Michael Maiello's picture

    The Flash Crash Boy

    When I was at Forbes I learned that the American Stock Exchange, once known as "the curb," also had the nickname, "The Scam-ex."  This was where people bought and sold shares of subprime public companies and where insiders and bucket shops conducted pump and dump scams on retail investors.

    To those who ran the exchange, such talk was just snobbery.  There were bad apples, sure, but not every public company is IBM.  The Amex gave small companies a chance.  Not all stayed small.  Some grew big and stuck with the exchange.  Besides, to protect its credibility, they hade every incentive to police their own lands or nobody would trade in Amex listed securities.

    A few years later, as exchanges consolidated, NYSE bought the Amex (and after that, Euronext bought NYSE and after that...)  Then we had the Financial Crisis.  We all learned about derivatives and how certain of them, like credit default swaps, were not traded on exchanges at all.  These were contracts between private entities.  When they traded, they traded over the counter.  OTC markets can work fine.  But sometimes you have to wonder who you're trading with, what their means and intentions are and how they're paying.

    The job of an exchange is to regulate security risk (am I really getting what I'm buying?) and counter-party risk (am I trading with a partner who has honest intentions and the means to meet their obligations?).  The business objective of an exchange is to collect listing fees (how much can my exchange offer?) and to promote trading volume (how many people can we get trading?) These goals are in conflict.

    On Tuesday, the Department of Justice arrested a trader who they say was a futures market manipulator who contributed to the 2010 Flash Crash, when the Dow Jones stocks fell 1,000 points in minutes.  What struck me about the criminal complaint, though, was that our pirate trader worked his scam from 2009-2014.  That means he traded for four years after the Flesh Crash.  It's not that his manipulations went unnoticed.  He received several stern letters from the CME Group, owners of the Chicago Mercantile Exchange.  But he was never kicked off the exchange.  I write more about it at The Daily Beast.



    Fantastic piece, Mike. Congrats!

    His computers fooled the big market players computers. His algorithms beat their algorithms.

    This is deregulated 'good faith' free market capitalism today.  

    From Marketwatch:

    ...E-mini trading spilled over into the equity market and helped trigger the extreme movements.  But the E-mini trades (by Singh Sarao) that the agencies said triggered the big moves (that) were from a large trader, subsequently identified as Waddell & Reed.

    Waddell & Reed has always maintained that their trades were not out of the ordinary.

    When Wall Street crashes again, then the government will write a taxpayer backed (socialist) blank check (again) to put the casino players back in the business of playing main street for fools.

    A bit strange - the naked short selling case of Overstock.com against Goldman Sachs, Merrill Lynch & Bank of America is much bigger, and Overstock humorously (or not) received a copy of internal emails specifically admitting the practice with typical trader bravado. The case against Goldman Sachs got thrown out because Overstock failed to prove the activity happened in California, but the court explicitly stated that Overstock had a triable case against Merrill Lynch's clearing division. It's been 10 years of people claiming Patrick Byrne is a paranoid psychotic, but all the suspected illegal activities have come out as true - even if as likely, no one will pay and no one will go to jail. Hey, it's the American Way™!!!

    This gaming the bids stuff is SOP for the big firms who have license from the SEC to run scams...from the Marketwatch link in my post above:

    Sarao characterized his own trading as just demonstrating to a friend “what occurs on the bid side of the market almost 24 hours a day....On social media, he was mocked both for soliciting outside help to create software and for the relatively small size of his profits relative to the disturbance he allegedly caused.

    Lesson, it's OK to scam the little players, but don't make it obvious the dice are loaded.

    Goldman Sachs proved time & again it's okay to scam the big players (half of the Greek bailout is Goldman Sachs' 2nd set of books). HSBC backed terrorists. Swiss bank & Barclays have major scandals... The lesson is "don't be a little fish or you'll get eaten; if you're Jamie Dimon you'll do fine".

    Martha Stewart got whacked for a $40K inside trading goof. She set herself up as perfect front page fodder - feds get to pretend they do their jobs, Wall Street guys get a big chuckle, business goes on as usual, Wolf of Wall Street style.



    From now on you and Mike W shall be known as THE BEASTS.

    This is great.

    Way to go, Michael!

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