Wednesday, July 13, 2016

Stock traders BEWARE! Do not try to out-cheat daBigCheaters or you go to jail!

What happened then is the same thing that happened with the other two notorious "spoofers" who have gained prominence in the recent year, Nav Sarao and Igor Oystacher: they got too good. So good in fact the HFTs - mostly Citadel - were consistently losing money to them. As a result, Coscia et al had to be punished. He was accused of entering large orders into futures markets in 2011 that he never intended to execute. His goal, prosecutors said, was to spoof, or fool other traders to markets by creating an illusion of demand so that he could make money on smaller trades. Prosecutors said he illegally earned $1.4 million in fewer than three months in 2011 through spoofing.

As Reuters added, Coscia's firm had fewer than 10 employees. However, he "entered more large orders than anyone else in the world" in nearly a dozen CME Group Inc markets ranging from corn and soybeans to gold after he began using two algorithmic trading programs in August 2011, prosecutors said during the trial. To be sure Coscia disagreed with the accusation: he testified that he didn’t do anything wrong and repeatedly said he intended to trade on every order he placed. He also said he traded a lot of large orders he placed. He was asked whether he fraudulently induced other market participants to react to the deceptive market information he created.

“I didn’t induce anyone,” Coscia said. “There’s no deceptive market information either.”

Technically, he is right - he did not induce anyone. He induced a whole of anythings, mostly countless HFT algos that reacted to his orders by pushing the market in the direction of his orderflow, only to be "spoofed." At which point the case really boiled down to just one thing: not whether it is legal to spoof, which it is and yet massive, well-connected HFT firms get away with it every single day, but whether it is legal to take advantage of HFT algos programmed to do just one thing - frontrun orders, and activity which leads to massive losses for the algos and the Citadels behind them, when the spoofer realizes just how dumb his counterparty truly is.

The verdict was clear: nobody is allowed to outspoof the spoofers. And this was the punchline from the lobby of very group of people who take advantage of broken markets every given day:

    "Investors are better off when spoofers who prey on high-frequency traders are brought to justice," said Bill Harts, chief of the Modern Markets Initiative, a group representing high-frequency and algorithmic traders.
Funnier words had rarely been spoken by the person whose "Modern Markets" Initiative has made real modern markets a farcial disaster.

And so the gauntlet has been thrown: anyone who dares to make money by "abusing" the dumb logic of Citadel algos will go to jail.
To make it simple, the big banks have computerized trading programs that prey upon conventional traders. But their behavior is predictable, so a sufficiently clever trader can take advantage of them in much the same way they take advantage of normal investors.

But only the big banks are allowed to cheat. So, do not pass go, do not collect your winnings, go directly to jail.

The stock market isn't even a casino. Casinos are considerably less rigged.