A Step By Step Guide How To Crash The Entire Market

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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