Guys placing a false and misleading trade is NOT insider trading. It is charged under market manipulation just like month/ quarter end price mark up.
These type of "trick" is common occurance but it's a matter of whether you are big fish enough for regulators to catch. And now with advent of computers they actually computerise this "trick" into a dumb algo called "Cancel if close"
http://www.bloombergview.com/articles/20...lash-crash
By Matt Levine
(Bloomberg View) -- Hey look, they caught the guy who
caused the flash crash of 2010! His name is Navinder Singh
Sarao, and he lives in London and in 2009 he asked someone to
help him build a spoofing robot:
On or about June 12, 2009, SARAO sent an email to a
representative of his FCM in which he explained that he
"need[ed] to get in touch with a [] technician [at the company
that provided his trading software ("Trading Software Company
#1")] that will be able to programme for me extra features on
[the software]," namely,
"a cancel if close function, so that an
order is canceled if the market gets close."
Sarao was trading E-mini S&P 500 futures contracts, but he
wanted a more convenient way to not trade them, so he e-mailed
his FCM (futures commission merchant, i.e. broker) for help
automating that. The idea is that he would put in a big order to
sell a whole bunch of futures at a price a few ticks higher than
the best offer. So probably he wouldn't sell any futures, since
he wasn't offering the best price. But he had to keep constantly
updating his orders to keep them a few ticks higher than the
best offer, to make sure that he didn't accidentally sell any
futures as the market moved. And that's a bit of a pain, so he
programmed an algorithm to do it for him. Though he also seems
to have done similar things manually, to support the algorithm's
efforts, or to stave off boredom while the algorithm did its
thing.
The point of this -- according to the federal prosecutors,
the Federal Bureau of Investigation and the Commodity Futures
Trading Commission, who are not happy with Sarao -- is that by
placing all these fake sell orders, Sarao would artificially
drive down the price of the E-mini futures. It's classic
spoofing: He'd place a lot of big orders to sell, everyone else
would say, "Ooh look at all those big sell orders, I'd better
sell too," they'd sell, the market would go down, he'd buy, he'd
turn off his algorithm, everyone else would say, "Oh hey never
mind, things are great again, there are no more big sell
orders," they'd buy, the price would go back up, and Sarao would
sell the futures he'd bought at a lower price a moment ago.
We've talked about spoofing before, and I've always been a
little troubled that it works, but what can I say, it works.
On May 6, 2010, according to the authorities, it worked a
little too well: Sarao did such a good job of driving down the
price of the E-mini future that he caused a flash crash in which
"investors saw nearly $1 trillion of value erased from U.S.
stocks in just minutes." I'll put some more details downstairs
but honestly they are boring details. Sarao traded a ton of E-
mini futures during the flash crash -- "62,077 E-mini S&P
contracts with a notional value of $3.5 billion" -- and made
"approximately $879,018 in net profits" that day, or a profit of
about 2.5 basis points on the notional amount, which I guess
isn't bad for one day's work. He did this by, basically, putting
in orders to sell thousands of contracts away from the best
offer. Those orders were never executed, or intended to be
executed, but they tricked people into thinking that there was a
lot more selling interest than there actually was. That combined
with a collapse in buying interest -- at one point Sarao's fake
sell orders alone "were almost equal to the entire buyside of
the Order Book" -- to create a collapse in prices. He profited
from those collapsing prices by selling high and buying back
lower. It's a pretty straightforward spoofing story.
----------------------------------------------------------------------------------
Two months later, he is said to have told his broker in an email that the CME had again been in touch, and this time he had "told ‘em to kiss my ass”.
http://www.telegraph.co.uk/finance/finan...-2010.html
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward
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