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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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Tue, 04/21/2015 - 14:46 | 6015407 Steroid
Steroid's picture

And the North Koreans are also reading this.

Scarry! We are doomed!

Tue, 04/21/2015 - 14:49 | 6015415 t0mmyBerg
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.

Tue, 04/21/2015 - 14:52 | 6015429 NotApplicable
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.

Tue, 04/21/2015 - 15:01 | 6015461 falak pema
falak pema's picture

what phrase would you use as sub ?

Tue, 04/21/2015 - 15:12 | 6015509 kaa1016
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...

Tue, 04/21/2015 - 15:23 | 6015543 Skateboarder
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)

Tue, 04/21/2015 - 15:29 | 6015580 pods
pods's picture

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

Definitely not a keeper.  

pods

Tue, 04/21/2015 - 15:43 | 6015620 nope-1004
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!!!

Tue, 04/21/2015 - 15:41 | 6015624 ml8ml8
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.

Tue, 04/21/2015 - 15:47 | 6015647 cigarEngineer
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. 

Tue, 04/21/2015 - 16:19 | 6015691 ml8ml8
ml8ml8's picture

HFTs around the world are puckering up.

Tue, 04/21/2015 - 16:41 | 6015870 weburke
weburke's picture

hard to imagine jurors agreeing to say guilty.

Tue, 04/21/2015 - 16:59 | 6015922 williambanzai7
williambanzai7's picture

Bingo!

Tue, 04/21/2015 - 15:49 | 6015651 ZerOhead
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...

Tue, 04/21/2015 - 15:17 | 6015528 Kaiser Sousa
Kaiser Sousa's picture

"what phrase would you use as sub ?"

ask Lord Blankfeind....

Tue, 04/21/2015 - 15:29 | 6015582 TheEndIsNear
TheEndIsNear's picture

This country

Tue, 04/21/2015 - 15:37 | 6015611 t0mmyBerg
t0mmyBerg's picture

fair enough

Tue, 04/21/2015 - 15:40 | 6015619 nailgunnin4you
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

Tue, 04/21/2015 - 14:53 | 6015435 NoDebt
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.

Tue, 04/21/2015 - 15:13 | 6015514 Remington IV
Remington IV's picture

CME + CFTC = complicit stooges

Tue, 04/21/2015 - 15:58 | 6015690 Kirk2NCC1701
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'.

Tue, 04/21/2015 - 23:19 | 6017017 golden torch
golden torch's picture

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

Tue, 04/21/2015 - 14:48 | 6015410 Arius.
Arius.'s picture

interesting timing of the decision to adress the cause of crash

Tue, 04/21/2015 - 15:00 | 6015431 pashley1411
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.

Tue, 04/21/2015 - 14:48 | 6015412 Tin Hat Salesman
Tin Hat Salesman's picture

Wtf is his leverage?

Tue, 04/21/2015 - 14:59 | 6015458 Bay of Pigs
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.

Tue, 04/21/2015 - 14:50 | 6015414 i_call_you_my_base
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.

Tue, 04/21/2015 - 15:16 | 6015526 JuliaS
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.

Tue, 04/21/2015 - 14:49 | 6015419 Racer
Racer's picture

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

Tue, 04/21/2015 - 14:54 | 6015443 101 years and c...
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.  

Tue, 04/21/2015 - 15:48 | 6015653 Captain Willard
Captain Willard's picture

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

This poor Singh guy didn't make his contribution.

Tue, 04/21/2015 - 14:49 | 6015421 Squid Viscous
Squid Viscous's picture

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

Tue, 04/21/2015 - 14:50 | 6015424 CarpetShag
CarpetShag's picture

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

Tue, 04/21/2015 - 14:52 | 6015427 Calculus99
Calculus99's picture

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

Tue, 04/21/2015 - 14:52 | 6015428 Dr. Engali
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.

Tue, 04/21/2015 - 14:53 | 6015436 Central Bankster
Central Bankster's picture

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

Tue, 04/21/2015 - 14:54 | 6015440 NoDebt
NoDebt's picture

It's complicated.

Tue, 04/21/2015 - 14:59 | 6015459 Dr. Engali
Dr. Engali's picture

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

Tue, 04/21/2015 - 15:04 | 6015478 sodbuster
sodbuster's picture

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

Tue, 04/21/2015 - 15:12 | 6015510 asteroids
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.

Tue, 04/21/2015 - 16:00 | 6015698 Weaponized Innocense
Weaponized Innocense's picture

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.

Tue, 04/21/2015 - 16:05 | 6015716 DeadFred
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

Tue, 04/21/2015 - 16:17 | 6015766 sodbuster
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?

Tue, 04/21/2015 - 14:53 | 6015437 carneades_jazz_hands
carneades_jazz_hands's picture

And which FCM allowed him the leverage to do this?

Tue, 04/21/2015 - 15:34 | 6015602 chomu
chomu's picture

Most likely MF implodable

Tue, 04/21/2015 - 14:55 | 6015445 ted41776
ted41776's picture

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

Tue, 04/21/2015 - 15:36 | 6015607 Arnold
Arnold's picture

working on it.

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

 

 

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

Tue, 04/21/2015 - 16:06 | 6015728 Weaponized Innocense
Weaponized Innocense's picture

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!

Tue, 04/21/2015 - 18:33 | 6016276 nailgunnin4you
nailgunnin4you's picture

Get help.

Tue, 04/21/2015 - 14:57 | 6015450 yogibear
yogibear's picture

All the Russian, North Korean, Iranian or Chinese (so many out there) hackers have to do is get into a few of the HFT systems and set software up to swing the markets several hundred points each way and trigger other trading systems to try and front run them.

Cause a cascading effect. That would shut down the markets.

What a sight that would be.

Tue, 04/21/2015 - 15:01 | 6015455 ekm1
ekm1's picture

Flash Crash was an experiment at the Central Command as to what would happen if the system was left to function by itself.

 

 

Tue, 04/21/2015 - 15:09 | 6015499 Bay of Pigs
Bay of Pigs's picture

Baloney. Watch the Wall St Code.

https://www.youtube.com/watch?v=kFQJNeQDDHA

Tue, 04/21/2015 - 15:15 | 6015521 ekm1
ekm1's picture

Wall Street code clearly implies Central Command

Tue, 04/21/2015 - 15:20 | 6015541 Bay of Pigs
Bay of Pigs's picture

Maybe I misunderstood you.

If you are referring to the William Dudley, NYFED and the BIS as "Central Command", I would agree with that term.

Tue, 04/21/2015 - 15:47 | 6015640 ekm1
ekm1's picture

gang of 8

http://en.wikipedia.org/wiki/United_States_Intelligence_Community_Oversight

 

"The Gang of Eight consists of the Senate and House Majority and Minority Leaders, and the Chairs and ranking members of the House and Senate Intelligence Committees"

Tue, 04/21/2015 - 16:30 | 6015833 Bay of Pigs
Bay of Pigs's picture

That is laughable to think those stupid assholes in the US gov't are running the show.

WTF?

Tue, 04/21/2015 - 20:02 | 6016538 ekm1
ekm1's picture

Either the government is oppressive or useless

Take a pick. Can't be both

Tue, 04/21/2015 - 15:02 | 6015466 Ban KKiller
Ban KKiller's picture

The world is so interdependent these days. See how Lebanese hash is being sold to both sides of the war! Still! War goes on and the marijuana fields keep producing. 

If "terrorists" destroy something they find out later that one of their bosses owned part of the destroyed target, ha-ha. But they don't care as they have wealth elsewhere. Like twin towers or building 7. Always, always about the money. 

Oligarchy/Plutocracy 2016!2+2=5

 

Tue, 04/21/2015 - 15:04 | 6015479 Everybodys All ...
Everybodys All American's picture

For what it's worth. I seriously believe the government is going to try to use this case to further takeover the markets. Like they already haven't I know. They just need to sell the rest of the public on their 'good intentions'.

Tue, 04/21/2015 - 15:22 | 6015547 JuliaS
JuliaS's picture

Apparently articles about high frequency trading also attract high frequency posters.

WTFRLY - ZH member for over 2 years, yet all he does is pump his online tabloid by posting 5-30 copies of site-linked headlines in a span of 3-5 seconds.

Tue, 04/21/2015 - 15:06 | 6015489 SheepDog-One
SheepDog-One's picture

This guy must have really pissed in the wrong guys Dom and coke piles.

Tue, 04/21/2015 - 15:06 | 6015490 yogibear
yogibear's picture

Harmonic motions took down the Tacoma Narrows Bridge.

Might have the same effect in the markets. Did they test for that?

 

Tue, 04/21/2015 - 16:12 | 6015757 Weaponized Innocense
Weaponized Innocense's picture

Well with enough tightenings as to only inject stimulus they will have plenty of time to stress test those harmonics reverberating through the system.... might really get the currency waves going..... making them do more than just back flips.

In the tech crash... On the sell out it was a trip as the downs in the market started curving back in time to give u crescent moon shapes .... That was some trippy stuff!

Tue, 04/21/2015 - 16:14 | 6015765 Weaponized Innocense
Weaponized Innocense's picture

Nothing like divergence...... Mmm mm mmmm it is right up there with quandary economics!

Tue, 04/21/2015 - 18:38 | 6016288 S.N.A.F.U.
S.N.A.F.U.'s picture

No, no, no says the CFTC, you're looking at it all wrong.  It wasn't harmonic motions that was the problem, and it most certainly was not the splendid design and engineering work that went into that most fabulous bridge.  It was that damn air blowing over it that was the problem!  And now we know the culprit.  After years of investigation, we have found the kid who had the gale (er, gall) to be blowing out the candles of a stolen birthday cake right in the vicinity of our precious bridge.  He shall pay for his crimes!

Tue, 04/21/2015 - 15:06 | 6015491 tommylicious
tommylicious's picture

straight to the 'lectric chair

Tue, 04/21/2015 - 15:09 | 6015498 gunsmoke011
gunsmoke011's picture

Lord how times have changed!! 3600 contracts? Don't trade much anymore - but back in the day - 3600 contracts would trade about every 30 minutes. This piece of shit is in worse shape than I imagined

Tue, 04/21/2015 - 15:10 | 6015502 flash338
flash338's picture

Was it just me or did I just read that as the CFTC admits HFT manipulates markets??

Tue, 04/21/2015 - 15:11 | 6015507 gunsmoke011
gunsmoke011's picture

Individual Investors were allowed to trade up to 5000 contracts if they had the pockets

Tue, 04/21/2015 - 15:15 | 6015525 Weaponized Innocense
Weaponized Innocense's picture

Got this off drudge. (Man I don't miss that about my x mother in law ~ she would do it in a real snotty manner though ... Because she was only thinking ur full of shit and I am going fuck u over every chance I get since I am a bitch and that is how I care.)

http://dailycaller.com/2015/04/20/does-hillary-clinton-suffer-from-uh-hu...

Tue, 04/21/2015 - 15:21 | 6015544 Catullus
Catullus's picture

3000 E-minis caused some stocks to go bid less? Bullshit.

Tue, 04/21/2015 - 15:24 | 6015554 CPL
CPL's picture

Fastest way is an unlucky, unscheduled and unplanned for broken arrow event that will just simply finish the job Fukushima started.  Right near the nest of sensors in California to trigger the silos to open and launch without people over rides.  That would be my first guess to solve the world's issues with money.  Just get rid of all the people.  Not like anyone really wanted a solution anyways.  They just wanted to be validated.  Besides everyone spent all that money and time on those weapons systems.

Might as well use them because why else would anyone build so many of them.

Tue, 04/21/2015 - 17:53 | 6016126 Charming Anarchist
Charming Anarchist's picture

That would be a waste.

Tue, 04/21/2015 - 15:37 | 6015560 youngman
youngman's picture

I thought you hd to be in New Jersey to beat the speed of light.....this guy was in England...and in his home doing this....I am jelous....I would bet Waddle and Reed would like an apology.....I love to listen to the people defend the HFTers...still......add liquidity you know....they take your money right out of your hands....that is the liquidity they add....this market is so screwed..but gold and silver are still down...

Tue, 04/21/2015 - 15:41 | 6015625 Urban Redneck
Urban Redneck's picture

Who the fuck WANTS to be NJ?

You can sit on beach in SE Asia and run algos, as long as the server is located at the right data center in the Shithole State, and you can VPN into it...

Tue, 04/21/2015 - 15:43 | 6015629 yogibear
yogibear's picture

The guy that figured out where all those front-running HFTs exist.

Spread Networks to shave millisecond from  Chicago to NJ spent $300 million to shave 3 milliseconds. Amounted to 10s of billions profits.

 

Where all the cables are laid out.

The plumbing or fiber optics that comes from the exchanges. 

BATS exchange.

http://www.cbsnews.com/news/is-the-us-stock-market-rigged/

 

Tue, 04/21/2015 - 15:49 | 6015655 foxenburg
foxenburg's picture

17. Nav Sarao Futures Limited PLC is a private limited company incorporated in the United Kingdom with its principal place of business in London, England.

That would be Public Limited Company, not private.

 

 

Tue, 04/21/2015 - 15:50 | 6015659 SillyWabbits
SillyWabbits's picture

So butterfly wing wind waves can cause a tsunami!

If they beat fast enough that is.

Tue, 04/21/2015 - 16:24 | 6015819 Yen Cross
Yen Cross's picture

  Maybe in 4-5 years we'll find out who flash crashed the USDX a few weeks ago?

Tue, 04/21/2015 - 18:35 | 6016279 economists_do_i...
economists_do_it_with_models's picture

The timing of this is interesting.  The issue was certainly far in the past for even die hard traders.  None of whom would ever believe such nonsense as factual.  I'm inclined to believe some sort of flash crash 2.0 is coming.  And they are laying the groundwork to blame some HFT firm.

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