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Why Nav Sarao Had To Be Destroyed: He Found A Way To Beat The HFTs At Their Own Game
Now that the confusion and the initial smoke following the stunning CFTC/DOJ/FBI allegation that the entire Flash Crash was the result of just one high latency UK trader's actions has cleared, several critical things have emerged.
First: Nav Sarao not a typical massively funded, connected and lobby-protected High Frequency Trader, such as Citadel or Virtu, using countless algos across numerous fragmented markets to frontrun size order blocks, but an old-school "point and click" prop trader. This is how he described his trading style in a response to the UK regulator:
I am an old school point and click prop trader. To this day I am still using the mouse to trade. That is how I trade, that is how I always have traded, admittedly very very fast because I have always been good with reflexes and doing things quick. My trading is for the most part very short term and for very small profits, a large proportion of my profits are 1 price movements, which in the eminiSP's case would be a quarter of a tick. I have also take longer term positions In the past and my biggest day was actually made for the most part whilst I was sleeping!
I am a trader who changes his mind very very quickly, one second I am prepared to buy the limit of 2,000, the next second I may change my mind and get out. This is what is unique about my trading I trade very large but change my mind in a second. This is why MF Global had to speed up their systems for me, yes they have other hedge funds etc trading 2,000 lots, but they didn't have anyone buying 2,000 and getting out seconds later and then going short a thousand ! All this traded volume was something that MF Global's system was not prepared for and I remember at the start their system was too slow for me. And all this is done with the my hand and a mouse.
What makes me change my mind? Well it could be anything, a move in one of the other markets that I look at, a chart set up that I suddenly remember from my 11 years of trading, or simply the WAY I was filled made me doubt my position, or for the large part it is just my INTUITION.
And while nobody will ever accuse Sarao of being a fundamental trader, he worked on a time horizon that is infinitely longer than that of collocated algos: while HFTs deal in tiny oddlots on a constant basis (for fear of being actually hit or lifted thus never actually providing liquidity) Sarao held on to large lots of what in HFT terms is an eternity: seconds or longer.
My orders are 100% at risk, 100% of the time. If I want to trade 300 lots I clip 300 lots as one order, I do not trade 300 one lot trades (so that it counts as 300 orders) in order to fulfil the CME messaging policy like HFT's have to do in order to make up for their 95% of orders which are neither genuine or possibly not even tradeable. Certainly not for a guy like me who is trading from the UK and whose system is miles too slow compared to these people due to the fact my orders have to travel further than everyone else's who are trading In USA. No wonder they can manipulative (sic) on top of my orders without any risk, for even when I change my mind and decide to sell into my buy order, the manipulative orders on top of my initial buy order disappear in the 4 milliseconds It takes for my buy order to be cancelled and replaced with my sell order so that I do not trade with myself !!!!!
Second, as we first observed yesterday, the real reason Nav was picked as a scapegoat is because he threatened to expose the "mass manipulation of high frequency nerds." This was validated last night when Bloomberg reported that "the sleuth who pieced together Navinder Singh Sarao’s pattern of spoofing isn’t an FBI agent or regulator. He’s an academic whose research has taken the view that high-frequency trading is good for markets." Hence, Sarao is bad for the HFTs and should be "eliminated."
Today, we find precisely how and why Sarao was singled out: he not only exposed out the parasitic trading strategies of the real culprits behind the broken market, the massive HFT firms (such as Virtu which went public 24 hours before the Sarao charges were filed) which gave the "regulators" no choice: one of them had to be put away for good, but found a way to capitalize on the algos' stupidity, and actually make money by beating them at their own game.
As such, regulators and exchanges such as the CFTC and CME had no choice but arrest him and prevent him from trading ever again!
Here are the details from his May 29, 2014 email to a FSA regulator:
I don't like the HFT arena and have complained to the exchange numerous times about their manipulative practices, please BAN IT, Another good rule change would be to increase the maximum clip size of the market from 2,000 to 5,000 lots. This would make people more wary of putting fake orders up and down the market depth because they would be more at risk of getting hit. I have asked the exchange a few times for this, and this was then proposed, but unfortunately rejected by the other people questioned !!!!
I have traded using a basic TT for numerous years. Due to the tact that there were some individuals In the emini SP who quite remarkably seemed to know WHERE 100% OF MY ORDERS WERE RESTING, even If they were over 90% partially filled !!! and hence made a concentrated effort to manipulate around those orders so they would not get filled, I decided to pay Edge Financial to build a program for me that would help disguise my orders more effectively. Initially 1 was told that the reason these individuals knew where all my orders were was because traded so big and was as such 'the elephant in the room'. However, It is worth noting that further examination showed that their special manipulative activity occurred exactly the same if I did a 20 lot order or a 200 lot order.
In other words, precisely what we have claimed from day 1: HFTs do not provide any liquidity at all - they merely look for size orders and immediately seek to frontrun them, in the process actually soaking up market liquidity .
And while the world wonders how it is that Virtu can have 6 years of trading with just one trading day loss, Sarao not only figured out how to outmanipulate the manipulators, but how to profit from it.
Here is his explanation:
I asked Edge to design 3 more functions specifically to help try and hide my orders from these people. I do not know if this can be described as HFT, to me it is just giving me the ability to have some extra functions that my base trading software (TT) does not give me and it should be noted that I only use these functions intermittently and sometimes not at all. it is called Navtrader, but it could be called anything and I was the only one who helped design it, albeit my design ideas were 100% generated from what I had already seen other traders using already in the emini SP, Please note I believe I have only had this NavTrader since the beginning of 2013 at the very earliest.
I decided that the only way I could mask my orders, was to place them as the market changed price so that they may not be seen in the 'chaos' of a price change. So I would have my orders pending to be placed as the market went from bid to offer or offer to bid.
The 3 main functions are as follows:
JOIN : These are pending orders that will be joined anywhere requested along the order book and become active when the price changed. Remarkably, these orders were still subject to the insider trading I describe above, even when they are as small as a 50 lot!
SNAP : These are orders that are the same as JOIN but at the market best price so that they become traded almost immediately. I also have a function that lets you put in a minimum quantity so that the buy/sell SNAP order only becomes active when there is a minimum of that number of contracts on the offer/bid. This worked rather beautifully when the mass manipulator of the e-mini sp was doing his normal manipulative activity at price 1800,00 on Friday 24th January circa 12.23pm. The fake bids he had placed were being removed too quickly for me to hit If I had put a snap for 700 with 0 as minimum volume it would not have been filled because as soon the bid was more than 1 lot big the 700 would have been active. With my 699 then resting the normal forms of manipulation that occur on 100% of my orders EXCLUSIVELY would then have preceded to follow. So i put a 700 lot SNAP with a minimum volume of 6OO, et voila I got my full 70.
Here is Nanex' Eric Hunsader showing precisely how he did it:
The Sarao vs #HFT spoofing battle captured on a Nanex chart: pic.twitter.com/rScgu6kuW2
— Eric Scott Hunsader (@nanexllc) April 24, 2015
Sarao continued:
ICE : The iceberg function on the CME isn't adequate for me, I hardly ever use it because it puts me at the back of the queue all the time. Hence, 2,000 needs to trade to get me out of 800 lots for example, My iceberg function is placed at a price and as soon as it is bid/offered at the price the iceberg will take all contracts at the price up to and including the number of my order. Again, there is a minimum volume box, so for example 1 can put 50 into it and put a sell ICE of 1,000 and then at that price every time the bid is more than 50, the ICE wilt take all contracts out until 1,000 is traded. This is a good way of catching spoofers, and et voila I can trade 1.000 lots at one price (following on from the above example),
The other orders I sometimes place during the day are slightly away from the market price and move up and down as the market moves with It. This Is to catch any blips up/down in the market so that I can make a small profit as the market comes back into line (almost immediately). These orders are placed rarely and only when I believe the market Is excessively weak or strong. Again, this was inspired by other traders I could see doing the exact same thing.
I am a member of the CME.
Alas, not any more, for one simple reason: you showed the broken system that it can be beaten, and explained how.
As a result, the only response the broken system had was to put you away for good.
Oh and as for the actual question whether Nav Sarao caused the Flash Crash, the answer is: of course not.
This chart exonerates Sarao for causing the flash crash (did he contribute? MAYBE. Cause it? NO) pic.twitter.com/OPdLtgieSe
— Eric Scott Hunsader (@nanexllc) April 24, 2015
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Those fuckers!!!
I'm confused, when did Corzine change his name to Sarao?
Liberty is a demand. Tyranny is submission.
Isn't his "crime" like counting cards in a casino? You aren't allowed to unrig a rigged game.
Issues :
1° Ban HFT trading
2° Ban certain categories of derivatives or severely curtail their use when naked.
3° Ban naked shorts and hedges; at least oblige traders to hold them for a certain period of time (3 days?)
In other words regulate the casino. Investigate and prosecute the regulators and do it all the way bottom to the top!
Cancerous capitalism will kill the market. It already has impaired it since donkey's years!
Might as well close the casino then.
The simpler solution would be:
FINANCIAL MARKETS ARE CASINOS NOT "EXCHANGES" OR "MARKETS"
"TRADERS" AND "ADVISERS" ARE BOOKIES OR DEALERS
At least everyone in the world understands plain language.
Calling a spade a spade
It would kill that entire idiotic industry and the "elite" schools pumping out blathering fools trying to come up with more and more lingo to bent the truth and sugar coat the fraud all the while stuffing their pockets with client's money and robbing from Peter to pay Paul.
Absolutely nothing of value is generated in the casinos.
I tell ya feral is very predicable. Use the right bait and they will jump all over it. Please keep this in mind when dealing with the feral.
If I were a criminal defense attorney, I'd give my entire career to defend this case against the most corrupt, inept exchanges and alphabet soup gov't agencies. So, let me get this straight; if I place an order to sell e-minis and then change my mind and cancel the order, I'm somehow responsible for the Dow going 700 lower? My client hasn't sold a fucking thing, and yet he's the guy bringing the system to it's knees? Are you fucking kidding me?
www.traderzoo.mobi
No disrespect. Back in 2007/2008, we had 200 point swings. By 3:30, we somehow managed to recover within the last 30 minutes of market trading. PPT was replaced with POMO. You may also remember, all short side selling was banned for a bit.
Note. Dont be the bait. The bait must be of no import to you.
this is just Bull Shit, do we have an address to write the CFTC to express our displeasure?
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
202-418-5000
202-418-5521, fax
202-418-5514, TTY
Consumer Assistance and Complaints: Call Toll-Free 1-866-FON-CFTC (866-366-2382), or use the Tips and Complaints Form.
Note to CFTC:
Don't throw rocks in glass houses.
I still don't fully get the described approach, shown in the twitter pic.
So Sarao usually bought.
That example on Friday 24th January circa 12.23pm was he buying too?
He takes out the HFT fake bids (how exactly?) and... then he does what, to trick a HFT into selling to him a little below "market"?
Confused.
I too would like a more detailed explanation for those of us who don't know all of the ins and outs of the (corrupt) system. The below is my guess at what is going on with some of the algorithms he came up with.
For ICE it sounds like he was taking advantage of dumbness in HFT algorithms. Specifically, the HFTs would change their price if you place a large order and hit one of their small fake orders. But it sounds like if your order is small enough that it only takes out their fake order(s) (i.e., doing so satisifies your entire order) then the HFT returns to being dumb again and comes back at the same price (don't know if it does so right away or maybe after some delay, maybe it backs off in terms of price and then returns to the original price over time). So his algorithm waits until there's a bunch of these fake orders (e.g., 50 rather than just 1, or one size 50 rather than a size 1) that will hit at a given price and then takes them all out at that price. His algorithm then waits for them to "recover" (come back to offering at that same price again) and hits them again. Rinse and repeat until you've offloaded your real entire lot at the given price.
With the SNAP one it sounds like he's doing something similar, but trying to do it all in one go (and using a market-order type of order to make the trade happen faster). I think the article is supposed to say "got my full 700" rather than "got my full 70". Not sure why he's using a minimum volume of 600 though if he wants to make sure 700 moves. Maybe another typo? (I.e., he meant min volume of 700?) It also sounds like ICE is basically built on top of SNAP, but whereas SNAP by itself can only move large lots when there is large volume, ICE can move a large lot even when volume is thinner.
If the HFTs weren't issuing fake orders at fake prices in an attempt to manipulate the market, there would be no way to trick the HFTs into buying/selling at volume (over time) at such fake prices (and Nav Sarao probably would not have been able to make even a significant fraction of the money he made). So he was just doing what you're supposed to do in the market - take profits from the dumb money. Per the CFTC though, it's only OK to take advantage of dumb money if that dumb money isn't a TBTF or someone else with deep political connections.
The part where he talks about placing orders "away from the market price" to "catch any blips up/down in the market" - without saying whether or not I have personally done so, I'll just say that's something that has got to be pretty common. Even everyday non-pro home traders can do that on illiquid stocks that get crazy stupid spikes when some dumb-ass places a market order (though home traders can also expect people/bots with better intel to then sit in the way and try to intercept such spikes before it gets to them - now apparently if you cancel that trade to make the bot go away and the place it again you are a "market manipulator").
He threatened the tribe's profits, indeed a large chunk of their currency/fiat scamanomics.
Indians and Chinese, for that matter Arabs, Germans, Scots and others also threaten the tribe in a different way... if not fucked by the system of fiat and the blogal banking empire, they will demolish the tacit stereotype about 'jewish genius.'
wealth and media and political and academic/administrative power + ethno-nepotism is most of *that*.
90% of trading coups are the result of insider information. Little genius involved.
And you have to be a member of congress to do that.
Tribe stole the gold from Egyptians to build their calf in the desert. All downhill from there...
now if he would just release the info onto the internet then the ganksters, fedsters, hft freaks & wall street criminals would get smucked big time (until the next scam is unleeched) but likley this guy is in a rubber room being fed "nutritional supplements" if you get my drift
Lobying, and oversight/regulation for the small guys only. they used to call it fascism. when was last time SEC or CFTC CME NYSE went after a big fish for FRAUD. Michael Milkin I think 25 + years ago. Love it because it's only gonna get worse from here.
I don't get it, where did he actually *cost* them money? I see that he managed to work around them at times, but nothing here seems to describe where he hurt anybody.
Nor does this explain how he won against the market himself, presumably he had a few front-running tricks himself or he wouldn't have survived.
See my reply to malek above for a detailed explanation. It looks like he was basically collecting the (HFT's) dumb money. Nav Sarao wasn't doing any front running, and he wasn't even winning "against the market" (unless you count HFTs as "the market"). He was just looking at HFT's probes ('fake' bids/offers - spoofs) and saying to himself "hmm, if I could actually buy/sell at those fake prices I could make millions". And then he figured out how to do exactly that.
I entered the "financial Industry fresh out of college, just prior to the crash of 87, when I watched hundreds of millions of market value evaporate on 100 share trades while at the same time the same brokerages were buying S&P futures. Of course this stopped the crash and our capitalist system was "Saved", while they pocketed huge money. Since that rude awanking to the supposidly pure capitalist system and the deep routed corruption, the only way to make money was to exploit inefficiencies in market mechanics. Now you can be prosocuted for it.
Nice take on "deficiencies" of markets ca be found at
https://contrarianopinion.wordpress.com/2015/01/29/invisible-hand-and-ot...
LOL "rude awanking."
Makes me giggle like a 10 year old.
How dare anyone figure out how the JPMorgans, Goldman-Sachs and other financial sociopaths lie and steal.
from my archives the Reuters article shows that the SEC determined who the flash crash was caused by and it wasn't Nav
-----------
"In their report on the 2010 equity market crash, the SEC and CFTC staff found that “against a backdrop of unusually high volatility and thinning liquidity, a large fundamental trader (a mutual fund complex) initiated a sell programme to sell a total of 75,000 E-mini contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position”.
“This large fundamental trader chose to execute this sell program via an automated execution algorithm (”Sell Algorithm“) that was programmed to feed orders into the June 2010 E-Mini market to target an execution rate set to 9% of the trading volume calculated over the previous minute, but without regard to price or time,” the report noted.
“On May 6, when markets were already under stress, the Sell Algorithm chosen by the large trader to only target trading volume, and neither price nor time, executed the sell program extremely rapidly in just 20 minutes.”
The fundamental trader’s sales were initially absorbed by high-frequency traders (HFTs) and other intermediaries causing a sharp rise in volume. But that fooled the sell algorithm into thinking there was more liquidity than was really the case, causing it to step up the pace of sales even further.
In effect, the large fundamental trader sold faster than the HFTs and other intermediaries could find other long-term fundamental buyers, and ended up trading against itself.
“The Sell Algorithm used by the large trader responded to the increased volume by increasing the rate at which it was feeding the orders into the market, even though orders that it already sent to the market were arguably not yet fully absorbed by fundamental buyers or cross-market arbitrageurs,” according to the report.
The SEC/CFTC study highlights the interactions between liquidity, market fragmentation, a single large bungled trade, and the responses of HFTs and other market makers."
....
John Kemp is a Reuters market analyst
source:
http://business.financialpost.com/2012/09/20/flash-crash-or-a-turning-po...
Guy is obviously innocent. Even CME admitted it in their statement just two days ago. It’s going to be show trial threat probably settled for DOJ to save face.
The spectacular arrest of stucked home millennial was just to show every other independent trader where he/she belongs if they dare to annoy big HFTs that own the SEC/CFTC.
One good thing that probably will come out of this is that those evil math Ph.Ds gonna get big pay cut because that were conned by simple grunt.
Here there are prophetic words about “free” markets written just few months ago I found at:
https://contrarianopinion.wordpress.com/2015/01/29/invisible-hand-and-other-paranoid-delusions/
excerpt:
It would be superfluous to add that strong buyers and strong sellers are those who run real marketplaces and making all the profit using all visible hands, often armed with guns or government connections. What’s left “free” in real market is nosebleed or worse for those who demand honesty and fairness.
Yes, the guy is innocent. That's part of why he was chosen. It will limit the trial discovery (if there is a trial) and therefor limit the disclosure of any 'sensitive' information about the algos. He was specifically chosen because he's not an algo trader. Whether he was a successful trader of not is beside the point.
The point is that the trial will now be about this guys fundamental trading methods and not about the market manipulating algorythms. It's a show trial, at best.
Obviously the real elephant in the room are the algo's that continue to move the markets north in a stabilized fashion. This elephant will remain untouched.
Bingo!! ++++
Now the only hope is the defense is aware of this and is able to leave a few doors open for discovery later.
Find and email to defense
When you go to the movies and you see people being crushed by falling rocks, those rocks are made of Styrofoam. They look real and the illusion created seems like an actual event when the actors appear bruised and lacerated.
The Styrofoam Financial Markets want to be seen as rock solid.
The difference is that the Financial Styrofoam Rocks can actually crush people without bruising them.
Even though they are no less illusionary!
Thoughtful, Committed Citizens
Can Change the World.
Indeed it's the Only Thing That Ever Has."
-Margaret Mead
So, he traded against Satan's demonic government, won and has thus far lived to tell about it... albeit his wardrobe has changed.
Or, is this just another set-up for something to come?
Als Zeid Raad al-Hussein - de mensenrechtenchef van de Verenigde Naties - een beetje slim is dan moet hij zich niet zozeer druk maken dat 'migranten worden vergeleken met kakkerlakken', maar het feit dat de blauwdruk van het systeem 'Leven en Laten Leven' nog steeds geen publiciteit heeft gekregen.
http://www.volkskrant.nl/buitenland/vn-chef-beschuldigt-britse-krant-van...
Al gaat Nederland wel Cubaanse diplomaten trainen in hoe een cultuur van waarheiddelen zou moeten werken.
http://www.nrc.nl/nieuws/2015/04/24/koenders-in-mei-naar-cuba/?utm_campa...
Dat menig land in een diepe politieke en economische crisis zullen terechtkomen is logisch, want geen enkele rechterlijke macht is in staat om de toetsen aan de 'Logica van de 1'. Dit had minister Dijsselbloem en vorzitter van de eurogroep eigenlijk na afloop van de bijeenkomst met zijn Europese collega-ministers van Financiën in Riga tegen de NOS moeten zeggen.
http://nos.nl/artikel/2032275-urgentie-bij-grieken-is-niet-hoog-genoeg.html
The perp, real or imagined, gets prosecuted based on who the people are.
Madoff didn't go to jail because he was running an insane Ponzi. He went to jail because of the names on his client list.
Are we supposed to stone Sarao because he was hurting The People.?
He didn't do shit to me. Now, those LIBOR bastards are another story. Oh that's right, the shareholders are paying the fines for them
He's lucky they didn't chase him through the subway and fill his head full of lead...
Why didn't he just pay a small fine and admit no wrong doing?
Quick, get bathhouse Barry on this.
How great it will be the day ISIS beheads every fucking Jew.
Wait, so the company that runs these algos that has a severe flaw isn't the one being prosecuted nor is the "proprietary" code checked to prevent this...
Can someone please explain how he spoofed the hfts? In lay mans terms. I don't understand I thought front running was stepping in front and trading before a retail order was filled.
That is correct. Front running is when a broker executes an order as principal at a price equal to or better while holding an order as agent, at that price.
In Laymans terms, by entering certain orders, he could trick the hft algo's. At least that is how I understand it. Of course if he were to admit that, then he would be guilty.
So, who is going to play Sarao in the movie?
Brown guy takes the fall.
When are some of the chosen people going to be convicted?
Brown girl in the ring is the tune you are looking for.
The Rainman says it best:
"There are lots of them." (Navs)
Finra NFA the FED are all private companies whose sole goal is to earn money (including DTC and NSCC is just too much for one post). The CFTC and SEC regulate exchanges and SRO's. The SRO"s are resposible for regulating the brokerages who engage in the markets. Why do these companies alwasy elude scrutiny. Finra, formally NASD, has a long history of Insider trading (Sold their 650 million CMO holdings 6 months prior to the crash) Their crack team of analysts bested the best and brightest on that one. Market manipulation a billion dollar settlement without admitting or denying wrong doing (https://www.questia.com/newspaper/1P2-5698425/nasd-settles-sec-charges-o...). Stealing NASDAQ from its membership by using outright fraud and misrepresentation. So in realality, the entire financial system is controled by 3 private companies.
well, fn duh. the only way to disrupt a system that has to read the market in a certain pattern is to overwhelm the pattern response with non sequitor patterns, a random algo that has no counter algo response, in fact, cannot have a counter algo response by design..
truly fn brilliant. the mind beats the machine because intelligence of the human mind can act without pattern, the insane trader, the ultimate sociopath, my new hero.
true!
Sind mo monneys. I is less ready yoos send. An ifs you eva meets mh emands imma fuckin kills ya.
CLEAR?
I just want know what mouse he use....
I smell a goat in the room, scapegoat that is...
Goats eat garbage. Destroying financial documents using a shredder is so yesterday. Just buy a goat.
or fly a plane into the building their stored in
Here's the issue: Do Androids Dream of Electric Sheep? (Remember that one by Dick?) That is, if my machine fools your machine though whatever type of market signalling, even if that's exactly what my machine was designed to do and did do, can that be characterized, as a a legal matter, as "manipulation" -- or is "manipulation" confined to some human being giving artificial market signals that fool some other human being when that human being, not his or her machine, makes trading decisions and buys or sells?
I dunno, he must be going counter-trend, say the price is falling, he bids above market, algos jump in to buy, he is filled and market ticks up. He then offers to sell under market, but above starting point. Algos see a bargain and buy from him. Then he goes short. Market returns to trend, he profits on short. Algos fooled themselves and are holding the bag. Whole thing happens nearly as fast as he can click. Say this is roughly correct. Does it matter? What if he just went short at the start, when he detected the trend? Well, maybe in a normal market he wouldn't get an execution, he'd never get his position. But the greedhead algos are always "adding liquidity", so he jerks them off. But my story here only worked if algos buy the bargain, mistakenly, ignoring the trend.
Maybe I should be in this my own self, ...
As a former floor trader/broker I was somewhat suspicious that I could not " SEE " the real market. This article confirms my suspicions - risk free trading for some risk filled for the rest. The way it was sold to the commodity floor guys was , " oh it will be greater liquidiity , tighter bids/asks , greater particpation thus lower volatility , etc. etc. blah blah blah." I blame myself for my own hubris for trying to compete with the machines for so long but there is a lot of poison that's in the mud concerning the rush to convert trading to digital arenas and simultaneously to convert the exchanges to a for profit maker/taker model. There will be a higher(est) justice meted out eventually.
We Nav Sarao-ed some folks.