of the day the person with the money is the person that actually makes real things. Not NKLA and not the investors.
It’s not only that making investments is easier. Look at my position in the market, I can work in a hedge fund building out their trading platform and earn a minimum of 2-3x what I would earn doing a similar job at an engineering company. Now you would expect that to be the reverse - there is a flood of investors and relatively few people actually making things, so an engineer could be making a premium by making things. That is absolutely not the case though.
> Making investments is much easier than making actual things, so more people do it
A talented person will make as much money or perhaps more money in software engineering than financial services. Most people in financial services make very little money, 60k-150k being a common range.
Why aren't there any jail terms in this case? I am 100% sure they are fined much less than the profit they made on it. Unless people are jailed, let me be precise here, unless the CEO is jailed for knowingly leading the scam it will not stop. There is no incentive for them to do financial fraud as long as they are just fined.
They definitely did not. Spoofing orders isn't going to let you post 1bn. Instead, it will only slightly/moderately improve the alpha of your existing trading operations.
IANAL, but I would think that it would be your (as the person deploying and maintaining this algorithm) responsibility to make sure this algorithm doesn't do anything illegal or disingenuous, either by putting safeguards into it or by constantly tracking it to make sure it doesn't do something bad.
I understand that... But as stated, the orders themselves are not illegal. It all hinges on intent of "your strategy to dupe other traders", but I fail to see how the algorithm creator would understand a black-box strategy developed by the algorithm. Eg let's say they algo was some form of reinforcement learning; it's not clear to me that you could even represent the policy space in a human-interperable way. All you have is inputs & outputs -- the AI has no "intent" beyond it's objective function -- say expectation maximization or risk minimization.
I assume this market is global, do other countries and companies felt the effects as well. Why do other country’s justice departments not fine them as well?
> The total fine includes a penalty of $437 million, restitution of $311 million and disgorgement of $172 million, the CFTC said. Disgorgement is the requirement to pay back profits that were illegally earned.
It appears that they made less than $200M in profit (spoofing is usually a relatively low margin trade).
Time and again I'm convinced that it is extremely difficult to succeed as a retail trader. The odds of you succeeding given false signals like this are just depressingly low. And this is just one instance where the prosecution was able to prove wrongdoing.