Liam Vaughan

I think that Vaughan sometimes uses too much artistic license to get us into the head of the main character. Vaughan clearly struggled without Nav's cooperation, and unfortunately I don't think that the public story is worth a whole book.

> Years later, investigators would talk about the “Spoof Wars” of the late 2000s, an ultra-high-stakes game of brinkmanship in which players would try to wipe each other out by hitting their opponents’ spoof orders and getting them to “puke”—close out positions they never intended to consummate for a devastating loss

> Every time a fresh order is placed at a certain price, regardless of its size, it joins the back of the queue for that price and moves steadily further forward as the price fluctuates and the orders in front of it are matched. If, however, a participant adds to their order, like a customer stepping away for a moment to add to their cart, they’re judged by the CME to have left the line and sent to the back. Nav’s brainwave was to have his algo add a single lot every time a fresh order arrived behind him, thereby constantly sending him to the back of the line and out of harm’s way. To keep his order size at the amount he intended, the algo would subtract a solitary contract the next time an order arrived, alternating between plus one and minus one

> In the twelve days the CFTC ended up selecting to illustrate the entity’s activity, its layering algorithm canceled or modified orders 182,000 times, corresponding to $35 trillion in notional trades—double the size of America’s gross domestic product. On eight of those days, not a single one of those orders was hit. The size of the orders was also immense: an average of 504 contracts, where the average across the market was seven. On the day of the crash, the layering algo accounted for close to a third of all canceled trades in the e-mini, the second-biggest futures market in the world.

> Nav was adamant he’d done nothing wrong, but he’d grown morose, that steel-box mind, normally so resistant to unnecessary feeling, buckling under the strain. As he was driven from his parents’ house, handcuffed, in the back of an unmarked police car, he could at least console himself in the knowledge that, no matter what came next, the running was over.

> he’d been taping himself for years, archiving the clips as evidence of what he perceived as cheating by other market participants. In doing so, he’d captured himself breaking the law again and again.

> For Nav, this exercise resulted in a recommended jail term of between seventy-eight and ninety-seven months. Under the terms of the deal, however, Nav would be given an opportunity to “earn off” part of his custodial sentence—perhaps even all of it—by providing assistance to the government in any civil or criminal investigation they needed him on. Normally, a defendant would provide such cooperation while they were in prison, but the DOJ had agreed to allow Nav to return to the UK and help them from there. … adamant that Sarao face some kind of punishment beyond the four months he’d already served, and, in recognition of his medical situation, ordered him to serve a year of incarceration at his parents’ house.

> Nav’s insights into identifying cheating in the order book were incorporated into the agencies’ detection software, helping lead to the convictions of more than two dozen traders from banks, hedge funds, and even the HFT firms he so despised. Nav’s “home videos” are still shown to investigators and prosecutors in training programs across the United States.

> making tens of millions of pounds, the master manipulator of the S&P 500 couldn’t pay his fine because he himself had been the victim of a Ponzi scheme… (mere)

An entertaining look at a stock trading savant (on the spectrum) who worked from his parents house engaging in massive fraud by manipulating loopholes in computer trading systems that contributed to the 2010 market "Flash Crash". It is well told and dramatic. How you see Navinder Sarao - hero or villain - is the question of the book.

One of the more tantalizing figures is "Mr. X" who uncovered Navs scheme and remains to this day anonymous. As Vaughan says, he is the one person whose perspective never faltered and who watched the circus around Sarao with bewilderment. "I think it is odd that you ask if I respect someone who committed massive fraud," he says. "No I don't. I don't respect people who steal money from other people. No matter how clever they are or justified they feel. Sarao did not target high-frequency traders. He was not a victim of the markets. He stole money from all market participants without discrimination. He tried to make the most money he could be using common cheating techniques. His 'genius' was his lack of fear and belief he would never fact the consequences. This allowed him to cheat massively. He did not give his money away like Robin Hood. There is nothing admirable about stealing money for personal gain."

That leaves the perspective of a autistic savant who did not know any better. All evidence points to the contrary, he knew it was criminal but rationalized it because he saw other problems in the market and why shouldn't he do the same? Most savants do not get into trouble with the law. So in the end, this is a story of a common criminal and news of the weird. It doesn't teach us very much. But it makes a good story. I look forward to hearing more about Mr. X, the real hero of the story, who is that masked man?… (mere)

Too crazy not to be true

Financial investigative journalist Liam Vaughan seems to have had the time of his life putting together Flash Crash. But then, the story is so rich with characters and so bizarre in its nature, that as he admits at the end - someone had to write a book on it. It is a case of truth stranger than fiction. That cost investors billions, one memorable spring day.

The Flash Crash was an afternoon in 2010 when the financial markets suddenly melted into almost nothing, then bounced back to almost where they started that morning. For a short time (minutes!), shares of major corporations traded for a penny or less, while others shot to $100,000 a share. Blame was needed, and investigations led to a Kansas City financial house which put in a huge sell order, rather inexpertly. But things are never that simple. In this case, it transpired that a single man, working from the edge of his bed in his parents' house in Hounslow outside London, was manipulating the markets, abusing the system until it broke.

Navinder Sarao was in his early thirties and unemployed. He still lived with his parents, and spent his weekdays playing the S&P futures for all they were worth, and more. He would routinely place trades worth billions of dollars, canceling most of them, and walking away with six figures of pure profit for half a day's work.

Bizarrely, he wasn't in it for the wealth. He lived at home, had an ordinary computer, drove a moped, and let no one know what he was doing. His parents, one ill and one working a counter in a store, never knew what he did all day. They had no clue he had run up profits approaching a hundred million dollars from his childhood bedroom. Perhaps even more bizarrely, he proceeded to lose it all on Ponzi schemes and shady con men, and when he was caught, he couldn't make bail or pay lawyers.

Sarao had adapted trading software to stack his orders at the back of their price point, and any time the market traded close by, the software would cancel his orders. So he never had to actually buy. In this way he could make it appear there was either huge demand which would send the market up, or huge selling pressure which would send it down. Either way, he was ready to profit with actual purchase orders he would hold for seconds before cashing out.

None of this is exaggerated. Here's what Vaughn says about Sarao's trading: "By any measure, NAVSAR was an outlier. In the twelve days the CFTC ended up selecting to illustrate the entity’s activity, its layering algorithm canceled or modified orders 182,000 times, corresponding to $35 trillion in notional trades—double the size of America’s gross domestic product. On eight of those days, not a single one of those orders was hit. The size of the orders was also immense: an average of 504 contracts, where the average across the market was seven." Contracts were $75,000 each.

Four years after the event, after every American agency had its crack at assigning blame, a trader looked a the record and proved everyone - including himself - wrong. “I got pretty obsessed,” he (still known as Mr. X today) says. “Based on the data I guessed it had to be the work of a large prop trading firm, maybe with an internal clearing arm to shield it from the authorities. The scale and the audacity of the behavior were so massive I couldn’t imagine it was one individual. As it turned out I was very wrong.” He became a whistleblower, reopening the case just before the statute of limitations kicked in, and that led to Sarao and an international effort to bring him to justice.

Sarao never thought he did anything wrong. He thought of himself as a victim of High Frequency Trading algorithms. This was just him fighting to level the playing field. He proudly videoed his screen while trading (providing hours of fascinating insights for investigators who seized his computer). All these attitudes, approaches, tactics and sheer thoughtlessness, along with crudeness, rudeness and total lack of respect for anyone he dealt with, led to a diagnosis of Aspberger's, once he was in custody. It made some sense out of the crazy story. His math skills were awesome, his instincts spot on, and his reaction time lightning quick. He was a fearless trader, but a failing human being.

The book is fast-paced, extremely engaging, and an easy read, despite the complexity of futures trading. Vaughan has done an excellent job of making it accessible and even exciting. It's a hard one to put down. And it's not over!

In January 2020, after this book was completed and after the American authorities were finally finished with Sarao as a co-operating source, the court finally sentenced him - to two years at home. Not only is this ridiculous for all the damage he did, but it is really all Sarao wanted anyway - to be left alone at home in his familiar bedroom where he was in control and productively engaged. Worse, the US court has no enforcement power in the UK, so the sentence is meaningless. It is the perfect capstone to a story beyond belief.

David Wineberg… (mere)