Matt Levine, Bloomberg, Guy Trading at Home Caused the Flash Crash, here.
Emphasis added because come on: The futures exchange wrote to Sarao on the day of the flash crash, telling him to stop spoofing, and he called them back “and told em to kiss my ass.” And then regulators pondered that reply for five years before deciding that they’d prefer to have him arrested in London and extradited to face criminal spoofing charges. One conclusion here might be that rudeness to regulators really works.
Julia La Roche, BI, TRADERS: The ‘Flash Crash’ arrest is a joke, here.
Here’s how futures traders reacted (emphasis added):
“Well what he did is a problem for CME, which they are cleaning up. They have been cracking down over past 6 months hard. He was not the cause of the flash crash. That is a joke,” one New York-based trader said. (The problem the trader is referring to is “spoofing.”)
“[Spoofing] is a separate issue, but spoofing doesn’t happen risk free,” another trader said. “If someone is in the market spoofing it they are taking the chance that a real buyer can lift their contracts and all of the sudden they are seriously short or long a position they never wanted to be in … which is why the market is normally a better liberator of these things than regulators. If I’m a big fund and see someone doing this, I may try and wait for the right time and then buy 5,000 contracts when I see them doing this if I know I need to buy a lot more and squeeze him as a short. That’s far more painful to him than a one time fine.”
A New York-based quant trader said that regulators absolutely should be tracking spoofing. However, the trader thinks regulators needed someone to blame this time. “My gut says he is basically being made a target because they need someone to blame for the ‘Flash Crash.’ The trader thinks that this “case smells of political PR” and that “someone somewhere is really working hard on their career.”
The quant also pointed out that the complaint said Sarao had been using the trading algo before the “Flash Crash” and in the years after. If he was the cause of the crash, why did we only have one crash in that period?
One Midwest-based trader said it was “impossible to have been caused by one trader or even exaggerated.” He added, “It’s insanely entertaining to think an individual or an entity caused that day.”
The trader explained that there were “far too many other markets losing liquidity just as fast and in fact FASTER that it’s LUDICROUS to think one individual in just the EMINI caused it. Insanely [reckless] in fact.”
“To blame them, to blame them for the ‘Flash Crash’ is absolutely ridiculous. It’s beyond ridiculous,” one trader said. “If anything, OK someone is trying to game the market here. It’s f—— stupid.”
Matt Levine, Bloomberg, Why is spoofing bad? here. Just have the CME create a pool all the market participants make mandatory contributions to – like a Swear Jar. CME randomly uses the funds in the Swear Jar to fill a chunk of orders off mid and then flattens out over the next 100 milliseconds in the cash markets in Jersey.
On the other hand, if you are a big fundamental investor looking to buy a lot of stock, you probably don’t want a fair price. If you’re a hedge fund manager who has spent months researching a company and come to the conclusion that its stock is undervalued, and you decide to buy 10 million shares, and you put in an order for 10 million shares at the current price, you will be sad if the price jumps up instantly. The whole point of all your research was to identify unfairly priced stocks; if high-frequency traders can just free-ride on your work by reacting to your order, then that feels like cheating. It feels like “front-running,” actually, which is how you’d probably describe it.
The other day I said that “Norway’s sovereign wealth fund wishes it could trade giant blocks of stock without impacting the price, which many large asset managers consider to be a fundamental human right.” For a big fundamental investor, trading without moving prices is the goal of market structure, so anything that makes prices react more quickly to order information is bad.