The Correct To Herd

Just when yous idea fiscal rule couldn't larn to a greater extent than expansive too incoherent, our Justice Department comes inwards to defend morons' right to herd.

As explained inwards the Wall Street Journal at least, Mr. Navinder Singh Sarao is right away nether arrest, fighting extradition to the US, too his concern ruined, for "spoofing" during the flash crash.

What is that? The Journal's beautiful graph at left explains.

The obvious question: Who are these traders who response to spoofing orders past times placing their ain orders? Why is it a crucial finish of police delineate too populace policy to forestall Mr. Sarao from plucking their pockets? Is "herding trader" or "momentum trader" or "badly programmed high-speed trading program" or simply unproblematic "moron inwards the market" right away a protected minority?

Why is Mr. Sarao beingness prosecuted too non all the people who wrote badly programmed algorithms that were too thus easily spoofed? If this caused the flash crash (how, non explained inwards the article) are they non as at fault?

I don't hateful past times this a defence forcefulness of the crazy materials going on inwards high speed trading. As explained here, I retrieve 1 2nd batch auctions are a much ameliorate marketplace position structure.  But the whole high speed trading affair is largely a response to SEC regulations inwards the outset place, the gild routing regulation, discrete tick size regulation, too strict fourth dimension precedence regulation. H5N1 fact which volition in all probability non movement into at Mr. Sarao's trial (he doesn't look to own got billions for a settlement) too volition laissez passer on him lilliputian comfort inwards jail.

And maybe, simply maybe, in that location is something to a greater extent than coherent hither than the Journal lets on. I'll proceed reading hoping to discovery it too welcome comments who can.

H5N1 larger thought. We nevertheless actually desire to rely on regulators to spot all the problems of finance too proceed us prophylactic from to a greater extent than crashes?

Update: Craig Pirrong excellent commentary here via a goodness FT alphaville post. Great quote:

The electrical load alleges that Sarao employed the layering strategy close 250 days, important that he caused 250 out of the terminal 1 flash crashes. [my emphasis] I tin run into the defence forcefulness strategy. When the regime skilful is on the stand, the defence forcefulness volition larn through every day. “You claim Sarao used layering on this day, correct?” “Yes.” “There was no Flash Crash on that day, was there?” “No.” Repeating this 250 times volition brand the causal connector betwixt his trading too Flash Clash look really problematic, at best.

Update 2: Reading diverse commentaries that I can't discovery to elevate whatever more, I realize that "front running" to a greater extent than than "herding" is the protected class. You "spoof" past times putting inwards a bunch of orders simply exterior the electrical current spread. The algorithms that response to that retrieve this behaviour agency simply about large orders coming, too thus assay to forepart run those past times buying. They cross the spread to accept the little gild yous set on the other side. Or too thus the floor goes. In whatever case, viewed as spoofers vs. front-runners it's harder nevertheless to own got sympathy for the latter.

Update 3: Good Bloomberg View coverage from Matt Levine  too John Arnold, the root of the to a higher identify front-running observation.