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Can you elaborate on this? I know a bunch of people who work in quant finance and while it seems completely socially useless it also seems perfectly legally legitimate.
For what?
No, he stole a bunch of money and got caught.
Every trader makes mistakes: around trading on what turned out to be material non-public information, or discussing business on non-recorded channels, or their company learns they've been failing to record chats (or emails) for months without noticing before, or due to a glitch they accidentally sold a ton of shit short they didn't have the right to short, etc.
All of these things are technically illegal but if you immediately reach out to the SEC (or whomever) and fess up they'll probably just slap you on the wrist. But it's completely at their discretion and they might bring serious charges. Or threaten licenses. Or jail. It very much depends on your relationship with the regulator. Woe is you if the SEC discovers these problems before you've noticed yourself and fessed up.
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In HFT (which, admittedly, is not "pretty much everyone who works in quant finance"), the issue is that rules about market manipulation designed for humans operating over timescales of minutes become dangerously vague when applied to computers operating over timescales of hundredths of a second. The rules against spoofing and layering are fundamentally the application to modern markets of the rules against the tape manipulation frauds of the 1920's that were brought in by Joe Kennedy's SEC after the 1929 crash. But those rules define crimes based, at least in part, on dishonest intent (which experienced practitioners can infer from behaviour). Inferring intent from behaviour is harder when one computer is ripping off another computer in a novel way, so it is harder to enforce the rules fairly, and more opportunity for unfairness. There are plenty of people who think that the distinction between what Navinder Singh Sarao was jailed for doing and what Citadel and Renaissance do on a daily basis is Who?, Whom?
The other areas of quant finance (derivatives pricing, risk modelling, quant hedge funds other than HFTs) do not operate in legal grey areas. There are also HFT strategies which do not operate in legal grey areas, such as Jane Street's ETF business.
This seems largely correct.
The who/whom thing it always felt to me like they needed to hang someone and he was the easiest to hang. Citadel supposedly has been a big backer of anti spoofing prosecutions because it negates some of their speed advantages and models. But they get sued too they just have better lawyers and do a fine job getting out of trouble. Witness them refusing to pay a WhatsApp fine.
I also fine it funny that the whole GMC/AMC trades (no idea if they made internally) they did seem to lose some money investing in the fund that blew up. I’ve always thought the GMC/AMC longs were guilty of market manipulation. Basically organizing a group to manipulate shorts into trading (puking) their position. Which would be illegal if three people with big war chests organized the move together. But done in a distributed way is tough to nail any one person for.
Do you mean GME (Gamestop) or GMC (Post-BK General Motors)?
I agree with you that the SEC could have got a conviction for market manipulation against DeepFuckingValue if they wanted it, but equity short sellers are even less popular than market manipulators, so nailing a short seller is safe politically. Both the 1920 Stutz and 2008 Volkswagen corners nailed some of the biggest, best connected players in the market, but there was no interference by the authorities. In both cases the longs ended up running out of cash because in the process of executing the corner they bought the target company for more than it was worth.
Doing that in a commodity futures market, where the shorts include non-financial end users hedging their real-world risk, will get you hauled off in handcuffs.
Ya of course.
I mean the law should be the law. I don’t know if deepvalue crossed the line. I know chamath tweeted short squeeze and encouraged people to play which might cross the line. And he’s lost a lot of people money with his promotions.
Short sellers might not be popular but the fund that blew up does provide a real service. They keep retail losses lower by shorting.
I guess that’s a who/whom case but maybe the distributed nature of it protected him. I tend to think not.
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All the libor manipulation convictions I believe got over turned a decade later. And supposedly the desks had official pressure to manipulate libor lower. A lot of the issues is there wasn’t a true market there.
Spoofing is now illegal. It wasn’t a decade ago until they invented it and started prosecuting people for it.
WhatsApp convos just got Banks fined a ton.
I don't think the Libor manipulation was being done by quants. The false numbers were being submitted by banks' treasury markets desks The pressure to submit the false numbers was coming from the interest rate derivatives desks (or, in the case of Barclays in 2008, the Bank of England). Both desks employ desk quants to babysit derivatives pricing models (and, increasingly, risk models) but aren't run by quants. (Tom Hayes has the classic quant background, but he was working as a flow trader, not a quant).
The US convictions got overturned on appeal, the UK ones did not. The difference is that the UK appeals court ruled that "What rate can your bank borrow at under the standard LIBOR terms?" is a question with (in principle) a single correct answer, and therefore changing your submission based on pressure from another trading desk implies that you were not submitting your best estimate of the true answer, hence per se fraud. The US appeals court said that there is necessary a range of reasonable answers, that choosing one answer within this range as opposed to another based on pressure from another trading desk is not fraudulent, and that the prosecution did not prove that the rigged LIBOR submissions were outside the reasonable range. I am with the Brits on this - everyone involved in LIBOR rigging knew that what they were doing was wrong (both by conventional ethics and by the situational ethics of well-run financial markets). I expect that they also knew that the market for LIBOR-linked interest rate derivatives could not survive their behaviour being exposed (because clients don't want to be ripped off).
All the crooks are now out of jail having served their sentences. Tom Hayes is still trying to clear his name, but there isn't much sympathy for him among London bankers - even if it is technically not a crime, rigging benchmark interest rates is the sort of thing we need to be seen not to do in order to retain the trust of our clients. London as a centre of interest rate derivative trading is weaker because LIBOR has been discontinued.
The people who I do have some sympathy with (and I note that they were not prosecuted) were the people who made optimistic submissions in 2008 in order to contain the financial crisis. You can argue about whether they were cheating according to conventional ethics, but their behaviour made LIBOR (which was used by the industry as a risk-free rate) closer to what everyone expected it to be, helped preserve financial stability in a crisis, and was what the regulators were fairly clear they wanted to see.
I don’t disagree with your analysis. Though flow trader versus quant are fairly adjacent plus as you said he looks like a typical quant. The reason I mentioned libor is it’s a prime example of mixed regulatory messaging and then they ended up in jail.
I remember when Zerohedge use to run articles on things like some stocks were getting so many order messages the system was breaking. That does sound like purposefully manipulating markets to break the system for edge. I would assume there are plenty of things like that of quants pushing the line to gain an edge.
There were, in effect, two separate Libor-rigging scandals. There was no regulatory mixed messaging about the Libor-rigging-for-profit that Tom Hayes et al were engaged in - even if you accept the 2nd Circuit's argument that it wasn't fraud, it was clearly a violation of market norms about treating customers fairly. The regulatory mixed messaging was about Libor-rigging-to-prevent-bank-runs in 2008.
Still think that ties into his quant concerns. No doubt many push the line for edge. So same thing mixed message.
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