The Hound of Hounslow: No $40m Wall Street wobbler

Architects, not coders, to blame for vulnerable HFT markets

It was the little one, honest

In the face of all the above, how likely is it that Navinder Singh Sarao (36), the alleged "Hound of Hounslow", was more than a gnat in a gale?

Can someone trading from his mum's house on the wrong side of the Atlantic tens of milliseconds away from the US equity exchanges involved (remember that the big boys pay huge amounts to get closer and closer to the exchange, even co-locating ("co-lo") in the same room, shaving precious microseconds off their latencies to trade) can have any effect at all except by accident, or by being allowed to?

Indeed some of the really big markets have had to turn down the ferocity, inserting delays and randomisation and bursting of activity, to avoid losing the big non-bank institutions such as pension funds. If they found it hard to keep up, how did the Hound?

I'm quite prepared to believe that he may have discovered some poorly tested rough edges in the big boys' algorithms and the markets, and gone on “wobbling the bridge” for fun and profit, but those big boys essentially control the bridge, and certainly control and are responsible for their own actions while on it, and could ignore him or crush him if they paid attention.

And as regulators seem to see exchanges as fellow travelers and instinctively want to blame anyone but them, who are they going to pounce on? The Hound.

I sought opinions from a number of colleagues and friends with extensive experience in the markets, mainly from the IT side as you'd expect, but with hands-on trading experience too for example.

Dominic Connor, Reg contributor and well-known quant headhunter, who runs the Random Walkers gang of quants and traders Meetup said:

"The thing that's interesting is that this isn't a major topic of conversation amongst the traders I talk to, they simply dismiss the idea as if it were stupid conspiracy theory involving the Freemasons and the Pet Shop boys."

"Nobody I talk to in financial markets believes this guy did or could have done this, he's not powerful enough."

"The prime directive of the SEC, like any regulator is to protect the exchanges, they're buddies; if Boeing or Airbus really built planes that crashed if I played Angry Birds on my Windows Phone they'd be sued to death, but exchanges are fireproof."

"Doesn't it strike you as odd that the US is blaming the one person involved who doesn't have a permanent legal team and has never ever made 'campaign contribution' to American politicians?"

A seasoned senior developer/manager with decades of experience, who wished to remain anonymous, told me:

"If one person can do this the regulators and the senior bods at the exchange should be the ones in jail."

"I would have thought simply swamping an exchange with orders is one of the first things they should think to guard against."

"Personally I think exchanges should limit any electronic participant to one order per second per stock/future/… But then I guess the exchanges make a lot of money out of this and screw everyone else."

However, yet another senior HFT guy with experience in trading (and who wished to remain anonymous) said:

"I have specific experience observing a market where a colleague's electronic trading had a fundamental effect on that market, to such an extent the exchange offered to change their operating hours."

"My view is the algorithms cannot be [looked at] in a dry abstract manner as if governed by an emotionless big brother, but rather as a manifestation of a person's personality."

"I think there is definitely a personal angle to this and ultimately personal liability: if you are a chartered engineer you quite often carry your own PI insurance even if you are employed by a company."

Bridge building

So, if you are malicious or negligent in the way you poke at bridges then there is a degree of personal responsibility.

But if you regulate bridge safety or are a major pan-national user of bridges and go on ignoring problems and letting (your own) shoddy workmanship in, then you can't lump all or even most of the blame on the weedy geek with glasses when he steps on to it.

Thankfully, for the real Wobbly Bridge, the engineers and regulators did the right thing. They didn’t take action against the a random spotty pedestrian, but rather they revised and improved their engineering standards and fixing the infrastructure.

Whouda thunk that'd work? ®