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by lordnacho 1661 days ago
As a trader, that does look really bad. These people know that the market looks at the orders to guess the state of supply and demand. The penalty looks big but it's over an 8 year period.

It's not exactly a secret that some market participants work out some kind of imbalance measure, and of you've ever implemented a system like that, like I've done, it will have crossed your mind that you could shove a load of orders in that mask the imbalance for everyone else. But you have heard of the spoofing rules and you don't do it. If we want a functioning market without a reputation for sharks, there's some rules to be followed.

Iirc they got a guy thrown in jail for this? Sarao or something like that? He had someone build him a spoofing machine and made a lot of money, though it's not clear to me how much was from doing this specifically.

In case you're wondering about that intention to cancel phrase, of course there are participants like market makers who do cancel a lot of orders. In that case it's a matter of them following the market in providing liquidity, they are not doing it to fool everyone.

4 comments

I often wonder: wouldn't fines paid as a percentage of stock be a better deterrent? Taking stock off shareholders changes the fraud equation from risk of fine vs the profitability upside, to shareholder's losing real value.

That's the role of shareholders AFAICT, to hold their board and the company accountable. Fail to do so and lose your shareholding seems the right direct risk.

The fines could also be a lot larger, because there is minimal risk of bankrupting a business from diluting existing shareholders. A 1% shareholder hit would be $4B at current market cap. Make it 5% and really make shareholders pay.

But there's a market where you can exchange the two, so they are roughly the same thing. If you have your 1% shares fined away, you can buy back the upside, if that's what you want. Or if you have a fine of 1% equivalent in cash, you can sell shares to pay for it.

Either way you've lost 1%, but you can decide whether to hold the upside exposure and voting control.

I think the key is the size of the fine. $1B to JPM is not really a whole lot. Maybe scaling the fine according to the size of the entity might make sense, but then there's a question of why everyone else at JPM is getting fined simply for doing their job in the same building as the guys who did this.

Edit. On second thought I guess you mean there will be a restriction on buying back the shares?

I think it's really important for people to understand that $1Bn isn't a lot of money to JPM because they do lots of things. They made $30Bn last year - but this specific trading business probably made nothing like that. They're doing consumer banking, investment banking, commercial banking, asset and wealth management. It might be true that $1Bn isn't a huge sum compared to the total profitability of JPM but I don't see why JPM's consumer banking arm has anything to do with the fine. Most likely these trading desks sum up to around 50-100 people at most. It's a very profitable sector (when you're breaking the law) but it's a tiny tiny part of what JPM do, and the idea that we should fine JPM more because they have lots of other businesses is just kind of crazy.
This would encourage the behavior because if there is less stock of the company held by anyone it increases the price .

Shareholders can change corporate behavior lik Carl Icahn but here it seems like it was very opaque to even monitor, the other way they can enforce good behavior is to sell the stock.

Shareholders can't be asked to police the company. That's not their job. They don't have the resources nor the expertise to do it.
Shareholders literally own the company. Not making them accountable for their companies actions is prob the worse incentive system ever.
No no, it's bad to ask questions of the management team, we call those "Activist investors"

https://en.m.wikipedia.org/wiki/Activist_shareholder

The sibling comments have an interesting worldview: can't fine management cause it's not their firm, can't fine shareholders cause it's not their fault, its nobody's fault.

Holders of common stock are not involved in the daily operations of the company. Not all ownership involves that level of liability. This is by design.
Apparently you didn't think very hard about that one. If you made the owner of a company criminally liable for any wrong-doing by the company's employees, nobody would risk owning a company. It would be impossible to have an advanced economy with these conditions.
I'm for the idea of no one wanting to own a company, who do I vote for?
I don’t think that’s what they said
So they can push for ever greater profits, but not bear any responsibility?
No, but if fines are the mechanism for punishment/restitution, they may as well be marked to market cap.
They don't need to police it, they need to give the board etc. the proper incentives to do business legally because they will be hurt financially if the business doesn't. The policing is still done by the government agencies.
All you need is a few activist hedge funds to do the policing. You can’t blanket say that shareholders lack resources.
In crypto spoofing is pretty prevalent. There are even tier 1 tradfi market makers who heavily engaged in not just spoofing but quote stuffing as well across crypto markets.

It's annoying to see, but not a big deal per se: your order book imbalance features just get weighted less heavily and you move on. ofc spoofing is illegal in tradfi, but if it wasn't, I kind of doubt it would even matter: market participants would adapt and the world would move on.

> In crypto spoofing is pretty prevalent.

It's completely legal. If big financial institutions would risk fines and prosecution to do this is a market where it's illegal, what on earth makes people think it wouldn't happen in markets where it's legal?

> There are even tier 1 tradfi market makers who heavily engaged in not just spoofing but quote stuffing as well across crypto markets.

I assume you're alluding to Cumberland/DRW?

There are also trivial technical solutions to this. Make orders non-cancellable for a certain period of time, throttle cancellation rate, etc. Any crypto exchange could implement this and win market share if it is really a feature that traders want.
One solution which should be on the table is to not prevent it, at which point people stop looking at order book imbalance or volume as a signal. The fundamental question is what is lost if there's no signal in order book data. Does it hurt price formation? Does it hurt liquidity? All of these are empirical questions. You also have to compare it not to the scenario where everyone abides by anti spoofing rules, but one in which compliance is imperfect (as evidenced by this article). There are defenses against market manipulation, but they can run afoul of the very rules against it, which leaves law abiding actors vulnerable. It's not clear at all that the current equilibrium is the right one, but sadly the discourse is rarely around the rules most conducive to liquidity, it generally starts with the premise that any kind of strategic order placement is inherently deceptive and wrong.
If I can't cancel I must quote wider, just like how if I can't be sure the exchange will even be up during volatility then I can't go 3x long futures at one venue and 3x short at another.
>Make orders non-cancellable for a certain period of time,

Exactly, in a similar manner that the PDT 4 trades in 5 days rule is implemented.

>https://www.bbc.com/news/explainers-51265169

>Michael Coscia in 2013.

>Coscia was sentenced to three years in prison for spoofing futures markets using a specially designed computer program, making an estimated $1.6m (£1.2m).

Yes - you're thinking of Navinder Sarao, the so-called 'Hound of Hounslow', held at least partly responsible for the 2010 flash crash.