The guy doesn't use an algo, he's a manual trader. http://www.zerohedge.com/news/...

http://www.zerohedge.com/news/...

but my point was there's no 'algo' that the MARKET uses to price things. Prices are set by traders, there's no such thing as a price that is 'right' or 'wrong', just what you do or don't want to pay.

Yeah, there's no such algo. I don't even know what you are talking about. Market prices are the Best Bid and the Best Offer, the difference between them is the spread, and then you have the Last Trade Price, which just shows you what someone last paid. In the stock markets the last trade price is what you see on the news, but in most other markets that isn't even noted. In F/X or on the CME they just quote the BBO (best bid and offer). These are literally just whatever traders have entered into the market at that time. They look at the numbers and either bid/offer or cancel bids/offers. There is no single algo, the prices are the net result of the behavior of all the market participants at all times.

Ummmmmm.... Yeah, that's not really what happened. Its true, if an investment fund was invested in AIG then to some degree it was 'bailed out', but there was a SEVERE haircut, and many funds simply lost billions upon billions of $. Also the major losses for funds weren't from being invested IN something like AIG, they were from buying investments FROM something like AIG, investments that were worth SHIT, and they ate every single bloody penny of that, nobody got bailed for owning a subprime loan portfolio, except the banks themselves and THEIR shareholders.

That also is NOT why there was intervention. It was most decidedly not to save people (who sadly ARE mostly the top 2%) from their bad investments, though it sometimes had that effect. It was to stop the total disappearance of the credit sector of the economy, which would inevitably lead to total economic collapse.

And again, you seem to think I'm some sort of Libertarian, which is utterly not the case. We have a perfect right to do any god damned thing that allows society to function in a reasonable fashion, but that doesn't change what does or doesn't work. I am only postulating that market forces applied to markets themselves can be a better solution than regulations which never in the history of mankind have had that effect.

Of course ANY arbitrary market move cannot be covered. Hell the recent craziness with the CHF blew at least 10 major F/X prime brokers clean out of the water in the space of a few hours. That doesn't mean that any one individual retail client was able to put arbitrarily large liquidity out there, that's a whole different thing.

My point is just that kiting checks involves funds you don't possess, nobody putting a bid on a market like CME lacks the funds to execute the trade if the bid is hit, and MOST bids are not placed with the anticipation that they will execute, 90% or more of them don't. So its hard to demonstrate that one specific trader is manipulating the market. This is especially true of a HUGE market like the E-mini, which has a gargantuan amount of capital in it.

Oh, I'm not in favor of total market deregulation, far from it! However, I think its possible that not every problem is solved by another regulation either. I'm FAR from being a Libertarian or anything like that, government is a tool, use the best tool for the job.

As far as #1 is concerned... There are 2 answers to that. First of all if you're going to let other people do your investing, then indeed you will give up some control. Secondly though the people DOING the investing have a fiduciary responsibility to you, so they should be picking the best markets. If they aren't then your later comments about going after scumbags apply.

As for #2, it doesn't really work that way. The govt didn't bail out ANY retirement funds (at least not private sector ones, nor any mutual funds and similar, money markets, etc). There were some people made whole for certain things out of FDIC or other insurance, but presumably they were paying for that via the premiums coming out of their returns, so its not QUITE a bailout, though perhaps the premiums are subsidized. So in the final analysis the problem isn't that the investors are too big to fail, its the firms themselves that get the bailouts.

I don't think any of that should happen, so I agree with you entirely, if one of these firms goes bust then the feds should come in, take 100% control and deal with it in whatever manner is required. The stock holders can simply deal, they invested, they selected the management that created the problem, they took the profits, they get the risks and consequent losses. If it was done right, the investors would certainly lead the charge to hold people accountable, they don't have the motivation if they're bailed out though.

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?