Saturday Links: 6-10 February 2017

Saturday Links: Sunday edition! Yeah, that's right. I didn't get around to writing this yesterday.

How the Flash Crash Trader’s $50 Million Fortune Vanished -- Bloomberg Markets -- Investigative piece on Navinder Singh Sarao's fortune, which is tied up in a complicated web of offshore investments. Sarao, dubbed the "Flash Crash Trader" and "The Hound of Hounslow", was convicted for fraudulent trading in the financial markets. Interestingly, aged almost 40, he lived in and traded from his bedroom in his parents' house. He went on to make roughly $50 million from futures trading. US regulators claim he helped cause the Flash Crash of May 2010. After having been extradited by his home country England and subsequently sent to Chicago, Sarao was ordered to pay $38.4 million to the CFTC and US Justice Department. I'm working on a post about the accusations myself; watch this space for more. I'm not going to defend Sarao's trading strategies, which may have involved an HFT practice called "spoofing", but I think it's ridiculous this matter had to be settled in the US and I must say it's nothing short of embarrassing if one individual trader can break the international financial markets from his bedroom. I mean, if that's really true, how stable and trustworthy can today's automated markets be?!

A Litany of Problems With p-values -- Statistical Thinking -- Informative post about the shortcomings of null hypothesis testing and p-values. Practitioners will find this extremely useful. From personal experience, I can say that null hypothesis testing only looks easy from the outside. It's extremely easy to calculate p-values, after all. Press a button in the statistical software of your choice. But to make educated inferences you should look beyond the numbers and ask yourself whether you would fully trust your statistical tests: If you're testing a potential trading idea, would you put your own money into it?

Saturday Links: 23-27 January 2017

I didn't come across many interesting articles this week, but the following two grabbed my attention:

Ex-Otkritie Trader Gets 12 Years for ‘Arrogant’ Bonus Fraud -- Bloomberg -- Shows that banker trials are far from over. Courts and regulators are still cleaning up the mess left by too much shady business that's been conducted in the industry; and apparently heinous dealings continued even after the financial crisis has made the public wary of bankers and basically everybody working in finance. This article is about ex-trader George Urumov's fraudulent schemes, from which he personally gained $40 million.

Speed Traders’ ‘Stupid’ Plan for Fast Network Halted in U.K. -- Bloomberg -- Just for laughs, article describing a proposal by high-frequency trading outfits DRW Holdings, Jump Trading and KCG Holdings to build radio masts as high as the Eiffel Tower. Rejected by local officials because it was "too incredibly stupid for us to even contemplate".

Money & Speed: Inside the Black Box

As a follow-up to February's video post about quants, here's a related documentary from VPRO that highlights the Flash Crash of May 6, 2010.

I vividly remember that Thursday evening when, as a risk management intern on a London trading floor, I witnessed the stocks of the world's largest corporations fall 10% and more in a matter of minutes. Markets had already been down 3-4% that day in the light of continued heavy protests in Athens. The atmosphere was eerie to say the least. On the day before, a group of angry demonstrators had set fire to a local bank, killing three employees who could not vacate the building in time. Every time the news channels resumed their live broadcasts of the violent protests equity indices and the euro dipped further. Starting at 1 p.m. New York time (6 p.m. in London) the prices of US equities began to fall sharply, triggering the first Liquidity Replenishment Points, i.e. circuit breakers, for several NYSE-listed stocks, and the chaos quickly ensued from there.

It is still not understood what caused the Flash Crash exactly, but an individual trader, Navinder Singh Sarao, who operated out of his parents' house in a poor part of London may have played a role (according to US authorities, anyway). He is currently facing trial in America after having been extradited by his home country.