The Man Who Crashed The Stock Market From Home

0:00 on a Thursday in the middle of 2010 a man named ninda SRA was trading stocks from a bedroom in his mother's West London home his laptop was connected to the American financial markets which were experiencing higher than normal levels of volatility all right you're looking at what's going on in Greece right now in US markets financials causing another leg down lows the large minute-by-minute swings created fertile grounds for huge trading profits and by 7:40 p.m. he logged off for the day raking in nearly a million doll in profits all the way over in New York the local time was 2:40 p.m. a bad day for the market so far but still just a couple of percentage points down from when trading started that morning but just 60 seconds after ninda logged off for the day all hell broke loose we have not seen a day like this what the heck

0:47 is going on down here uh I don't know I'm looking at EUR dollar Futures with down 13 12 basis points I mean there is fear this is capitulation really within 4 minutes the stock market was down almost 10% a trillion dollars of value wiped off American companies in minutes the day became known as the flash crash of 2010 one of the most violent and unexpected collapses in stock market history a crash that exposed the dark side of a new wave of algorithmic trading ushered in sweeping Financial regulations and revealed a fascinating story of a lone UK bedroom Trader who abused loopholes to make tens of millions of dollars so what exactly happened it was the 6th of May 2010 and when

1:32 trading opened at 9:30 eastern time it was immediately an unusual day new information regarding the European debt crisis had come to light overnight and Traders were responding to it there's an index called the vix which tracks market volatility how violently stocks are changing in price it's also referred to as the fear index and by 2:30 p.m. it was up 22.5% indicating that this was already a very turbulent day for the markets the p500 index which tracks the US Stock Market was down a couple of perc then at 2:32 p.m. something really unexpected happened a huge block of e- mini S&P 500 futures was dumped on the market these are a type of financial contract that Traders used to bet on the movement of the stock market don't worry the details

2:20 aren't that important yet but someone suddenly throws 75,000 of these contracts at the market a total value of $4.1 billion it's a huge shock to the system and just 9 minutes later stocks plunged 3% in a matter of minutes by 245 the market was down nearly 10% on the day at the individual stock level things are even more chaotic 2 billion Shares are traded between 240 and 3 p.m. a total volume of $56 billion about 20,000 trades are executed at prices more than 60% above or below where they were trading just a few minutes earlier some at completely irrational prices a CN the stock representing asensa fell from $40 a share to 1 cent within 7 Seconds a 30

3:07 billion company was suddenly trading for under $10 million other stocks saw the equally irrational opposing situation Apple stock went from $250 a share to $100,000 a share within seconds briefly valuing the company at $54 trillion which is almost the total value of the entire US Stock Market Today I really want to highlight just how absurd this is there were two trades for 8895 Apple shares executed at these prices in total they should have sold for $216,000 but instead they sold for $ 89.5 million and then it just stopped by 3:00 p.m. the broad stock market had largely regained its losses from the crash although still down as it was when the day began the crash lasted just 36

3:53 minutes hence the name flash crash and the violent financial event naturally raised a lot of questions questions which we now have the answers to what caused the crash who were the Traders responsible and what does all of this have to do with a British man who discovered a hack to make millions from his bedroom so who is ninda SRA he was born in 1978 into a typical British workingclass family and his first big introduction to the world of trading was through a job at futex live in the mid 2000s it was there he learned how to trade stocks and and he was really good at it he mostly traded Futures contracts they are legal agreements to buy or sell an asset at a specific price and date in the future so instead of just buying spy

4:40 the index that represents the US Stock Market I could buy Futures contracts to bet on the change in price for the US Stock Market this is called the e- mini S&P 500 futures I only have to put up a small collateral for H1 and each contract allows me to control 50 shares of the index so I can make or lose a lot of money from small upward or downward movements ninda found success in trading these e mini S&P 500 contracts and by the time he left futex live in 2008 he'd accumulated about $2 million when he left the firm it was the middle of the global financial crisis he believed that a bailout for financial institutions was coming so he bet all of his money on stocks rebounding the week that the bailouts were announced the

5:26 stock market increased 19% and using Futures contracts he turned his $2 million into $15 million he continued to trade during 2009 but he noticed it was becoming harder to make profits because of a new type of trading high frequency trading with computers and the internet becoming much more sophisticated automated trading was growing in use a New York Times article from July 2009 was one of the first times it gained mainstream attention they described highfrequency trading powerful algorithms execute millions of a a second and scan dozens of public and private marketplaces simultaneously they can spot Trends before other investors can blink changing orders and strategies within milliseconds there are many strategies that high frequency Traders

6:12 use to profit but I'll just explain a couple of them stock exchanges like the New York Stock Exchange and the NASDAQ are supposed to show all of the available buy and sell orders to everyone at the same time but they used a loophole to show some Traders orders ahead of time in exchange for a fee so slow Traders Place their buy orders but rather than being shown all of the potential sellers at the same time some of those orders were most likely routed to a collection of highfrequency Traders for just 30 milliseconds in what is known as a flash order yep that's right they called them flash orders possibly the biggest foreshadowing of all time by receiving orders from The Exchange a few milliseconds before everyone else highfrequency trading Bots can quickly buy and sell shares for a tiny profit

6:59 High frequency Traders also benefit from competition among the various exchanges which pay small fees that are often collected by the biggest and most active Traders typically a quarter of a cent per share to whoever arrives first but then the article talks about another strategy which in hindsight was essentially a blueprint for anyone who wanted to abuse financial markets for a profit they analyzed a July 15th trading session chipmaker Intel had reported strong quarterly earnings the night before and Traders set out to by another chipmaker broadcom when the market opened beyond the genuine trades there was a lot of stock manipulation soon thousands of orders began flooding the markets as highfrequency software went into high gear automatic programs began issuing and cancelling tiny orders

7:45 within milliseconds to determine how much the slower Traders were willing to pay the high frequency computers quickly determined that some investors upper limit was 2640 the price shot to 2639 and high frequency program began offering to sell hundreds of thousands of shares creating and quickly cancelling orders is a type of Market manipulation it was already illegal at the time but it didn't have a specific definition in US law it became known as spoofing because it involved making fake orders for the sole intention of tricking other Traders into thinking that a stock had more interested buyers than it actually had ninda seral who was frustrated with highfrequency Traders stealing his profits began using this illegal strategy he built his own custom highfrequency

8:32 trading bot and started trading e- mini S&P futures again but this time he used his bot to create thousands of fake orders before quickly cancelling them the spoofed orders were set at all different prices to give the appearance that these were genuine trades from different Traders this specifically is called layering another very illegal form of Market manipulation the fake Market activity created a momentum in the price that he could then profit from with genuine trades and it worked wonders he was making hundreds of thousands of dollars a day which brings us back to the infamous flash crash on May 6th 2010 ninda was trading the markets from a bedroom in his parents' home he used his spoofing and layering strategy to profit from The increased volatility by midday he was placing

9:17 around $200 million worth of Trades and by 240 p.m. ET or 7:40 p.m. in his local time he logged off after making $950,000 a minute later the flash crash began so did ninda cause the flash crash with his huge volume of fake trades well not exactly the financial times reported that na vinda's fake trades were so large they made up 20% of all the sell orders of the e- mini S&P futures at various times during the day which in simple terms means he did add a lot of trading volume to the market and he did push prices to artificially low and high prices so that he could profit from them but he wasn't actually trading when the crash occurred an official report later

10:02 found that while he and other highfrequency Traders did contribute to the crash there was someone else who actually caused it well actually I looked at a number of different reports that all analyzed the trading data the two main pieces were a study published in 2014 and the official report from the SEC and cftc notably this report makes no mention of Na vinda's illegal trading activity and that was by Design ninda was already under investigation by the Department of Justice and they didn't want to alert him but I'll get back to this later in the video the most shocking part of the flash crash is that the entire crash can pretty much be traced back to a single trade at 232 p.m. a mutual fund initiated an order to sell 75,000 e- mini S&P futures

10:50 contracts a total value of 4.1 billion now you can't just dump an order like this on the market without crashing the price because there wouldn't be enough buyers on the other side the buy side liquidity for the e- mini contracts was under $3 billion buy side liquidity effectively meaning the pool of willing buyers and so this trade would have to be slowly drip fed into the market for reference a similar trade to this earlier in the year took more than 5 hours to fully execute so the mutual fund decided to use a cell algorithm to slowly sell the 75,000 contracts they set the target execution rate at 9% of the trading volume from the previous minute this limit prevents the bot from dumping too many shares onto the market too quickly if there was a billion

11:36 dollars of these contracts being traded back and forth every minute the bot would only sell $90 million worth of contracts every minute sell algorithms can also have price and timing limits so that the contracts aren't sold on the market for a price that's too low this mutual fund used no such limits any price and any speed was acceptable as long as it didn't exceed 9% of trading volume and that was a huge mistake on initial thought you might think that trading volume is a good way to see or measure how many willing buyers there are for these e mini contracts after all if the trading volume is a billion dollars a billion dollars has been traded back and forth over the past minute doesn't that mean that there's at least in the last minute

12:23 a willingness of people to buy a billion dollars worth of contracts this logic was pretty much true for the entire history of the stock market except in 2010 there's another huge element high frequency Traders remember these trading Bots aren't trying to acquire or offload their own positions they're buying and selling just milliseconds apart often to other Bots before the real buyer acquires the contract they don't add to the pool of willing buyers but they do increase the volume between 241 and 244 p.m. highfrequency Traders traded 140,000 e mini contract representing 33% of total volume Bots that had no intention of holding the contracts were driving up the trading volume as the volume Rose the mutual funds sell

13:09 algorithm viewed this as the pool of willing buyers increasing so it started feeding more of the 75,000 contracts into the market The High Frequency Traders were creating the illusion that there was lots of willing buyers and when there weren't enough buyers it crashed the e- mini market the pain quickly spread into the actual stock market Market because of cross Market arbitrages these are traders who buy the e- mini contracts and sell the Spy index to profit from small discrepancies between those two prices but in this case they essentially were transferring the collapsing e- mini market into the actual Stock Market within just 20 minutes the entire 75,000 contract order had been executed on the market an order that should have taken more than 5 hours

13:56 this 2014 study specifically looked at the role of highfrequency Traders it concluded that while they did increase the trading volume they didn't actually cause the crash they just accelerated a problem that was essentially created by the mutual fund that uh made a huge oopsy when it came to the cell algorithm of those 75,000 contracts ninda was one of these highfrequency traders who were not directly to blame but did add fuel to the fire of course one big difference was that most of Na vinda's trades were completely fraudulent and it didn't go unnoticed sometime shortly after the commodi Futures Trading commission received information about some strange groups of trading orders that were made during the crash the data sets that we reviewed for Na's activity showed he

14:45 would place these orders together and modify those orders several sometimes thousands of times or hundreds of times before then cancelling them uh and not getting hit with enough evidence the cftc passes the case over to the Department of Justice the investigation took years to complete but in 2015 ninda was finally arrested in the UK he was indicted by a grand jury on 22 counts of wire fraud Commodities fraud and manipulation for trades between 2009 and 2014 the 22 charges carried a maximum sentence of 380 years in prison the financial times reported that ninda admitted to entering more than 85 spoof trades on the day of the crash and in the de J statement it says he admitted

15:30 to making at least $12.8 million from the illegal activities in 2016 he entered a ple agreement with the doj on spoofing and wire fraud charges but thanks to his help in furthering US Financial regulations he only received one year's house arrest the flash crash brought with it a tightening of financial regulations The Dodd Frank Wall Street Act was passed as law just 2 weeks after the crash it was a piece of legislation initiated by President Obama after the global financial crisis and among other things it finally provided a direct definition of spoofing in US law the crash also shed light on a number of flaws in financial markets how large automated sell orders can trigger extreme price movements that high trading volume is not always a reliable

16:17 indicator of Market liquidity and another example of just how connected the derivatives and securities markets are after n vinda's arrest many believed he was essentially a scapegoat for a practice that that was rampant on Wall Street spoofing and layering trades should be illegal but it's also something done all the time even by the big firms going after a lone UK Trader for this is even more ridiculous when you consider the global financial crisis just happened and only one person was jailed in the US for their role in the crisis I hope you guys enjoyed this very long and complicated story and if you did a huge way that you can support me is simply by hitting the Subscribe button and even better check out one of my other videos next

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