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."
It seems to me the guy is a scapegoat. What he did is likely illegal market manipulation (placing orders and canceling them before they are executed to give a false impression of a price / volume / something else); I am not defending that; but 300+ years?
I really doubt though that the amount he presumably won (much less than $50M) can be responsible for a significant financial event such as a flash crash at a world's major stock exchange. I suspect high frequency traders regularly affect markets in a much more significant ways (e.g., I think generating large volume via zero-sum trades than withdrawing from trading could cause significant pricing swings).
I agree with you on this. I work in finance, and one of the many hats I wear at a small shop is regulatory analyst (basically, I run/create the specialized reports when FINRA, SEC, etc come knocking). +300 years seems excessive, but the financial penalties seem apt: forfeit your ill-gotten gains plus a topper.
An aside: I've always found sentences such as 300 years to be absurd (unless they run concurrent). Why not just call it life and be done with it? Or, is the judge trying to make a statement like the judge in Texas that recently set bail at $4 billion for an accused murder (who turned his self in)?
> 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.
Maybe neither? As good as this kid might be, hard to believe he did a 30x year! Even with more risk and there was some crazy volaility back then, a 30x year going from half a million pounds to 15 million in 12 months is very high.
Never know of course. He might have done it. theoretically possible with the exotics CDS in that year. But also hard to trust journalists aren't just twisting facts these days.
Another explanation for the rise: He already had several million while working at the firm, but they weren't in his name, not in a public filing anyway until went out on his own and took out the funds.
A 30x return is easy - rare, but easy. Repeating it, however, is damn near impossible.
Options trading, which he was good at, went haywire on that day. Anybody in a decent position with options made crazy returns. But their timing had to be good. If you bought a short-dated, just out of the money SPY put the day before, and sold it that afternoon, you made a killing as far as percentage return.
The number of people who had that or similar trade probably numbers in the thousands. But the reason you don't hear about them is it was either to hedge a larger position, or a small speculative position, and making $50,000 doesn't make headlines.
I agree with this. I made a 32x return on a front-month WAY out of the money options trade in March of 2008. I tried to pull it off again and lost all of it. Good tuition money.
I always wonder why to invest it all... at the very least, if I gained 10x or 32x, I'd save away the original amount or a small fraction of the total, and NOT gamble with that.
There is substantial research that suggests taking a moderate asset allocation combined with annual rebalancing will have a fairly predictable return over the long run (a decade or more).
If you're making trades frequently, you're probably (as shown by research) throwing that money away.
There are always things that go up, and others that go down, but a well constructed portfolio will do more of the former and less of the latter. Annual rebalancing then buys the cheaper asset (by definition, on a relative basis, the cheaper asset is bought and the expensive asset sold when rebalancing).
And yes, it is actually that simple. The problem is (as someone else on this thread had posted): fear and greed. If you can ignore that, you can do well.
Firstly: this is just overall a ridiculously incorrect comment.
Second: the 30x return discussed was back in 2008-2009. The flash crash you are talking about happened in 2010. Also the SPY moved down like -10% during the crash. Bro, come on.
I just want to jump in and comment that 30x gains in a year are not really that crazy with out of the money close to expiration options. I've had 2 different years in the past with better than 30x gains (and years where my options account went to 0).
If you had bought out of the money puts with a near term expiration for an index like SPY and it dropped 10%, you could be talking 80-1000 times return depending on how far out of the money and how close to expiration.
Disclaimer: I do not recommend out of the money options trading for anything other than pure gambling on money you couldn't care less about losing.
Ok Hacker News, I think I am done for the day after this.
Just to be clear, we are talking about a 30x return in someone's entire net worth, in 12 months, from trading.
I didn't say you couldn't construct a perfect hypothetical trade that in hindsight would have earned someone a huge 30x or 100x return or whatever. Not sure how that's even relevant though (unless maybe you trade from home and buy those expensive mega-ultimate-dragon options trading online skype courses and still think such trades are even worth talking about).
I didn't even say a 30x return of his net worth was impossible, I said it's "hard to believe" and "very high'.
But apparently a 30x return "is easy" and this guy has done it twice...
OK. Well it's been fun. HAGW everyone
P.S. I appreciate chrisatumd's disclaimer, nice to see, and a good reminder that investing and trading is gambling and you can lose it all, whether you're an amateur or pro.
I agree with your second point. As to my wording on your first point, I should explain a bit more....
"Easy" means that it's not technically hard to do. For instance, anyone who's lucky enough can win 30 times their money in roulette. It's "easy", but rare - only 2-3% of people do it.
For contrast, "hard" to me would be something like trading gamma-delta option spreads.
Technically, just about any investor do the former (although they'd have to be lucky), while few can do the latter.
Final point - I consider being lucky consistently is damn near impossible (although statistically, I guess it happens to a few of the 8 billion people out there).
Not trying to upset you, just trying to help you see that the story is not crazy. I'm not sure if you've tried trading futures or options before.
I've never traded futures, but I've seen with the amount of leverage that options provide makes the story quite believable (easy was probably not what the prior commenter meant).
It's possible, but almost inevitably, the "strategy" employed backfires, and the trader loses everything. One that comes to mind is Brian Hunter[1], formerly of the now defunct Amaranth Advisors hedge fund. Hunter was viewed as a sort of wunderkind, but he had a natural gas position (I've heard the initial position was between $1B and $2B, but I don't know specifics) go south, and rather than sell off and accept the losses, he doubled down and sank the firm. Margin calls ensued (of up to $6B) that could not be met and assets ended up being sold off for pennies on the dollar. (I previously worked for a firm that bought a large chunk of Amaranth's assets).
Ya man I been in the industry a long time I remember Brian Hunter from even before Amaranth. Always interesting reading when his name pops up. Clearly, a brilliant trader on a different level than most guys, but ya that's not always enough on it's own. He should have gotten that DB bonus though, that story was fucked up.
I didn't even say a 30x return of his net worth was impossible, I said it's "hard to believe" and "very high'.
It's simple if you have the talent.
E.g. here's a person who deposited $1000 in cash into a trading account and wound up with $100,000 after just 10 months of trading. That's a 100x return.[1]
Think of how rich that person could have been had she decided to continue her trading!
> 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."
This depends on the situation. If you get a bill in Y7 that is not significantly higher than the bill in Y1, it in fact would be worth it, because that capital could have compounded for 7 years.
Focusing on optimising your taxes is actually often worth it. I would dare say not enough people do it. But the more you optimise, the higher the risk becomes you have to pay it back. As with anything, it's risk vs reward.
At the returns this guy was making, it actually makes sense to defer paying taxes as long as possible.
Don't forget to include the costs of creating dummy corps, the risk of the off shore owner of the dummy corp running away with your money, the lawyer fees to keep you out of jail, etc.
There are many legal ways to minimize taxes. I might go a step beyond run of the mill tax accountant advice, but if you're getting advice from a guy who changes his phone number every week, that could be a bad sign.
Of course. I'm not advocating that. But I do think most people assume there's not much you can do, aside from paying up. Getting a decent understanding of basic tax law pays itself back over the years.
I've met self employed people who don't even understand the difference between salary, corporate tax and dividends.
That's below the competence of an H&R block adviser. Having basic minimal competence is of course a good idea. But, the risk vs. reward from messing with your taxes is capped at a fraction of your income so there are generally far better risks to take.
> Focusing on optimising your taxes is actually often worth it. I would dare say not enough people do it.
I'd largely agree, people don't optimise their tax enough but large companies/corporations get away with it far too much.
It's a pretty big issue in the UK, the last figures I saw where Tax Evasion costs us 67bn a year (HMRC figures iirc) vs 1.8bn for all benefit errors (not fraud, that figure is errors and fraud).
We cracked down on benefit fraud massively... If I where a cynic.
It's important to draw a distinction between tax minimization (within the bounds of the law) and tax evasion (illegal minimization). I don't think anyone here is promoting illegal evasion.
Are there ways to optimize personal income taxes the same way corporations do? Can I create a shell person in the cayman islands and pay them the exact amount of my income and deduct my US income to $0?
I can try. Firstly, worth mentioning the quote is a bit facetious, witty, jocose...Jolly old Warren Buffett can often be a bit playful and sort of sarcastic when talking about investing in public but it seems few people pick up on it.
Also maybe worth mentioning the quote is based on a well known "2 Rules" phrase format. For example:
“There are 2 rules of life. Rule number 1 is ‘Never quit.’ And rule number 2 is ‘Don’t forget rule number 1.’” - Duke Ellington
and
"There are 2 rules for success. Rule 1: Never tell everything you know. Rule 2:.. ;)"
OK with that said, I wouldn't overthink the quote. Obviously you can't really guarantee you will "never lose money" and so it's not really a rule and even Buffett loses money sometimes.
If I had to guess what he means: I would say use the quote as fun/serious reminder to think about risk ahead of reward and remember concepts like margin of safety that help protect you from loses even if a stock doesn't go up like you expect and hope.
Actually it's not facetious at all. The point comes from his mentor Benjamin Graham, which relates to the difficulty in recouping investment capital following a loss (ie: making your money back after you break the rule).
eg: You have $100k in your investment account. You have a bad year and lose 50% of your money, leaving you with $50k. You now need to have a 100% return in the next year to just make your money back, even though you only had a 50% loss. Seth Klarman, another highly successful value investor like Buffett is also a proponent of this way of thinking.
I'm being totally serious here as I'd love to learn where my writing and communication is being unclear:
May I ask, did you read my full comment?
And do you know the definition of facetious?
I'm not trying to be rude, I just don't understand why you wrote what you wrote.
For example: when you mention "his mentor Ben Graham" did you think I had not heard of Ben Graham or that I didn't know he was Buffett's mentor so you added that too?
Granted it's possible I hadn't. Or maybe you wrote it as a courtesy in case other readers hadn't heard of him? I ask because you saw in my first comment I am quoting Buffett. Then in my reply to waqf I write about Buffett again, his mannerisms and his track record...So maybe I know at least a little bit about the guy. Maybe?
But then at the end of my comment I not only write the concept of "margin of safety", I put it in italics to emphasize it. How did you see that and still wrote what you wrote?
How can someone know the concept of Margin Of Safety and not know Graham? Margin of Safety comes from Ben Graham. "Margin of Safety" is the Title of Chapter 20 of his book The Intelligent Investor; where Graham explains what it is in detail. Plus he just talked about MoS all the time and called it the "central concept of investment". MoS is Ben Graham.
Also heads up. Margin of Safety is also the title of Seth Klarman's whole book. Have you heard about Seth Klarman or his book Margin of Safety? After reading your comment in full I am guessing you may have. If you haven't, it's worth looking up and has an interesting story attached (at one point the book was being stolen from libraries and going for thousands of dollars on eBay. Madness!). Also if you are into investing of any kind, not just value investing, I recommend reading the book. Very good.
Anyway sorry if this is weird or rude or has gotten too long. I'd really love to understand where I am not writing clear enough. Thanks.
Also as for "facetious". Seriously look up the word. If this is a real rule how do you follow "never lose money"? I'll wait.
In the meantime a rule is a prescribed guide for conduct or action. Someone can lose money from forces out of their control. It's like telling someone "Rule 1 of driving: Never get into a car accident". That's not a rule. You can't follow that rule. Someone could hit you even when you are driving perfectly. Rule broken. A real rule would say something like "always drive the speed limit" or "Never text and drive". Those are rules you can follow or break. I'll let you figure out the real rule here for Buffett (hint look in to Chapter 20 of Graham).
Lastly, your example about how if you lose 50% you now need to earn 100% on that to get back to where you where you started is something I see brought up often. It is sad and it is fucking stupid how it gets talked about. This is not some investment concept from one of the greatest investment thinkers in history nor his mentee. Ha, if only. What you are describing is just a basic math concept. Most people learn this in elementary school I believe. Kinda shocking sometimes how proud and confident people who are new to investing become of themselves when they realize they understand how percentages work and percentages work normal and as expected when talking about the monetary value of something changing too...
Does "X times 0.95 times 1.05" = X"? Of course not.
Replace X with your $100k portfolio, 0.95 is -5%, then 1.05 is +5%, does mathematics still work? Still not equal? Obviously.
I know people are trying to help others when talking about all this stuff. I am trying too. And Caveat emptor and all that. Don't believe everything you read on the internet. But it's a bit frustrating at times to watch and sucks when people lose their hard earned money when they try investing based on bad or misleading information they received; especially when good information that is written well is out there and free to read online or at a library. On the other hand I'm sure there are more than a few folks who are very happy when idiots try investing without doing their research first so they can take the other sides of their trades...Margin of Safety is so important and this is a real investment concept and it actually needs to be learned, but be warned it will take more than a minute to understand it. Passive ETF much less work.
You're all good - I've never actually seen such a long response to a short thread before! And indeed, I have read Klarman's book a number of times - he talks about avoiding capital loss and the difficulty in recovering from bad choices quite a lot in the book. Best of luck with your investing!
> "There are 2 rules for success. Rule 1: Never tell everything you know. Rule 2:.. ;)"
In regards to this quote, this is why hedge funds are so protective of their "secret sauce". At a fund I worked for, I saw an employee sued in federal court for intellectual property theft 4 hours before he was terminated. Criminal charges followed a few months later. (Don't email source of a quantitative trading system to your personal email, lest you want to be jailed & unemployed and untouchable by the rest of the industry).
Besides the obvious of "Don't lose money because that's bad", he's referring to how losses can quickly wipe returns.
If you're shooting for 10% per year and you lose 5%, you need to then get a gain of more than 5% to get even again, pushing you to take worse risks.
Hence, by simply focusing on a strategy of "Not losing money" you can come out ahead.
This was also the original Hedge strategy where you short some stuff and buy some stuff so you can get some of the gains without participating in all the losses. For instance, if you can capture 70% of market ups while only taking 70% of the downs, you'll beat the market.
Literally, plot daily gains vs daily losses of S&P. If you only take 70% of the losses but get 70% of the gains (so multiply each win/loss % element in the series by 0.7, and apply the new sequence to a portfolio balance), you'll end up doing better than the market.
How about this, below is the link to the data (S&P 500 daily returns), whoever is right will donate money to an education-related charity at 70% of the dollar amount donated by whoever is wrong. So for example if you are correct, I will donate $100 and you donate $70, and vice versa.
Happy to chat about it more if you want. But just intuitively and quickly everyone should be able to see why one can't say an equal 70% up/down capture ratio will just beat the market...
1. let's agree the market can do whatever the hell it wants. Up, down, whatever.
2. Imagine a market is down -5% and then up 10%. According to your story and capture ratios, when this happens your portfolio is down only -3.5% and then up 7%. Right? 70% of the down and 70% of the up?
I think you will find in just this example the market beats your portfolio by more than 1% here. This is just a simple example and I am being generous. When you look at real data you will not only find a similar pattern, but your portfolio gets absolutely crushed by the market.
Maybe an even quicker intuitive answer: If a 70% up/down capture ratio portfolio will beat the market, why isn't this a huge thing and everyone sells/changes their regular full market S&P 500 ETFs to do that?
Your data only goes back 10 years. Mathematically, whether 70% up/down works out to beat the market depends on the period we're talking about.
> I think you will find in just this example the market beats your portfolio by more than 1% here. This is just a simple example and I am being generous. When you look at real data you will not only find a similar pattern, but your portfolio gets absolutely crushed by the market.
Here's a python script that generates random numbers to simulate the stock market. Each time you run it, you'll get a different result: http://pastebin.com/UNtDPjxd This is basically your "simple example" run many times side by side. Sometimes a hedged strategy works better; sometimes not.
The place I got this idea in the first place was a book I read in college about the history of hedging as a strategy. It noted one of the earlier demonstrations of why it's a good strategy was when a fund showed that participating in 70% of the gains/70% of the losses of the S&P beat the S&P. But which years? This matters. Unfortunately, I can't find the book anywhere. IIRC, I think we'd be talking about a stretch covering the 40s, 50s, 60s.
This is similar to how Milken pitched the junk bond -- it was originally based on a paper that showed a balanced portfolio of low rated bonds performs better than a balanced portfolio of high rated bonds (this is explained in Den Of Thieves). This was true back then because low credit ratings were so heavily discounted by market conditions (mainly, nobody wanted to buy them).
> why isn't this a huge thing and everyone sells/changes their regular full market S&P 500 ETFs to do that?
For the same reason that no one is pushing a diversified portfolio of junk bonds anymore; what worked in the past doesn't necessarily work in the future.
Thanks. For a second I thought I was chatting with someone you who knew what they were talking out. I appreciate you confirming you were basing your answer of something you read 10 years ago in a book, a book you can no longer find. The rest of your comment shows you didn't even study the basics of finance and economics either.
Dave, Hacker News has some of the smartest commentary I found on a News site. Questions on here regularly have people answering them where that person has experience, worked in that field professionally and have studied those topics in school and have degrees in them.
I realize this is the internet, expectations are low. People troll. Even if you wanted to help, why not wait a minute before answering to see if someone more informed or more experienced, than a book read 10 years ago will have answer. It's more a courtesy to the person asking as they get a better answer, and it stops you from looking like an idiot. Win-win.
Just wanted to add that Dave's notion is not quite as absurd as you make it out to be.
As you might know, daily rebalancing leveraged ETFs (say, 2x or 3x) are basically a bad idea for long-term investments, because they are (simplistically) short vol. So, they might outperform the (non-leveraged) index/ETF if vol is low and total return over the period is high. But typically, with normal or high vol, or over long periods, they underperform non-leveraged.
By analogy, a less-than fully invested ETF/trading strategy that's basically "0.7x" leveraged will beat the (non-leveraged) index/ETF in certain trading regimes (where total return over a period is negative or modestly positive, while vol relatively high).
I interpret it as if you are only correct half of the time, you can make money by letting your winning positions run and cutting your losses. Many winning traders talk about limiting your losses and risk management as being key.
Anyway, it's a bit too harsh to downvote. He's just answering a question, and correctly says if you lose 5%, you need to make back more than 5% to get back to even.
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?
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!
When you make that kind of money suddenly you're an accredited investor. It's supposed to mean you're a sophisticated enough investor to take on riskier investments, but the way it's implemented it only measures if you can take a loss (either you have > $1mil in assets or make $200k+/year). Thus people like athletes are exposed to much riskier investment deals than they really have the ability to comprehend. I don't blame anyone for losing money, let alone athletes.
To answer your question, I personally don't know all the details about my Vanguard fund, though I understand the basics. But that's very different from a slick salesman in a suit selling me an opportunity to invest in Brazil in a high-risk high-return investment scheme.
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'.
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).
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).
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?
He was manipulating the market by generating large sell orders. This would drop prices (because others can see that some stock is being rapidly sold off -- especially by high-frequency traders or other automated programs who will also start selling). He would then cancel these orders to buy at the new low prices. This is called spoofing orders.
It was a large reason for the crash (though not the only component in my opinion) because these orders amounted to $200 million worth of bets that the market would fall and they were replaced or modified 19,000 times. And of course this is just one person. The market involves multiple people so you can imagine how much money was at stake here.
Of course investment banks do this sort of thing all of the time, this guy's crime is that he wasn't associated with one of the big incumbents.
HFT generates and cancels orders on magnitudes like this all day long, but they have to be allowed to do so because it "creates markets", whatever that means.
Sort of true. They will do the trade, but only if there was already someone in the system willing to make the same trade. HFT firms don't hold positions at the end of the day.
AIUI, the difference is that, at the moment the HFTs place the order, they have every intention of filling them. Just because they might change their mind a fraction of a second later and modify their orders isn't particularly relevant.
Whereas spoofing is placing orders that you don't have any intention of filling. The only point of the orders is to move the market, rather than to actually make trades. And that's the thing that's illegal.
Well, the law doesn't really say anything beyond "manipulative devices" and "contrivances," but right now, judges have kinda ruled that intention matters. But we don't know much, because most of these cases get settled out of court, so we don't have a robust case law to base any of this off of. Basically, if you participate in a financial transaction in any way, be prepared to be accused of a crime.
Intention mostly matters, sometimes doesn't. Sometimes the left arm doesn't talk to the right arm and conflicting orders go out. Technically this could be construed as spoofing, but sometimes it's business unit A not talking to business unit B, because A isn't in the same location as B, or there's a Chinese Firewall between A & B. It might not be intentional spoofing, but it can happen, anyway.
I also don't understand why this is illegal. The markets should not be predictable.
People like that guy should be rewarded financially for making it unpredictable.
You don't want to have an economy where only a tiny group of powerful people understand what's happening while 99.99999...% of the population are at in the dark and at their mercy.
A fair system should be simple enough to be understood by everyone or complex enough to be understood by no one - Anything in-between is not a fair system.
Uh, yeah they should. To someone with perfect knowledge, a proper free market should be 100% predictable. It's only unpredictable if other people know things that you don't (and the market itself is the vehicle by which that knowledge is disseminated). Introducing uncertainty into the market without introducing knowledge into the market is a bad thing. And spoofing trades in order to move the market isn't providing any knowledge, and it is in fact making the market less efficient because it no longer matches the knowledge of the participants.
I don't think it's fair that people can make money from having 'perfect' knowledge of the market. I don't buy into the efficient market hypothesis.
I can point out many significant inefficiencies in the system - E.g. Nepotism (allocating employee rank and pay based on social connections instead of skills/results), executive bonus structures which favor short-term gains over long-term gains, monopolies which make companies complacent and employees less productive, other anti-competitive behaviours - These factors allow large, inefficient companies to beat competitors in the market in spite of significant internal inefficiencies.
Anti-competitive behaviour will probably always exist in the markets; it's part of human nature and it's basically universally accepted except in the most extreme cases (E.g. antitrust cases).
Maybe if humans become smarter and more psychopathic (like in the novel 'Atlas Shrugged'), then we could have an efficient market, but right now, I think it's very far from efficient.
Maybe it's efficient on a human psychological level (from the perspective of an average trader/investor) in that there is some sort of universal consensus about the value of everything. The problem is that this consensus is not rooted in reality but on a superficial, socially-constructed representation of it - That means it's not necessarily efficient in terms of maximizing the output of companies and the happiness of their customers.
> I don't think it's fair that people can make money from having 'perfect' knowledge of the market. I don't buy into the efficient market hypothesis.
These two statements don't seem related. And I don't understand the first one anyway. Where does "fairness" come in? It doesn't seem unreasonable to me that one person who has perfect knowledge about a financial market would be able to make money that someone who doesn't have perfect knowledge wouldn't. And it seems quite "fair" to me that this would be so; why should the person with better knowledge not be able to benefit from their better knowledge?
Well, I'm not really sure how exactly to exploit this (I'm not a trader, all I really know about this is what I've read in all of the previous discussions about this), but that's really besides the point, because nobody has perfect information. In any case, I suspect the only real way to take advantage of this situation is to determine the orders that the spoofer actually does intend to make (e.g. spoofing to depress the price and then buying low) and making those trades first yourself. But you're not actually harming the spoofer in that case (except in that they didn't get to make the trade they wanted), because the spoofer won't actually have executed any trades, they'll have simply attempted (and failed) to execute them.
Which is to say, if you have perfect knowledge, you might be able to prevent the spoofer from reaping the benefits of their spoofing, but you won't actually have harmed them, and of course the effect on the market is just as bad as if you let the spoofer spoof in peace.
spoofing is largely defined in its relationship to people submitting large orders that they intend to cancel for the purpose of moving the market. so, while the rest of the market thinks there is buying or selling pressure coming from the spoofer's large order, the spoofer has private information that he does not intend to actually trade that large order. he simply wants to move the market towards one of his much smaller orders, and get it filled instead. then, he cancels the large order, and the market in theory should revert back to its old price, because the information that a large order will be moving the market has been taken away. now, what's important is that the spoofer actually has to send a large order. and even if he has no desire or intention of getting it filled, it's still available to be filled. so, if someone thinks a market is going up, but there isn't enough liquidity for him to express his opinion, he could wait for a spoofer to come along to inadvertently provide liquidity with a large offer, and trade with that offer before the spoofer has time to cancel.
What you describe isn't someone taking advantage of the spoofer's intention not to actually trade, though. Or rather, it's not someone who has perfect information using that information to understand that the spoofer's order does not represent actual knowledge. It is, in fact, someone who has limited information and believes the market does not reflect reality, and then using that to place an order that just happens to use the spoofer's order. So in this case, it's no different at all from them trading with a market maker.
Also, I would assume spoofers don't typically place orders in illiquid markets, precisely because they risk having someone use their new order as a source of liquidity. I mean, spoofers don't actually want their orders filled. Plus, the whole point of the spoofed order is to trick market makers into moving their positions, and if the market isn't liquid then clearly there's no market makers (because if there were market makers, then the market would be liquid), and if there's no market makers then spoofing isn't going to work to begin with.
Markets already are unpredictable. Spoofing is the equivalent of running an auction on ebay and submitting bids yourself under fake accounts to drive up the price to trick the one person who actually wants it into paying more.
And he had a separate account that would trade the market distortion.
His big orders weren't the best bid or ask. They were a few orders deep in the market.
Basically people and machines would jump further in front of the big buy or sell order with their own orders, and move the price in a direction. His smaller account would make profits from those trades.
Yes you could affect trillions of dollars of derivatives and the sentiment of the entire market with just a few dozen millions.
It is still a widespread practice and tough to prove. But spoofing was made illegal in the Dodd Frank Act. So if the government can nail some easy cases and create case law, then they could think about going after the banks that do it. Emphasis on think.
Your question is exactly correct. As long as they are real orders, with real risk of being executed, there should be nothing at all wrong with this behavior. If people are so stupid as to move their orders trivially based on others' actions, they deserve what they get.
The reason this gets prosecuted is that it's an easy target for the exchanges to make it look like they care. They are now publicly-traded companies interested in profits first and foremost--not market integrity (which maybe used to be the case--different discussion).
source: 25-year vet of futures markets, the last 10 in HFT; many many millions of orders and executions
what about buy-and-hold investors who don't do anything to deserve that ? Why should they get unnecessary volatility in their portfolios just because some get-rich-quick kids want to treat NYSE like its Mortal Kombat?
> if people are so stupid as to move their orders trivially based on others' actions
Then why show level 2 quotes at all ? Isn't your argument equivalent to "level 2 information is useless"? If not, then people wouldn't be stupid for using it, would they ? Would you trade in a market that only had level 1 quotes ?
They don't get unnecessary volatility unless they're paying attention to the order book all the time. Realized equity volatility is MUCH MUCH MUCH lower in the era of HFT.
Yes, "flash crashes" exist, and normally because of liquidity disappearing. Yes, algos are basically sheep that all bail at the same time. But overall, the net effect is massively beneficial to everyone except lazy traders (which include fund managers who miss the days of getting lots of steak dinners from their favorite brokers).
I'm not arguing against algos or HFT, just spoofing. also I updated my comment to ask about level-2 quote information. If people are stupid for acting on perceived intention of other market participants, wouldn't that make the case that L2 quotes are entirely garbage and should just be removed from the exchange ?
HFT doesn't really do anything for markets since they take very little risk, and that is the purpose of a market... the magic coil will kill your business anyway
I thought true HFT (not short-term momo, etc. where the intention is to actually take risk) had essentially died already, Virtu aside
Not remotely true, many buy and hold investors have stops to limit their losses and/or exit their positions at certain levels. Flash crashes hurt them greatly.
So you'd rather ride the sinking ship and lose all your money as the company goes bankrupt? Are you saying you'd never exit any of your positions no matter how much money you lost?
The stock market cannot go to 0. It is literally impossible. If you are invested in the fortune 500.. and the value went to literally 0.. we are in a zombie Apocalypse. Money no longer has value. So yes I lost all my investment, but I also don't have a job, and a gun is my most valuable asset.
Buy and hold = Buy big index funds (i.e. Fortune 500), and then never ever ever ever sell, until you are ready to spend the money (i.e. draw-downs in retirement).
Trying to go "oh the market lost 20% this week, it is going to 0 soon" is a fools investing.
The market itself cannot go to zero, but individual stocks can. If you're of the view the market can't be beat and investing in index funds is the way to go then your position is fine. If you're of the view where you select the stocks you want to invest in, as a great number of market participants are, then your position if flawed because stocks do go to 0 and as such exiting losing stocks makes sense. Tossing all your money into an index fund is not trading, so you're not even talking about the same thing I am.
Flash crashes massively hurt people who invest in particular stocks because they do often have exit points which get triggered by those crashes. The advice you're giving doesn't apply to these people, they're not the ones just dumping everything into an index fund.
Better to have a loss limiter, than lose it all. Without a stop loss, you can't limit your risk. And yes, exiting at a small loss is the point, it prevents a much bigger loss. Refusing to exit with a loss is how the market takes it all from you.
Retirees might need to liquid a percentage of their portfolio each month to pay their bills. Getting caught in a flash crash can have an effect on them.
In a general sense though I agree that the behavior shouldn't be illegal but am fine with exchanges implementing rules about it. For a trade to occur both the buyer and the seller are getting what they want at a price they both deem acceptable. Phantom orders does not inherently change that.
Keep in mind that you're talking about getting caught in a window that was 34 minutes long. So you'd have to be pretty unlucky, not to mention oblivious, to push through a market sell order at that time.
Here's an analogous situation - let's suppose you are a buyer in an auction for a car. You're competing with all other interested buyers to get the car, and after a bunch of back and forth, you win the auction.
Later, you find out that one of the most aggressive bidders in the auction was actually just a buddy of the seller, trying to increase the price in his/her favor but avoid at all costs actually winning the auction.
You'd probably rightfully think this was unfair, and this is exactly what spoofers are doing in an electronic market. They are generating the illusion of interest to buy or sell, without the intention to actually do so, in order to move the market in their favor.
No, only one order was legitimate. They placed an ask at the top level and then placed 3 bids below the top level. As soon as someone hit the ask, they cancelled the bids. The bids made it look like the market was going up. If the top level bid had been hit first, they still would have cancelled
Because it's financial fraud, and it harms the legitimacy of the market itself and it harms the other people participating in the market. It's not like banning a cheater in a video game, there are real world stakes.
I believe if you cheat at a casino, you are just banned and kicked out.
Also, perhaps there is a differentiation between working within the mechanics of a system to cheat, and going around a system to cheat. An example from the esports league would be the difference between using a corner case to shoot through a wall, versus hacking into the server and modifying the code.
If you don't cheat, but do something the casino doesn't approve of you are kicked out. If you actually cheat, and the casino decides it is worth it, you'll have the government come down on you too.
That isn't the definition of stealing. In fact I would argue, while it is dishonest, it isn't stealing in slightest. Stealing means you took something, without agreement, that rightfully belongs to someone else. The scheme is more accurately described as fraud than stealing.
I was an intern at Goldman Sachs in 2007 working in IT and my boss was explaining to us how market making works and he described this exact phenomenon - how banks, hedge funds, HFT trading outfits spoof orders constantly so you cannot rely on the order book to determine direction / intent of other traders in the market. Apparently this guy's crime was not being part of a hedge fund or large bank.
That isn't true. Making an order with an intent to cancel is a crime. Hedge funds routinely cancel orders, but they do not necessarily make them with the intent to cancel them from the beginning.
Perhaps the most routine trade I see is with a Time in Force of Immediate or Cancel. Fill or Partial Fill if you can, cancel the remainder. Happens millions of times a day.
No they don't. The very big difference is intent and actual behavior. Sarao was blatantly not following through on any of his spoofing, which is where the intent is derived based on pattern of behavior.
If a hedge fund behaved the exact same way, they'd get in trouble for it. That is, if Renaissance Technologies decided to do spoofing on 99.999% of its market action, they'd get in trouble for it. Hedge funds doing high frequency trading, is not the same as spoofing.
Yes but canceling a lot of your orders is not necessarily indicative of spoofing. In fact it's kind of the crux of market making. These are ver different behaviors.
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?
> 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.
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.
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.
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?
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.
>But is it a common sentiment that you can be charged with anything by a district attorney?
Pretty much. If you piss them off enough, or if they are trying to get elected to something else and think you are a good way to do it, then yes, they will charge you with something and keep going at it. (See: Aaron Schwartz).
It's not "anything", it's "intent to defraud". The prosecutor needs to provide a minimum standard of evidence to bring charges, they don't need to prove intent (to hear the case). The rest is like I said.
AIUI the answer is basically "it's very hard to prove", which is why very few people actually get punished for it. IIRC in the flash crash trader's case he actually had emails that made it very clear what his intentions were with the orders he placed (but I could be misremembering).
Note that intent is a necessary component of many (most?) crimes. For example, if you accidentally get someone killed, with no intent, you haven't committed murder. If you try to kill someone but fail, you've still committed attempted murder even if the target is untouched.
Reliably determining intent is just about impossible, but it doesn't stop the courts from trying.
Obviously they cannot. It's basically subjective, and it looks like Sarao just got too greedy.
The CME does enforce rules about trade executions, that the ratio of orders placed to orders executed does not get too low (like 1/30 or something.) I'm guessing Sarao just placed a small amount of large-size orders to get around this.
The whole thing kind of surprises me as I think it is well known that there are plenty of algos that place orders with the sole intent of enticing/manipulating the market. But as I said, it's not really something you can define objectively.
EDIT: I did a bit of reading, yes, Sarao placed orders for massive size on CME. Big kahoonas for sure.
The purpose of markets is taking risk. Any participant whose intention is not to take risk is a parasite
Like many things in life, there are complete bullshit situations where some people get a better deal than others simply due to some arcanery. Are doctors in America 4x better than European ones, or are residency spots artificially restricted to keep salaries high?
The world has less and less parasites every day because technology allows us to see them for what they really are. This is just one of the many
The purpose of blackjack tables is taking risks. The purpose of markets is to determine a price that is fair to both sellers and buyers. Risk-taking intermediates are just a possible building block for coming up with a solution to that goal.
Arbitrage that only exists due to the technicalities of market microstructure is parasitic to me. True HFT identifies trades with no risk; a long and a hedge at the same microsecond. That's just fractions of pennies that true risk takers lose, every day. They don't care at all about the intrinsic value of the security
It is market manipulation. Placing a big order would signal to other traders that there is someone who wants to buy/sell a lot of the stock and therefore the stock's price would change accordingly. But then the trades are never actually executed, therefore he intentionally manipulated the price of the stock.
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!
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.
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.
Implementing a very basic order entry check to verify each client's abuse of an orderbook like this is pretty trivial and done in a lot of places. CME just didn't want to do anything about it.
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.
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.
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
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.
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."