26 April 2015

So, the Flash Crash Was Caused by Some Guy Living in His Parents' Basement?

The DoJ is attempting to extradite Nav Sarao to the United States because he allegedly caused the "Flash Crash".

While this might be significant for Mr. Sarao, this is missing the forest for the trees.

If our markets are so unstable as to be tripped into catastrophe by one guy, they are too unstable to exist in their current form:
Everyone on Wall Street has been talking about this week's arrest of a little-known UK-based trader on allegations that he caused the May 6, 2010 "Flash Crash."

That's because the consensus view on the Street is that the arrest itself is absolutely ridiculous. In fact, as one trader put it, it's "beyond ridiculous."

Over the past few days, we've had several conversations with traders, quantitative analysts, and hedge fund managers. It was the topic of conversation at happy hours and charity events.

What's more, there wasn't a single person we spoke to who bought the argument that one guy wiped billions from the market in a matter of minutes by "spoofing" — a practice in which a trader orders a bunch of trades and then cancels them. It creates artificial demand and manipulates the price of a stock.

It's been almost five years since the "Flash Crash" and regulators are suddenly blaming Navinder "Nav" Sarao, a 36-year-old who trades S&P futures from his mom and dad's house in a London suburb. Yep, regulators think a guy in saggy sweatpants and Nike Airs trading from his parents' basement did it.
It also appears that the charges are just plain bogus:

Round up the usual suspects!
This prosecution is all about covering up the total vulnerability in the market.

The "Flash Crash" was not a result of actions of one person. It was a result of the profit strategies of dozens, if not hundreds of actors in the markets, and they all are structured in a way that was calculated to maximize, and exploit, volatility.

The "market making" capabilities of high frequency traders is a mirage:  As soon as the market experiences upset, they pull out, and create a crash.

We need to make the markets less responsive, and create greater transaction costs.

Otherwise, instant market panics will become a routine part of our lives, and the lives of the 99% not extracting rents from the financial markets will suck.


Post a Comment