This blogpost is a about a book titled, “Flash Crash”, written by Liam Vaughan.

This book traces the story of Mr. Navinder Singh Sarao, the man behind the 2010 “flash crash”, or at least the man that has been portrayed by the media and regulators as the cause for “flash crash”. It reads like a crime thriller except that it is a real story of a reclusive Brit who makes 70 million usd trading in a few specific futures instruments on CME. How does one single person managed to reap so much money from a market that is dominated by HFT players ? Well, that’s what the author tries to take the reader through in the book. The author tries to give a non-technical intro in to the mechanics of spoofing, one of the major tactics using Navinder to make money. Machines used by HFT are good at identifying patterns but not spoofing where humans deliberately try to put in orders to spoof the orders placed by others/algos. Well, at the time Nav was in to this tactic, no one had ever been pulled up by regulators for employing the tactic. In fact, it was widely held opinion that HFT players were hand in glove with exchanges and had an upper hand over all the individual prop shops or prop traders that did not have the capital and resources to set up massive trading infra.

The thing that I found interesting is - what a single minded focused man can actually achieve ? Nav had studied the order book for many years and had managed to get a custom software written that could help him in placing spoof orders, go back in the queue at various ticks away from the best bid - best ask. He managed to get software vendors to write specific features that helped in his layering strategy and other tactics. For an individual traders sitting in a suburb in UK, pulling this off is fascinating. Well, even though he is convicted, the whole episode does not look black and white. Was he really the cause of flash crash ? Well, no one knows. But it is evident that his intent was to spoof the market and the fact that he left an enormous amount of video evidence did him in. Who in the world would create a video of himself while employing these so called controversial trading tactics ? There are many such odd elements in Nav’s story. The fact that he invested his entire savings in to many schemes which fizzled out or were ponzi schemes makes his story interesting. He was cited as a fraudster by the media and regulators but the guy lost all his money to a bigger fraud.

The book ends with Navinder pleading guilty and his sentence is vastly reduced when he agrees to help regulators in catching spoofers in the market.

One of the other interesting things I learned was the literature on HFT itself. A decade ago, I had read a lot of books on rise of HFT, the way they were playing havoc with the markets, the way these firms were creating entry barriers to other players. Suddenly the books written on this subject, the papers written on HFT seemed to have gone down dramatically. This book has a chapter on the way HFT lobby works and exchanges do not want HFT players to be shown in a bad light as they earn a ton of money from these players. The story goes that a top notch researcher at CFTC was leading a team to do market micro structure research. His entire team was let go, following a article on NYTimes.

In a way, the lesson here is that, nothing can stop HFT players as it is in exchange’s best interests to see massive volumes from HFT players. The other day I was talking to a friend of mine who was mentioning about a guy who had put in two years of work ex at a HFT shop and had earned 1.2 million usd. It is virtually unheard of such compensation levels in any other field. No wonder, the field is being actively sought after by many. More than a decade ago when I was doing my MFE, very few opted for hedge funds. I was told that the recent trend shows that pretty much every one wants to get in to hedge funds after MFE. In that sense, the curriculum of MFE has also massively changed to suit the changing needs of the students and the market place. I am digressing here. Coming back to this book, I think one can spend a few hours reading this book to get a contrarian view of how a human can fool machines/algos and make millions of dollars in the process.