June 24, 2015 at 13:00Flash Crash 2010: $ trillion prime suspect
- Transfer
Navinder Singh Sarao may be extradited to the U.S. based on allegations that he helped organize an instant Wall Street crash in 2010. But is he really guilty? The New York Stock Exchange on the day of the collapse of the US stock market, May 6, 2010. Photo: Timothy Clary / AFP / GettyImages
In fact, was it worth it to worry about? Judging by the name, "instant collapse" [Eng. flash crash
], which occurred on May 6, 2010 in the US stock market, did not last so long. A one-trillion-dollar decline in the value of securities was temporary. The calm market situation - along with the familiar stock price - resumed in less than half an hour. Most investors — millions of people with long-term savings invested in American companies — have not lost a dime. Most did not notice the rapid collapse of the market: everyone was busy with their own affairs.
Unfortunately, for an instant collapse, you can’t just close your eyes. The reason for this importance and the peculiarity of the role in the incident, Navinder Singh Sarao - nicknamed “Dog from Hounslow”, like the protagonist of the film 2013 “The Wolf of Wall Street” - are the potential danger of the current situation.
If, as the US authorities suggest, one trader, working from home in Hounslow, was able to bring down 6% of the largest stock market, is the whole system based on honesty? And what harm can traders with even more financial resources do?
The words “potential danger” were uttered by Andrew Haldane, a leading economist at the Bank of England, in his famous 2011 speech when regulators were unable (as now) to understand what happened.
Heldein’s speech was entitled “race to zero” - a reference to the incredible speed of trading that has become possible in the current financial market environment thanks to unlimited computing power. He talked about the “arms race” between high-frequency (HFT) firms, carrying out transactions faster and faster. “Today, the minimum execution time for a transaction is about 10 microseconds,” he said (and that was four years ago). - This means that, in principle, approximately 40,000 pair transactions can be closed in an instant. If HFT programs were used in supermarkets, an ordinary family could buy 100 years ahead in a second. Just imagine".
What gives an advantage in speed? In fact, many trading strategies take advantage of this. Using a small and temporary price difference, say, in stock prices in New York and Chicago can bring good profit. But your computer program must get ahead of another player’s program by a whole microsecond.
High-frequency trading, perhaps, sounds like a rare entertainment that causes widespread disapproval, but this is not so at all. According to statistics, at this time, HFT trading occupies three quarters of all trade that is conducted on the US stock markets, and regulatory authorities did not even try to hinder its growth. More transactions in more places, in their opinion, lead to more activity in the market, which in turn leads to lower prices, and everyone benefits from this.
So what does Sarao have to do with it? According to the prosecution, he illegally “manipulated” constantly changing markets, trying to “trick” computers of other investors and get profit from it. He traded E-mini contacts, whose prices vary depending on the S & P500 index, on the Chicago Mercantile Exchange, the largest US futures market.
The US Department of Justice believes that he used the so-called “layering” strategy. layering]: for example, he placed a number of sell orders, which he intended to cancel, which created the illusion of pressure in the market to decrease. And when other computers reacted to apparent pressure, he could earn by buying stocks at a low price and then selling them after price stabilization. And all this happened faster than you had time to blink.
On the day of the instant market collapse, the US Department of Justice announced that Sarao “intensively and on a large scale” used the “layering” strategy and earned $ 879,018 in net profit for that day alone. In general, over 5 years, according to the Ministry of Justice, Sarah fraudulently received $ 40 million.
We will have to wait to find out how the prosecution will prove his guilt if the case still comes to court. However, many believe that Sarao’s involvement in the collapse of markets seems implausible. Firstly, Sarao has repeatedly launched its algorithm since June 2009, and then the market did not collapse. Secondly, he turned off his computer two minutes before the market crash began. Thirdly, if he is only “involved” in the instant collapse, is it worth it to charge the rest? Why is Sarao blamed for everything?
And one more thing is strange. The Chicago Futures Exchange asked Sarao about his dubious trading activity even before the instant collapse. Moreover, on that very day they wrote to him as if "they expect orders to be placed legally with the aim of conducting legitimate transactions." If the authorities knew what he was doing, why did they allow him to trade after May 2010 and waited almost five more years before demanding his extradition?
According to one version, Sarah - regardless of how legal his methods are - should be declared a hero. Bronte Capital hedge fund manager John Hempton considers traditional HFT companies to be in fact criminals, as their goal is to “pick up” regular investors, “outstripping” their orders: they use computers to identify trends in markets and place orders before the rest.
Computers trying to outwit other computers is a picture unusual for the traditional perception of stock markets as places where informed buyers meet with informed sellers and where companies can go to get financing.
Of course, the same thing is happening now. But the main question that arose after the collapse of the markets is what danger do all of us face with the advent of new “high-speed” technologies? Heldane dealt with this problem in 2011. He concluded that it might be necessary to introduce new rules, and "sticks in wheels can prevent another disaster."
], which occurred on May 6, 2010 in the US stock market, did not last so long. A one-trillion-dollar decline in the value of securities was temporary. The calm market situation - along with the familiar stock price - resumed in less than half an hour. Most investors — millions of people with long-term savings invested in American companies — have not lost a dime. Most did not notice the rapid collapse of the market: everyone was busy with their own affairs.
Unfortunately, for an instant collapse, you can’t just close your eyes. The reason for this importance and the peculiarity of the role in the incident, Navinder Singh Sarao - nicknamed “Dog from Hounslow”, like the protagonist of the film 2013 “The Wolf of Wall Street” - are the potential danger of the current situation.
If, as the US authorities suggest, one trader, working from home in Hounslow, was able to bring down 6% of the largest stock market, is the whole system based on honesty? And what harm can traders with even more financial resources do?
The words “potential danger” were uttered by Andrew Haldane, a leading economist at the Bank of England, in his famous 2011 speech when regulators were unable (as now) to understand what happened.
“He [the collapse of the market] taught us something very important, albeit unpleasant, about our knowledge of modern financial markets,” Heldane said. “It’s not that they were erroneous, but the inaccuracies that exist can increase and lead to systemic failures ... Market collapses, like car crashes, turn out to be more serious the higher the speed.”
Heldein’s speech was entitled “race to zero” - a reference to the incredible speed of trading that has become possible in the current financial market environment thanks to unlimited computing power. He talked about the “arms race” between high-frequency (HFT) firms, carrying out transactions faster and faster. “Today, the minimum execution time for a transaction is about 10 microseconds,” he said (and that was four years ago). - This means that, in principle, approximately 40,000 pair transactions can be closed in an instant. If HFT programs were used in supermarkets, an ordinary family could buy 100 years ahead in a second. Just imagine".
What gives an advantage in speed? In fact, many trading strategies take advantage of this. Using a small and temporary price difference, say, in stock prices in New York and Chicago can bring good profit. But your computer program must get ahead of another player’s program by a whole microsecond.
High-frequency trading, perhaps, sounds like a rare entertainment that causes widespread disapproval, but this is not so at all. According to statistics, at this time, HFT trading occupies three quarters of all trade that is conducted on the US stock markets, and regulatory authorities did not even try to hinder its growth. More transactions in more places, in their opinion, lead to more activity in the market, which in turn leads to lower prices, and everyone benefits from this.
So what does Sarao have to do with it? According to the prosecution, he illegally “manipulated” constantly changing markets, trying to “trick” computers of other investors and get profit from it. He traded E-mini contacts, whose prices vary depending on the S & P500 index, on the Chicago Mercantile Exchange, the largest US futures market.
The US Department of Justice believes that he used the so-called “layering” strategy. layering]: for example, he placed a number of sell orders, which he intended to cancel, which created the illusion of pressure in the market to decrease. And when other computers reacted to apparent pressure, he could earn by buying stocks at a low price and then selling them after price stabilization. And all this happened faster than you had time to blink.
On the day of the instant market collapse, the US Department of Justice announced that Sarao “intensively and on a large scale” used the “layering” strategy and earned $ 879,018 in net profit for that day alone. In general, over 5 years, according to the Ministry of Justice, Sarah fraudulently received $ 40 million.
We will have to wait to find out how the prosecution will prove his guilt if the case still comes to court. However, many believe that Sarao’s involvement in the collapse of markets seems implausible. Firstly, Sarao has repeatedly launched its algorithm since June 2009, and then the market did not collapse. Secondly, he turned off his computer two minutes before the market crash began. Thirdly, if he is only “involved” in the instant collapse, is it worth it to charge the rest? Why is Sarao blamed for everything?
And one more thing is strange. The Chicago Futures Exchange asked Sarao about his dubious trading activity even before the instant collapse. Moreover, on that very day they wrote to him as if "they expect orders to be placed legally with the aim of conducting legitimate transactions." If the authorities knew what he was doing, why did they allow him to trade after May 2010 and waited almost five more years before demanding his extradition?
According to one version, Sarah - regardless of how legal his methods are - should be declared a hero. Bronte Capital hedge fund manager John Hempton considers traditional HFT companies to be in fact criminals, as their goal is to “pick up” regular investors, “outstripping” their orders: they use computers to identify trends in markets and place orders before the rest.
"I would prefer that the" leading "computers do not bid," says Hampton. “And that will be possible if spoofing is allowed .” spoofing - setting limit orders that will be removed before they are executed - approx. transl .]. It makes the work of high-frequency traders more risky. " Hampton calls the US Department of Justice case “just ridiculous.”
Computers trying to outwit other computers is a picture unusual for the traditional perception of stock markets as places where informed buyers meet with informed sellers and where companies can go to get financing.
Of course, the same thing is happening now. But the main question that arose after the collapse of the markets is what danger do all of us face with the advent of new “high-speed” technologies? Heldane dealt with this problem in 2011. He concluded that it might be necessary to introduce new rules, and "sticks in wheels can prevent another disaster."
Related links:
- How a 27-year-old man earned several million in "financing the death spiral" of penniless shares
- Wolves Hunters from Wall Street (translation loop)
- How I Earn $ 500K in Machine Learning and High Frequency Trading
- Frantic bulls: how Wall Street got addicted to high-speed trading (material cycle)
- Analytical articles and videos on Russian and foreign stock markets from ITinvest