In the news today, the CFTC and SEC have allegedly caught the person solely responsible for causing the flash crash of 2010:
Apparently, some random guy in his house caused the flash crash. As highlighted in this article, the chances of that being true are probably slim; he may have had something to do with a coalescence of other factors. But, he caused it apparently by what is known as "spoofing."
Spoofing is when you input a bunch of large block sell orders above the current market price so that they are not filled. Then, trading algorithms and robots pick up that information and decide to sell in anticipation of those orders crossing the tape and causing the price to drop. But, the large block orders are cancelled before they can be filled. The price drops, and the spoofer buys the asset at a lower price before it goes back to pretty much where it was.
Sometimes, spoofing is done by other robots. Cool, algo-wars. The great thing though is that a lot of the time it is done just be shear speed of pressing hot keys. Imagine, a human being can actually outsmart a (potentially) multi-billion dollar algorithmic trading robot army and make a profit.
In my opinion, more power to them. For some reason, it is legal to outsmart human beings with advanced technology, but to outsmart computers with... old technology? That's something!
Instead of questioning the practice of spoofing, we should probably question the stability of a bunch of computers zipping orders around based on extensive codes. Humans don't fall for spoofing!
If one guy in a basement in London can crash the entire U.S. stock market, the system is not stable.
We need a re-emergence of human traders, even if they are "less efficient." That system worked (pretty much) fine for decades. Besides, the over-automation of everything can end badly...
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