Except there isn't one best way. I'm suggesting competition between markets. In the end the providers who best serve the people who actually make and lose real money, not the pure speculators, will determine what rules they want to follow, and it won't be the crap rules that Goldman and such want.

Do you know what the answer is? No, probably not. Only by analysis can we determine that.

What I would suggest is that the barrier to entry for establishing different markets should be kept as low as feasible, and it should be relatively easy for order flow to move between one and another. Then different vendors of market services can construct markets with different rules and order flow can go to the ones that function best. If a market full of HFT traders sucks for the retail investors, then they won't trade there.

Part of the problem is that currently this sort of thing is viciously suppressed. While some ECNs have been established, and there are various 'dark pools' and such it is EXCEEDINGLY hard to establish a really legitimate alternative to something like NASDAQ, and FINRA/CFTC/NFA/SEC actively inhibit such market formation for various reasons which amount to "it might fuck with established market players business models." FINRA in particular is utterly corrupt.

Yeah, neither am I. I have a partner who's a Series 7 FINOP/ROP, and licensed with the NFA, CFTA, and FINRA. I'm sure if I ask him he'll give a rather definitive answer. I know from experience what it is likely to be though, which is basically that the big players are all scum and the only reason this guy is in trouble is because he stole candy from the town bully, not because he did anything they don't do on a daily basis. As I've said in other posts though, there COULD be specific illegal acts, using inside information of some sort, collusion with other traders, front running of some form (if his money came from investors), or falsifying regulatory reports to his SRO (CFTA most probably).

Again, no bid or offer can go onto the CME that you cannot fill, the FCM or Prime Broker that owns the trade will not place the order because they're on the hook to guarantee the credit of every single trade. If you are self-clearing then you have to put up enough capital to make that guarantee yourself, and you're HEAVILY regulated, so if you violate that rule then you'll be busted out for insufficient funds LONG before you traded for years.

Now, conceivably the guy was self-clearing AND he committed fraud in his reporting to the CFTC, NFA, or whatever. In that case the SRO owns his nuts and the SEC would come after him for THAT. Its unusual for someone like this to be self-clearing though, its expensive to comply and you need a LOT of expensive cash. Plus it would be pretty risky because sooner or later one of your bogus offers would be hit and you'd be forced to break a trade, at which point you're REALLY FUCKED.

The margin rules are actually up to the FCM/Prime Broker, so you aren't really exactly correct there. They will only allow bids/offers to be placed which their risk control determines can be covered by the firm's credit, and they normally won't allow their own credit to be risked at all, beyond what they can predict at least. So any bid/offer Sarao placed he would have had to be able to back up if it was hit, period.

Yes, large accounts generally have more favorable margin requirements, but they still HAVE requirements, and if your unrealized P&L and bids/offers you are likely to actually execute on pass certain limits then you WILL be called, just like some retail trader. I've written risk management algorithms for EXACTLY THE MARKET that Sarao is alleged to have been manipulating, and traded the E-Mini. Its going to be at least very difficult for anyone to demonstrate that what Sarao did is materially different from what anyone else does on that market. It certainly sounds like a pretty garden-variety high frequency algo to me. You place bids and offers at multiple levels and keep them 'pegged' in reference to the BBO, and then open positions at levels your algo predicts will yield positive results.

You cannot put an order on the CME that you cannot execute, that's what FCMs and other Prime Brokers are FOR, they guarantee the credit of every bid and offer.

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.