The New York stock exchange in day of a collapse of stock market of the USA, on May 6, 2010. Photo: Timothy Kleri/AFP/GettyImages
Really, whether it was worth worrying because of it? Judging by the name, "the instant collapse" the [English flash crash] which occurred on May 6, 2010 in stock market of the USA lasted long not so. Depreciation of securities for one trillion dollars was temporary. The quiet situation in the market – together with a usual stock value – renewed less than in half an hour. The most part of investors – millions of people with the long-term accumulation enclosed in the American companies – did not lose cent. The majority also did not notice a prompt collapse of the market: all were busy with the affairs.
Unfortunately, it is impossible just to close eyes to an instant collapse. The reason of such importance and feature of a role in Navinder Singh Sarao's event – got the nickname "Dog from Haunslou", like the main character of the movie of 2013 "A wolf with the Wall Street" – consist in potential danger of the current situation.
If how assume U.S. authorities, one trader, working from the house in Haunslou, could bring down 6% of the largest stock market, really all system is hanging by a thread? And what harm traders with even large volume of financial resources can do?
The words "potential danger" were pronounced by the leading economist of Bank of England Andrew Heldeyn (Andrew Haldane) in its known performance of 2011 when regulators could not (as well as now) to understand what occurred.
"He [a collapse of the market] taught us to something very important, though unpleasant, about our knowledge of the modern financial markets, – Heldeyn declared. – Not that they were wrong, but the available inaccuracies can increase and lead to system failures … Collapses in the markets, like road accidents, those are more serious, than speed is higher".
Heldeyn's speech was entitled as "race to zero" – sending to the improbable speed of the trade which became possible in the current conditions of the financial markets thanks to boundless computational capability. He told about "race of arms" between the high-frequency (HFT) firms performing transactions quicker and quicker. "Today the minimum duration of execution of the transaction makes about 10 microseconds, – he said (and it was four years ago). – It means that, in principle, in a flash it is possible to close about 40 000 pair transactions. If HFT programs were used in supermarkets, the normal family could could be bought for 100 years ahead within a second. Only provide".
What gives advantage in speed? Actually, many trading strategy take this advantage. Use of a small and temporary difference of the prices, say, in stock quotations in New York and Chicago can make quite good profit. But your computer program has to outstrip the program of other player by the whole microsecond.
High-frequency trading, perhaps, also sounds as rare, defiant general disapproval entertainment, but it absolutely not so. According to the statistics, by this moment HFT trading occupies three quarters of all trade that is conducted in stock markets of the USA, and regulators did not even try to interfere with its growth. The bigger number of transactions in the bigger number of places, in their opinion, leads to bigger activity in the market which in turn leads to reduction of prices, and all benefit from it.
So at what here Sarao? According to charge, it illegally "manipulated" constantly changing markets, trying "to deceive" computers of other investors and receiving from it benefit. He traded in contacts of E-mini which prices change depending on the S&P500; index; in the largest market of futures of the USA – the Chicago commodity exchange.
The Ministry of Justice of the USA considers that he used so-called strategy of "stratification" [English layering]: for example, it placed a number of warrants for sale which intended to cancel that created illusion of pressure in the market towards decrease. And when other computers reacted to the seeming pressure, he could earn, taking shares at low price and then selling them after price stabilization. And all this occurred quicker, than you managed to blink.
In day of an instant collapse of the market the Ministry of Justice of the USA declared that Sarao "intensively and in big scales" used strategy of "stratification" and earned $879 018 of net profit only for this day. Generally in 5 years, according to statements of Ministry of Justice, Sarao fraudulently received $40 million.
We should wait to learn how charge will prove it to wine if business after all comes to court. However many consider that the version of participation of Sarao in a collapse of the markets looks improbably. First, Sarao repeatedly started the algorithm since June, 2009, and then the market was not derailed. Secondly, it switched off the computer in two minutes prior to crash of the market. Thirdly, if it "is only "involved" in an instant collapse whether you should not bring charges and the rest? Why blame one Sarao for everything?
And here still that strange. The Chicago future exchange asked Sarao on its doubtful trading activity to an instant collapse. Moreover, in that day wrote to it as if "expect that orders will be placed on legal grounds for the purpose of carrying out lawful transactions". If the authorities knew, than he is engaged why they allowed it to trade after May, 2010 and waited for nearly five more years before demanding his extradition?
On one of Sarao's versions – regardless of that, its methods are how legal – it is necessary to declare the hero. The manager of Bronte Capital hedge fund John Hampton (John Hempton) considers the traditional HFT companies – actually by criminals as their purpose – "to gather" permanent investors, "advancing" their orders: they use computers to reveal trends in the markets and to place orders before the others.
"I would prefer that the "advancing" computers did not participate in auction, – Hampton claims. – And it will become possible if to permit spoofing [English spoofing – setting of limit orders which will be cleaned before are performed – a comment perev.]. It does work of high-frequency traders Bol risky". Business of Ministry of Justice of the USA Hampton calls "just ridiculous".
The computers trying to outwit other computers – a picture, unusual for traditional perception of stock markets as places where the informed buyers meet the informed sellers and where the companies can address for receipt of financing.
Of course, the same occurs and now. But the main issue which arose after a collapse of the markets – to what danger all of us are exposed with the advent of new "high-speed" technologies? Heldeyn in 2011 was also engaged in this problem. He drew a conclusion that, perhaps, introduction of new rules will be required, and "sticks in wheels can prevent the next accident".
Links on a subject:
- As the 27-year-old young man earned several millions from "financing of a deadly spiral" of cheap events
- Wolves hunters with Wall Street (a cycle of transfers)
- As I earned $500K from machine learning and high-frequency trading
- Violent bulls: as Wall Street became dependent on "high-speed" auction (a cycle of materials)
- Analytical articles and video about Russian and foreign stock markets from ITinvest
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