A Step By Step Guide How To Crash The Entire Market

Tyler Durden's picture

While we already noted that the CFTC and the DOJ have gone full scapegoat retard, by blaming the entire flash crash on one solitary trader (operating out of the UK no less), which means that Waddell & Reed should now sue the SEC for hundreds of millions in lost fees and defamation, it is worth re-emphasizing the hubris and the audacity that these "regulators" have, to assume that sophisticated market participants are truly dumb enough to believe any of this is just shocking.

In any event, going with the bullshit story concocted by the confused brains at the CFTC (whose former head when all this happened, is now being groomed by Hillary Clinton to be America's next Treasury Secretary), and for all those who wish to follow in the "rogue" ES trader's footsteps, here is how Navinder Singh Sarao singlehandedly crashed the entire market, leading to the single biggest loss in market capitalization in history.

From the charging document:

Defendants aggressively used both the Layering Algorithm and the 188/289-Lot Spoofmg strategies on May 6, 2010, the 2010 Flash Crash day.

 

Defendants first turned on the Layering Algorithm at 9:20a.m. CT, placing four orders, totaling 2,100 contracts. These orders were each one tick apart, starting three ticks from the best ask. The orders were modified 604 times over the following six minutes so the orders were always at the third level of the sell-side of the order book or deeper, and then canceled with no executions, as the Layering Algorithm was turned off. While the first cycle of the Layering Algorithm was active, the E-mini S&P price fell39 basis points.

 

While the first cycle of the Layering Algorithm was active, Defendants bought 1,606 contracts and sold 1,032 contracts.

 

Defendants' use of the Layering Algorithm and the 188/289-Lot Spoofing intensified throughout the day. At 11:17 a.m. CT, Defendants turned the Layering Algorithm on for more than two consecutive hours, until 1 :40 p.m. CT. During this cycle, Defendants utilized the Layering Algorithm to place five orders, totaling 3,000 contracts. A sixth order was added at around 1:13 p.m. CT, increasing the total to 3,600 contracts.

 

These orders represented approximately $170 million to over $200 million worth of persistent downward pressure on the E-mini S&P price and, over the next two hours, represented 20-29% of the entire sell-side of the Order Book. The orders were replaced or modified more than 19,000 times before being canceled at 1 :40 p.m. CT. At that time, the Order Book was severely imbalanced and Defendants' 3,600 Layering Algorithm orders were almost equal to the entire buyside of the Order Book. In total, the Layering Algorithm was on for over four hours and 25 minutes on May 6, 2010.

 

In addition to the Layering Algorithm, Defendants aggressively utilized the 188/289-Lot Spoofing which intensified the Layering Algorithm's effects. Between 12:33 p.m. CT -1:45 p.m. CT, Defendants placed a total of 135 orders with 188 or 289 lots on the sell-side of the Order Book, totaling 32,046 contracts. Ofthese 135 188/289-lot orders, 132 orders were canceled without resulting in execution.

 

Between 11:17 a.m. CT and 1:40 p.m. CT, Defendants' actions contributed to an extreme order book imbalance in the E-mini S&P market. This order book imbalance contributed to market conditions that caused theE-mini S&P price to fall361 basis points.

 

During this two-hour period, Defendants traded 62,077 E-mini S&P contracts with a notional value of$3.5 billion.

 

On May 6, 2010, Defendants caused an artificially low price to exist in the lead month of the E-mini S&P contract.

So now that you know how to crash the entire stock market single handedly, please do. Because this is not a "market." As we said in July 2010,  "It's Not A Market, It's An HFT 'Crop Circle' Crime Scene."

And finally, this:

In addition to the Layering Algorithm, Defendants frequently manually "flashed" large-lot orders in a variety of lot sizes in the Order Book that were quickly canceled with no intention of these orders resulting in trades. At times during the Relevant Period, the Flash Spoofing was used with and to amplify the impact of the Layering Algorithm. At other times, Defendants' Flash Spoofing was used alone to benefit Defendants' trading strategies

In other words, 5 years after Zero Hedge first explained precisely what happened on May 6, 2010, the CFTC finally admits that the flash crash was not due to Waddell & Reed, but due to HFTs and quote stuffing.

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Steroid's picture

And the North Koreans are also reading this.

Scarry! We are doomed!

t0mmyBerg's picture

what a crock of utter bullshit this is.  What a farce our country has become.  Not a single person working in Washington DC deserves to have their job or to "serve" anyone in any capacity except perhaps as someones bitch.

NotApplicable's picture

I'd say that as long as people are dumb enough to use phrases like "our country" then each and every scumbag in DC deserves to have the job to serve them, good and hard.

falak pema's picture

what phrase would you use as sub ?

kaa1016's picture

This is such bullshit. This one guy in London caused the flash crash. Get the fuck out of here. How do you make an elephant disappear in a crowded movie theatre? Misdirection...

Skateboarder's picture

If 100,000 middle class families that have $10,000 in banks withdrew their cash on the same day, that's $1B. Would that be enough to annihilate all the leveraged debt chains on the planet? My bet would be on 'yes.'

(perhaps I'm off in the order of magnitude. If anyone's got an accurate estimate, that would be most interesting to see)

pods's picture

This one is so short you don't even have to measure it.

Definitely not a keeper.  

pods

nope-1004's picture

One rogue trader can smash Emini.... lmao.

 

Oh and just FYI, tomorrow at 2pm EST I will smash Emini cuz I figger what the hell, I can beat this guys' score!!!

ml8ml8's picture

So they're accusing this guy of market manipulation by spoofing, but he executed 67k contracts in one day? Sounds like actual buying and selling to me.

But how, exactly, does putting bids/offers out move the market? Who's buying and selling based on the depth of the spoo book?  Is it other algo's OR dare I say it....could it be.... central banks?  Are his market manipulations just making central bank market manipulations too difficult?

Sure will be interesting to see whether and how spoofing and market liquidity changes now that they've unveiled this case.  Maybe after they're done, the only one left trading e-mini's will be central banks.

cigarEngineer's picture

The hilarious part is the lack of coverage of any other days when their algo was running, or a comparison between other days. When I saw this story on Drudge i thought it was too stupid for ZH to print... until i read the hilarious details above. 

ml8ml8's picture

HFTs around the world are puckering up.

weburke's picture

hard to imagine jurors agreeing to say guilty.

ZerOhead's picture

Anyone who would be naive yet capable enough to do just that would almost certainly be inviting a drone strike for providing material support to terrorists if it were in fact carried out.

Unless they worked for a hedge fund on Wall Street that is...

Kaiser Sousa's picture

"what phrase would you use as sub ?"

ask Lord Blankfeind....

nailgunnin4you's picture

I'd say that as long as people are dumb enough to use phrases like "our country" then each and every scumbag in DC deserves to have the job to serve them, good and hard.

 

Amen

NoDebt's picture

At the rate of one conviction every 5 years we should have the rest of these HFT market manipulating bastards put away in about 60 thousand years.  Just in time for Fukushima to cool off.

Remington IV's picture

CME + CFTC = complicit stooges

Kirk2NCC1701's picture

"It's Putin's fault" is all I'm waiting for. /sarc

Seriously... What surprises me, is that if the Russians or Chinese military hackers wanted to crash the US/UK markets, they presumably could have done so by now -- by doing exactly the kind of 'perfectly legal' thing described here. That, plus using a few other tricks.

OTOH, if I were them and wanted to do this, I'd wait until just after we announced that our (Russian and Chinese) currencies will be backed by Gold. You then let loose the "cyber-hounds of hell" in tandem, for a double-barrel effect. But that's just 'devious me'.

golden torch's picture
golden torch (not verified) Steroid Apr 21, 2015 10:19 PM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com

Arius.'s picture
Arius. (not verified) Apr 21, 2015 1:48 PM

interesting timing of the decision to adress the cause of crash

pashley1411's picture

looking at the dates, I'm guessing they were going to run out of time to file charges, and wanted to put some sort of result to "justify" years of watching midget-porn and grooming-for-their-next-job.

Tin Hat Salesman's picture

Wtf is his leverage?

Bay of Pigs's picture

Indeed. It is absurd on its face. 

Think of the leverage used by the London Whale on behalf of the Morgue on some of those upside down trades.

i_call_you_my_base's picture

"A Step By Step Guide How To Crash The Entire Market"

Actual:

1) Keep rates at zero for more than 10 years

...done.

JuliaS's picture

Think it was Bill Burr who said that if terrorists really wanted to destroy the American Economy, they'd be taking out mortgages instead of flying planes into buildings.

Racer's picture

And all those other HFT algos that cancel trades thousands of times a second are perfectly legit?

101 years and counting's picture

only if they are TBTF or already approved by crony capitalist standards.  ie, corzine and buffett would be allowed to do this.  

Captain Willard's picture

They have bought a "license" from politicians to do their manipulation. 

This poor Singh guy didn't make his contribution.

Squid Viscous's picture

Feds should just say they had a big red "that was easy" button that they pressed multiple times...

CarpetShag's picture

"being groomed by Hitlery" - any video coverage on that?

Calculus99's picture

It's always the small fry they go after, and get...

Dr. Engali's picture

"Market", that's some funny shot right ther. I don't care who you are. We don't have Mark's, we have a policy tools.

Central Bankster's picture

Explain how 3600 contracts to buy/sell in the E-mini qualifies as "manipulation"?

Dr. Engali's picture

Because they said it is. No more questions. The matter is dead.

sodbuster's picture

It only takes 3600 contracts??? This market is even shittier than I thought.

asteroids's picture

Exactly. How the fuck does swining a few hundred million cause a market worth at least a thousand times to crash? Harken back your memories and remember the boyz burning almost at least that much to rip the face off the bears during the last seconds of a trading session. Nah, the "boyz" removed stepped back for  whatever reason and "liquidity" disappeared, thats why it went into free fall. It was glorius.

Weaponized Innocense's picture
Weaponized Innocense (not verified) asteroids Apr 21, 2015 3:00 PM

He is that retail investor they've been talking about against the tbtf bull HFT bot spoofers in what a glorious bull market this has been.... Yea except that day...
That's what happens when u set up a trade to grab lows these days.....
that trick is only for the licensed against disruptors.

DeadFred's picture

Look at how many billions the Fed had to throw into futures last October to crank things around in the other direction. It seems that 'down' is cheaper than 'up'. Curious

sodbuster's picture

What's even more amusing? When the CME went from non- profit to a for profit entity, they completely abandoned the concept of maintaining an honest price discovery, and a fair market- it became all about volume and money- they give central banks special rates for their business. The question is- do they only care about up volume, and not down or selling volume? Have to have sellers on the other side of the trade, do you not? What's the problem? Kevin Henry taking a crap that day?

carneades_jazz_hands's picture

And which FCM allowed him the leverage to do this?

ted41776's picture

lasers are so pase, we need something that can trade faster than the speed of light

Arnold's picture

working on it.

http://en.wikipedia.org/wiki/Faster-than-light

 

 

Well, not me personally...........

Weaponized Innocense's picture
Weaponized Innocense (not verified) Arnold Apr 21, 2015 3:06 PM

Yea because in college when they were trying to shove that nothing is faster than speed of light shit down my thought I was like to myself going but those explosions off the sun just came at me faster than the speed of light.... Idiots!