The CME, and EVERY SINGLE OTHER trading venue in existence, requires guaranteed credit before you trade. You simply CANNOT place an order for E-Mini on CME and not be able to make good on it if your bid/offer is accepted. Thus there is no such thing as 'kiting'. Broken trades are VERY rare and if you do break one, there's an investigation and serious penalties are in order. Generally speaking there's someone with the available credit to make the counterparty whole.

So, this Sarao guy for instance, would have been going through someone, say RCG, who is an FCM (Futures Commission Merchant) where he would have say $1 million on deposit. RCG would offer him say 100:1 margin, so he'd make positions as large as $100 million, and if at any point his unrealized P&L grew to close to his $1 million they would call his position and he'd be busted out. At the end of the day he pays RCG some interest on whatever margin he actually used and keeps his profits on whatever he made trading his $100 million in buying power. At NO POINT will RCG ever allow him to be in excess of his credit limit or underwater, and they are regulated and thus guaranteed to have sufficient risk capital to cover any shortfall with the counterparty to any trade on CME. ALL Sarao's trades will be 'given up' to them, or else placed directly through their platform (Onyx 2 I believe currently) and placed by RCG on its omnibus accounts.

The point is, you can't place trades you can't back up, its simply impossible.

Which regulation do you think you're explaining here?! lol.

Institutional traders, or anyone moving a large block of liquidity in or out of the market does it as quietly as they can because they don't WANT to affect the price, not because of some regulation. If I have $500 million worth of IBM to liquidate I'd be a fool to dump it on NYSE and watch the price drop 2% in the next 100ms because that's money out of my pocket. There's no exact RULE that says "you cannot affect the market price" because ANY move of that size WILL affect the market price, its unavoidable. Goldman Sachs and their ilk are 100x more sophisticated than you and WILL detect your large contribution to liquidity in that instrument, and WILL take a chunk out of your hide by pushing the price down. That's how markets are SUPPOSED to work. This happens no matter what you try to do to conceal your order flow, they are just light years ahead of you. And again, this is the normal functioning of the market.

Now, if you actually dump shares in huge quantities in the course of some scheme to bilk people, some sort of pump-and-dump or if you're selling someone else's liquidity and buying it back on the cheap through some other channel or etc then yeah, there's a legal issue there, but it has to do with fiduciary responsibility. This is why these entities are all regulated. Nobody gets to put a trade on the market unless they're regulated, period. If you aren't then you go through an LP/Prime Broker/Clearing Firm that IS, and its their neck on the line.

This will add to the cost of liquidity, costing legitimate traders billions. The question is which is the greater cost, excess churn in liquidity, or poorer price discovery?

Then the cost of price discovery will go up significantly. There ARE markets which implement limits, forcing a delay on each trade, only quoting at certain periodic intervals (say once a second), requiring liquidity to rest on the book for a certain period before it becomes eligible for payment, or requiring added liquidity to be 'close to the market' so that MMs can't just lay off with some useless bid (like they can on NASDAQ). ALL of these things lead to higher execution costs through wider spreads.

I mean, I don't claim to know what the ideal balance is, but restraining trades isn't clearly a good idea, it has both positive and negative consequences and balancing them out is a very tricky prospect given how complex the markets really are.

Yeah, but I work in this field, and I can tell you that MOST bids and offers aren't acted on, and MOST of them are far 'off the money'. HOWEVER, every single bid or offer placed upon the market, and the CME surely counts, is financed. You simply cannot put a bogus order onto the CME, the NYSE, or even the most rinky-dink ECN. So, the question remains "so what?", the man's money was where his mouth was, and its up to other people to decide what to buy or not buy.

The real point is, there's no clean line here. Normal market activity consists of trying to get other people to buy high and sell low so you can do the opposite. Its a zero-sum game and you cannot point to one bid or offer and say "that's fraudulent" and another essentially identical one and say it isn't. I mean I've literally traded the E-Mini on the CME, just like this guy did. Our algos put in multiple orders at multiple price levels and pegged them a few pips off the BBO. How is it that my order flow is legal, but his almost indistinguishable one isn't? I think there's about a snowball's chance in hell they can show he did anything criminal. I mean its possible, there could have been other activities that crossed certain lines, having insider information of some sort, etc, but just placing orders on a market? I defy any prosecutor to make a case that such a thing is criminal.

This is just smart trading. I know 100 guys that COULD do this, assuming they had the requisite margin. As long as you place trades on the book that you're willing to fill based on the rules of that market there's no reason why you should be called a 'crook' for that.

Meh, I expect there is a whole world of transition involved, and improvements to be made in all sorts of areas, but the incentive exists to make them and they are purely incremental technical improvements, so its virtually guaranteed they will be made. It isn't going to take 300 years. 100 years ago cars could barely make 25 MPH and even then only on a few specially maintained roads. I'm sure plenty of people thought they wouldn't catch on for '300 years' either.

NPR had an April Fools Day story where they had an automated car that did that, cursed the other drivers, used the horn, etc. It was kind of funny.

but there's no HUGE change that occurs when a train is automatic. Yeah, its cheaper, and probably somewhat safer, but trains are REALLY safe already, an order of magnitude more so than automobiles, so the gain is much smaller. On top of that nothing much changes. The train still goes to the same place with the same schedule no matter how it is operated.

With cars they wouldn't operate in anything like the same way. Just think about this, if cars were truly driverless and could be summoned as needed why would you care what car you use at any given time (beyond you have some specific need, say for a bulky cargo or etc). This means that the entire paradigm of cars can change, they could simply be a service where they circulate around as needed and pick people up, preposition themselves, etc. They could also achieve MUCH higher utilization, 10 cars could do the work now done by 100 cars, which all mostly sit idle all day anyway.

Its not just a minor detail for cars, its a TOTALLY DIFFERENT SYSTEM that isn't interchangeable with the existing system. That's why I compared it to the change between horses and automobiles, not the change between manual and automatic trains, which really amounts to a detail, not a paradigm shift. This change is therefor inexorable because it brings vast efficiency gains and increased functionality. Once it happens the change will quickly propagate across the world, with any holdout regions being instantly marginalized and their citizenry left looking rather foolish as they spend 10x more than everyone else for a worse service.

It seems inevitable to me. Its going to take a lot of work and time and increased CPU power and better sensors, etc to fully realize all that, but we will. The advantages are so large that any nation 'Luddite' enough to refuse will be stone age compared to the rest of the world 30 years later.

Well, we will have to disagree. I think the change is now inevitable and won't be seriously impeded just by a few accidents all that much. The cars being sold 10 years from now will largely be capable of self-driving in a wide variety of situations, and that will just snowball. Once the idea of the car as a utility that can simply drive itself to where it is needed and carry out simple tasks on its own takes hold driving will die a very swift death.

Actually the number has declined pretty sharply in the last 10 years, to 32,719 in 2014. Its still a huge number, and the number of injuries is staggering, numbering in the several millions. I didn't look for an economic loss estimate but at the rate of 90 deaths per hour in the US it has got to be quite expensive. Every person in this country is effectively paying something like $1000/yr just to pay for the consequences of crappy human driving.

Yeah, we could lower our medical costs drastically, by 300% anyway, but it would still be 1/3 of a huge number is a huge number.

I didn't mean to suggest otherwise, sure, it will start with 'highway mode', but that won't be a long phase. For obvious reasons people will desire the ability to drive on surface roads. Actually parking will come before surface roads, Ford already has a system that can autonomously move the car and park it, driving at low speeds in a dense environment. It will only be a matter of time, I still say about 5 years, before these capabilities have effectively merged and we have a car that can deal with most situations. It might not be allowed to just drive without a 'supervisor' for a certain time, but there will be a huge push to get rid of that limitation.

Think about it, an autonomous car can go to school and pick up the kids, it can go to the store and be loaded with groceries, it can go to the dealer and get maintained, it can come and fetch you, obviating the need for a second car in many cases, etc etc etc. People may think they want to drive right now, but really they don't. They want the power and convenience of instant effortless transportation.

And once that day comes, then they won't even care about owning a car, the concept will be silly. The entire edifice of the car culture will vanish like a puff of smoke into nothing. Cars will simply become a ubiquitous utility, a service you pay to access and which supplies you with however much personal transportation you need or can afford. And of course then it can be supplied at different grades, you can ride with other people going where you're going and its cheaper, you can ride a 'car' that stops at various stops and picks up and drops off lots of people, gosh its a bus! Everything is about to change. The entire edifice upon which most people's reasoning about autonomous vehicles is built will be quaint nostalgia in 20 years.

Those are all considerations, but 50,000 people are killed in automobile accidents in the US alone every year. When that carnage is reduced to 2500 the naysayers will have zero ammunition, especially since the COST is huge and thus the savings also huge. Just as people accepted the hazard of cars over that of horses to gain advantages so will they accept driving by machines. The more economically sensible alternatives pretty much always win out over time.

I think its one of those things that once it comes to fruition everything simply changes. Its like automobiles. Most people laughed and insisted that horses would be around for another 100 years and cars were 'a fad' or 'a toy for the rich', etc. Once Ford made the first cheap car horses were done in 10 years flat, off the road.

It will be the same way. Safe, automatic driving will free up people's time, it will reduce costs greatly, and it will start a whole series of changes in the transportation infrastructure that will snowball. That's how I see it. In 10 years people will start to balk at buying a car they have to drive for themselves, and eventually they won't even care to own one anymore, it will be trivial to summon up what you need from whomever you contract for that service. The whole fetish of car ownership will go up in a puff of smoke. There will of course always be a few nostalgics, hobbiests, collectors, people that drive in some specific situations perhaps, but not much.

Its not possible to say exactly how long the transition will take, but in 5 years automated driving will be much improved over its current state, which is already pretty good, if limited. Within 10 years it will probably be accepted, like cruise control is now, and somewhere down the line, probably within our lifetimes, certainly well within the lifetimes of younger people, it will be ubiquitous. I'm guessing about 20 years, after that a human driver will be an oddity, if not an outright hazardous situation to be dealt with.