WEBVTT - An Historic Crash 0:00:12.640 --> 0:00:15.880 Hello, and welcome to What Goes Up, a Bloomberg weekly 0:00:15.920 --> 0:00:19.560 market podcast. I'm Sarah Ponzek, a reporter on the Cross 0:00:19.560 --> 0:00:22.480 Asset team, and I'm Mike Reagan, a senior editor on 0:00:22.520 --> 0:00:26.240 the Markets Team. This week on the show, two guests, 0:00:26.440 --> 0:00:30.960 two topics. First, this month marks the tenure anniversary of 0:00:31.000 --> 0:00:34.000 the infamous flash Crash. We're joined by the author of 0:00:34.000 --> 0:00:37.120 a new book. It's called Flash Crash, A Trading Savant, 0:00:37.200 --> 0:00:40.640 a global man hunt, and the most mysterious market crash 0:00:40.680 --> 0:00:44.239 in history. Also, later on, small cap companies have been 0:00:44.280 --> 0:00:46.960 pressured even more than the market as a whole through 0:00:47.120 --> 0:00:51.279 the coronavirus crash. Joh for Rizvi, a portfolio manager over 0:00:51.320 --> 0:00:55.400 at Harding Lovener, explains how to navigate the space, and 0:00:55.520 --> 0:00:58.120 as always, we will close out the episode with the 0:00:58.280 --> 0:01:01.720 craziest things we saw in markets this week. So if 0:01:01.760 --> 0:01:04.120 you saw something crazy, please give us a call on 0:01:04.160 --> 0:01:07.840 the hotline at six four six three two four three 0:01:07.920 --> 0:01:10.920 four nine. Oh, and maybe we'll play your voicemail on 0:01:10.959 --> 0:01:13.520 the show. Of course, you can tweet at us with 0:01:13.600 --> 0:01:17.000 your crazy market observations. Just tweet to the handle at 0:01:17.080 --> 0:01:20.520 Podcasts and let us know what you're looking at. And uh, 0:01:20.800 --> 0:01:24.319 Sarah obviously, as you know, the craziest thing is uh, 0:01:24.360 --> 0:01:27.160 my favorite part of the show. We're kind of lucky 0:01:27.240 --> 0:01:30.240 this week though, in that we don't get to talk 0:01:30.280 --> 0:01:33.280 about the just the craziest things we saw in markets. 0:01:33.280 --> 0:01:35.800 This week, we literally get to talk about the craziest 0:01:35.800 --> 0:01:38.640 thing I think I've ever seen in my career. And 0:01:38.680 --> 0:01:43.039 that was ten years ago this month. Um, I was 0:01:43.080 --> 0:01:46.319 the editor handling the daily markets wrap that I know 0:01:46.400 --> 0:01:52.320 you've you've written a million times. And as you know, 0:01:52.440 --> 0:01:55.200 some some days the market wrap is very easy to write. 0:01:55.280 --> 0:01:58.320 There's a clear explanation for why the the markets did 0:01:58.320 --> 0:02:00.960 what they did. Sometimes it's not so easy, and this 0:02:01.040 --> 0:02:03.160 was one of those days. You know. It was, um, 0:02:03.360 --> 0:02:05.600 probably a year after the market a little bit more 0:02:05.640 --> 0:02:08.360 than a year after the market bottom from the financial crisis, 0:02:08.720 --> 0:02:11.480 so people were still very much on edge, right, and 0:02:11.520 --> 0:02:15.120 all of a sudden the European debt crisis had just 0:02:15.280 --> 0:02:20.040 sprung into life and really caused another bout of volatility 0:02:20.080 --> 0:02:23.840 that that was worrying too too many people, um and 0:02:23.960 --> 0:02:27.080 causing some some swings in the market. Um. This swing 0:02:27.160 --> 0:02:30.800 was something else though, Uh, you know, I remember distinctly 0:02:30.919 --> 0:02:35.520 that the TV News channels, the cable news channels broadcasting 0:02:35.800 --> 0:02:40.880 these massive demonstrations in Greece, in Athens and other parts 0:02:40.880 --> 0:02:43.440 of Greece as people sort of rebelled against the austerity 0:02:43.480 --> 0:02:46.520 that was being imposed on Greece as as part of 0:02:46.560 --> 0:02:51.880 their bailout conditions from the European Union. Um. And so 0:02:51.919 --> 0:02:54.800 the market was understandably weak because of that. But then 0:02:54.800 --> 0:02:57.120 all of a sudden, the bottom just dropped out, and 0:02:57.200 --> 0:03:01.040 I mean within minutes, uh, every X was crashing. I 0:03:01.120 --> 0:03:03.520 think at the low point that Dow in the SNP 0:03:03.600 --> 0:03:07.280 had both dropped more than nine percent during the day. 0:03:07.560 --> 0:03:09.760 It was insane and and all of that within a 0:03:09.760 --> 0:03:13.320 matter of minutes, some blue chip company stocks were trading 0:03:13.360 --> 0:03:17.639 for literally a penny apiece. Um. So so needles to say, 0:03:17.680 --> 0:03:22.240 we didn't quite have a great explanation that day in 0:03:22.280 --> 0:03:25.480 the in the Market's wrap. It's ten years later though, 0:03:25.560 --> 0:03:28.120 and we're very lucky to have on the show someone 0:03:28.200 --> 0:03:31.200 who has uh an excellent book out on this topic 0:03:31.720 --> 0:03:34.519 and on the role of sort of one loner trader 0:03:34.520 --> 0:03:38.400 outside of London, the role he played on that day 0:03:39.320 --> 0:03:42.080 when the markets just went crazy. So very happy to 0:03:42.120 --> 0:03:44.080 have him on the show. His name is Liam Vaughan. 0:03:44.280 --> 0:03:48.760 He's an investigative reporter with Bloomberg News in London and, 0:03:48.840 --> 0:03:51.760 as you said, author of that new book flash Crash, 0:03:51.960 --> 0:03:54.440 which I know I'm a little biased, he's one of us, 0:03:54.480 --> 0:03:56.400 but honestly, I think this is gonna be one of 0:03:56.400 --> 0:03:59.280 those finance books that is going to be a must 0:03:59.320 --> 0:04:01.040 read for every on. It's going to be on everyone's 0:04:01.040 --> 0:04:03.720 bookshelf soon because from what I've read of it so far, 0:04:03.800 --> 0:04:09.160 it's just so excellently well written and well reported. Uh So, Liam, 0:04:09.200 --> 0:04:11.000 I hope you're not blushing too much, but welcome to 0:04:11.000 --> 0:04:18.320 the show. I can hardly thank you. Michael, no problem. 0:04:18.360 --> 0:04:21.440 So tell us briefly, I know, I mean I could 0:04:21.480 --> 0:04:25.200 talk about this for hours, but just briefly, sort of 0:04:25.240 --> 0:04:29.040 give us a portrait of uh this character nav Saro, 0:04:29.120 --> 0:04:33.080 who was uh this loner trader outside of London that 0:04:33.240 --> 0:04:36.560 the US prosecutor sort of zeroed in on for his 0:04:36.680 --> 0:04:38.760 role in this. But how did he get to that 0:04:38.839 --> 0:04:43.000 point where he's a guy that uh could at least 0:04:43.040 --> 0:04:47.640 play some role in what happened on the markets that day? Yes, so, 0:04:48.040 --> 0:04:53.880 Novenda Sings Around is a fairly ordinary in some ways 0:04:54.000 --> 0:04:57.520 kid from a pretty working class area of West London 0:04:57.600 --> 0:05:02.000 called Hounslow. He lived with his parents. They live in 0:05:02.040 --> 0:05:06.200 a pretty modest semi detached house which is directly below 0:05:06.240 --> 0:05:09.320 the Heathrow flight path. So if you go to his 0:05:09.520 --> 0:05:12.239 road you can literally look up at every five minutes 0:05:12.279 --> 0:05:15.080 you can see the planes fly by so close that 0:05:15.120 --> 0:05:20.560 you can count the windows and all conversations stops because 0:05:20.600 --> 0:05:22.560 you are you know, because you are that close to 0:05:22.600 --> 0:05:24.000 the flight path. So that gives you a sort of 0:05:24.040 --> 0:05:28.600 sense of of where he's coming from. Not a partial neighborhood, 0:05:28.600 --> 0:05:33.400 in other words, absolutely not. No. Um And he was 0:05:33.440 --> 0:05:37.560 a gifted, you know, kind of mathematician at school. He 0:05:37.640 --> 0:05:41.440 had um, you know, some academic chops and he found 0:05:41.440 --> 0:05:45.440 that he could multiply figures in his head with great ease. 0:05:45.520 --> 0:05:47.720 But he wasn't a great scholar. He was a you know, 0:05:47.760 --> 0:05:49.720 a bit of a sort of cheeky lad if you like, 0:05:50.040 --> 0:05:54.039 who loved playing football with his mates. Um And he 0:05:54.160 --> 0:05:57.320 was also a keen computer gamer, so he used to 0:05:57.360 --> 0:06:00.240 play the game Fifa, which is a soccer game, and 0:06:00.279 --> 0:06:02.920 he ended up being in the top seven hundred out 0:06:02.920 --> 0:06:05.440 of three million in the world. So he, you know, 0:06:05.480 --> 0:06:10.360 he was pretty de extrous, good reflexes, pretty obsessive um. 0:06:10.520 --> 0:06:13.920 And then after he'd finished university, he saw an advert 0:06:14.080 --> 0:06:20.240 in the Evening Standard newspaper which literally said wanted futures 0:06:20.279 --> 0:06:24.920 traders must work well under pressure, which is believable to 0:06:25.279 --> 0:06:33.160 how Goldman Sacks hires their Yeah, amazing. And the interesting 0:06:33.240 --> 0:06:36.800 thing about now is that he's kind of arrival into 0:06:36.800 --> 0:06:40.360 the market's coincided with this kind of evolution from the 0:06:40.400 --> 0:06:45.479 pits to the screens. So late nineties you had all 0:06:45.520 --> 0:06:48.520 these pits closing, and you have the beginning of kind 0:06:48.520 --> 0:06:51.680 of mascale or electronic trading, but you don't really have 0:06:52.240 --> 0:06:55.920 high frequency trading at that point, so you have all 0:06:55.960 --> 0:06:59.000 these kind of trading arcades that spring up there are 0:06:59.040 --> 0:07:02.480 a little bit rough and ready, And basically the system 0:07:02.520 --> 0:07:06.360 is that they will back you with money, um, and 0:07:06.400 --> 0:07:09.080 if you don't do well, they'll kind of coach you, 0:07:09.200 --> 0:07:10.880 give you some sort of tuition on how to use 0:07:10.920 --> 0:07:13.240 the software, how to read the markets, a bit of 0:07:13.640 --> 0:07:17.240 you know, economics, that kind of thing, um, and then 0:07:17.880 --> 0:07:19.520 they'll kind of let you loose, and if you have 0:07:19.640 --> 0:07:21.880 some potential, they'll keep giving you more money, and if 0:07:21.880 --> 0:07:25.120 you don't, then they'll let you go. Um. And basically 0:07:25.160 --> 0:07:27.920 the way that the business model works for those arcades 0:07:27.920 --> 0:07:30.240 is that you know, all you need is a handful 0:07:30.280 --> 0:07:32.560 of naves that are very good and they take a 0:07:32.600 --> 0:07:37.560 percentage on everything they make. They charge um, you know, 0:07:37.680 --> 0:07:39.360 per a round trip. And you know it was it 0:07:39.360 --> 0:07:41.240 was a good business model for a while. But most 0:07:41.280 --> 0:07:43.040 of those that walk through this the door of this 0:07:43.160 --> 0:07:46.440 firm few text, which is above a supermarket, you know, 0:07:46.480 --> 0:07:49.840 about forty five minutes outside and miles away from the 0:07:49.920 --> 0:07:55.080 kind of city of London. Um. And so nav you know, 0:07:55.280 --> 0:07:58.120 arrives there like all the other sort of rookies. Um. 0:07:58.600 --> 0:08:01.200 And he's taught a style of tray aiding called scalping, 0:08:02.400 --> 0:08:05.560 which has got nothing to do with kind of macroeconomics 0:08:05.680 --> 0:08:08.440 or looking at interest rates. In the long term. It's 0:08:08.440 --> 0:08:13.920 all about looking at orders coming into and leaving the marketplace, um, 0:08:13.960 --> 0:08:17.000 and looking for clues as to whether the markets about 0:08:17.040 --> 0:08:20.240 to fall or about to rise, and then taking very 0:08:20.280 --> 0:08:23.360 short term positions in and out and in a lot 0:08:23.360 --> 0:08:25.720 of ways it is a weirdly like a kind of 0:08:25.760 --> 0:08:28.840 computer game, you know, where you're reacting very quickly to 0:08:28.960 --> 0:08:32.640 information and data that comes your way. UM. So now 0:08:32.679 --> 0:08:36.640 have you know inevitably turns out to be incredibly gifted 0:08:36.800 --> 0:08:40.120 at this style of trading, and he goes from literally 0:08:40.160 --> 0:08:44.280 having no money at all to having two million pounds 0:08:44.640 --> 0:08:47.480 by the time he leaves few texts five years later, 0:08:48.000 --> 0:08:51.160 which might sound like small fryer, but this is a 0:08:51.200 --> 0:08:54.559 guy who's still living at home with his parents, um, 0:08:54.600 --> 0:08:56.800 and compared to most of the other traders on the floor, 0:08:56.840 --> 0:09:00.839 he was a complete start. So two thousand and eight 0:09:00.840 --> 0:09:02.920 he decides to leave. He's sick of sort of giving 0:09:02.920 --> 0:09:06.160 away his profits to the managers a few texts, so 0:09:06.240 --> 0:09:09.480 he goes home to his parents place, um, and he 0:09:09.520 --> 0:09:13.720 starts trading from there um. But something happens along the 0:09:13.760 --> 0:09:18.040 way which kind of changes I guess his destiny in life. 0:09:18.120 --> 0:09:21.679 He starts to become increasingly fed up with the arrival 0:09:21.679 --> 0:09:25.840 of high frequency trading firms because essentially, you know, what 0:09:26.040 --> 0:09:28.120 h f T or a certain type of HFT does 0:09:28.280 --> 0:09:30.600 is very similar to what navs doing. It's kind of 0:09:30.640 --> 0:09:34.360 looking at orders entering and leaving the market, looking at 0:09:34.360 --> 0:09:37.320 the queue for different price levels, and tries to jump 0:09:37.360 --> 0:09:40.760 ahead of you know, short term price moves. So people 0:09:40.840 --> 0:09:45.920 like navs suddenly found themselves really struggling to compete, and 0:09:46.040 --> 0:09:48.280 rather than quit the market, which is what a lot 0:09:48.320 --> 0:09:52.240 of his friends did. Nev decided that he would get 0:09:52.240 --> 0:09:55.080 in touch with a computer programmer and he would build 0:09:56.000 --> 0:10:00.920 essentially a kind of sophisticated spoofing mach shame, which he 0:10:00.960 --> 0:10:03.880 could not. Yeah, let me just set up because because 0:10:03.920 --> 0:10:06.880 I think that's that's sort of the plot twist where 0:10:06.880 --> 0:10:10.559 it gets really interesting. Because scalping is one thing, and 0:10:10.720 --> 0:10:12.840 correct me if I'm wrong, but scalping is a type 0:10:12.880 --> 0:10:18.559 of trading that's basically legal spoofing. Spoofing is when you 0:10:18.559 --> 0:10:22.840 you intentionally put try to flood the market with orders, 0:10:23.000 --> 0:10:25.559 either by orders to sort of send that futures price 0:10:25.679 --> 0:10:28.600 up or flood the market with sell orders to bring 0:10:28.640 --> 0:10:32.160 it down. Uh, And you don't really intend those orders 0:10:32.200 --> 0:10:34.800 to be executed. You put them in as as sort 0:10:34.800 --> 0:10:36.840 of a way to trick the other traders, whether they 0:10:36.880 --> 0:10:40.240 be humans or computer algorithms, into thinking that there is 0:10:40.280 --> 0:10:44.600 a supply demand imbalance going on. So I'm curious when 0:10:45.160 --> 0:10:48.400 was it when exactly did not make the leap from 0:10:48.400 --> 0:10:51.400 scalping to to actually spoofing. Did he do that as 0:10:51.440 --> 0:10:54.240 sort of a hand trader or was it not until 0:10:54.320 --> 0:10:57.520 he developed this, uh, this computer program that you're talking about. 0:10:58.080 --> 0:11:00.960 So that is a very good question at and I 0:11:01.000 --> 0:11:04.320 guess one that I'm saying I don't know entirely because 0:11:05.480 --> 0:11:12.000 the first time that he um sort of is on 0:11:12.240 --> 0:11:15.920 record as kind of getting involved with spoofing is in 0:11:15.960 --> 0:11:19.160 two thousand and nine, which is when he writes to 0:11:19.240 --> 0:11:24.760 this UM like developer and has a kind of blueprint 0:11:24.840 --> 0:11:28.400 for this algorithm program that he wants to build, and 0:11:28.400 --> 0:11:30.640 it's at that point in time where he's quite specific 0:11:30.679 --> 0:11:33.920 about wanting to exactly, as you say, have a machine 0:11:33.960 --> 0:11:36.880 that will be able to flood the market with said 0:11:37.000 --> 0:11:40.640 orders specifically and then make sure that they never get 0:11:40.760 --> 0:11:43.240 hit so the orders will be canceled. But by then 0:11:44.400 --> 0:11:48.080 other market participants, particularly algorithms that are making very short 0:11:48.200 --> 0:11:51.240 term decisions, will have reacted to it, and the market 0:11:51.280 --> 0:11:53.199 will have moved a couple of ticks, and that will 0:11:53.240 --> 0:11:58.480 be simultaneously trading and trying to sort of benefit from that. UM. 0:11:58.520 --> 0:12:00.439 I mean as to whether it was illegal, the actual 0:12:00.480 --> 0:12:03.800 spoofing rules themselves didn't come in until later until two 0:12:03.880 --> 0:12:08.160 thousand and eleven UM, but arguably what he was doing 0:12:08.520 --> 0:12:11.439 would have been caught up in other kind of statutes 0:12:11.480 --> 0:12:17.040 like fraud security. Yeah, exactly, so, so, Liam, can you 0:12:17.080 --> 0:12:19.800 help explain to us the mechanics of what actually happens 0:12:20.160 --> 0:12:22.079 during a flash crash. I mean, we constantly hear this, 0:12:22.160 --> 0:12:25.080 and I'm sure the mechanics are different in each one 0:12:25.120 --> 0:12:26.880 that has happened over history, But in the likes of 0:12:26.920 --> 0:12:29.440 the one that happened in two thousen, what were the 0:12:29.440 --> 0:12:33.880 actual mechanics underlying? And then how did nav actually get 0:12:33.920 --> 0:12:37.760 pulled into all of this? What was his role in it? Sure? So, 0:12:37.880 --> 0:12:42.160 May six, two thousand and ten, UM, as you was saying, Michael, 0:12:42.240 --> 0:12:44.920 was a very volatile day anyway. It was the kind 0:12:44.920 --> 0:12:48.760 of midst of the Eurozone crisis. Um. The kind of 0:12:48.760 --> 0:12:52.720 fear index was was rising very quickly throughout that weekend, 0:12:52.800 --> 0:12:56.160 increasingly on that day, and you just had prices that 0:12:56.240 --> 0:13:01.520 were we're kind of increasingly fall links throughout the course 0:13:01.520 --> 0:13:04.800 of the US morning, and up until about one thirty 0:13:05.520 --> 0:13:09.680 the market was down about three or four percent already. UM. 0:13:09.760 --> 0:13:14.120 And then you know, panned the camera to Kansas City 0:13:14.360 --> 0:13:18.920 and there is a kind of large pension fund called 0:13:18.920 --> 0:13:24.520 woodele and Reid that had been long stocks and had 0:13:24.520 --> 0:13:28.520 been benefited from a kind of big ramp up in prices. 0:13:28.920 --> 0:13:31.440 But on that day, the fund manager got skittish and 0:13:31.480 --> 0:13:33.840 decided that he wanted to hedge his position, so he 0:13:33.960 --> 0:13:39.880 so he he sold seventy five thousand e minis, which 0:13:39.920 --> 0:13:43.200 is worth about four billion dollars at the time. So 0:13:43.640 --> 0:13:47.320 this very large fund places this very large order. But 0:13:47.400 --> 0:13:50.840 the issue, one of the issues arose in the way 0:13:50.840 --> 0:13:55.000 that they executed the order because they used an algorithm, 0:13:55.000 --> 0:14:00.720 but they didn't include any kind of um like fail 0:14:00.800 --> 0:14:03.880 safe so for example, so the so the algorithm they 0:14:04.000 --> 0:14:08.000 used was to sell at nine percent of the market 0:14:08.080 --> 0:14:12.240 volume until the order was executed. And the issue arose 0:14:12.679 --> 0:14:15.040 in the because the markets were so volatile at that 0:14:15.080 --> 0:14:19.440 point in time, volumes actually spiked and this selling algorithm 0:14:19.520 --> 0:14:22.600 went into overdrive and was just selling and selling and 0:14:22.640 --> 0:14:25.640 selling and selling. There was no kind of price level, 0:14:25.720 --> 0:14:29.280 no stop loss there. So that arrives when you have 0:14:29.360 --> 0:14:32.560 this already highly volatile marketplace, and then there's a bunch 0:14:32.600 --> 0:14:36.479 of other things, weird things that happen as well. So, um, 0:14:36.560 --> 0:14:39.880 you know, this is happening in the the futures markets, 0:14:39.880 --> 0:14:44.440 but meanwhile in the stock markets there is there's like 0:14:44.480 --> 0:14:46.800 technical issues that day that just so happened to be 0:14:46.840 --> 0:14:48.760 happening on the New York Stock Exchange, which means that 0:14:48.800 --> 0:14:52.040 there's delays in prices that are arriving to people, and 0:14:52.120 --> 0:14:55.000 all of this creates a situation where market participants are 0:14:55.040 --> 0:14:59.720 just leaving in their droves um and then suddenly, at 0:14:59.760 --> 0:15:02.960 one forty one PM, the bottom falls out of the 0:15:03.000 --> 0:15:07.440 market and within the space of four minutes it's fallen 0:15:07.520 --> 0:15:11.400 another five per cent um, and you know, there's a 0:15:11.440 --> 0:15:14.680 complete and utter drought of liquidity at that point as 0:15:14.720 --> 0:15:16.920 everyone is kind of pulling the plug, and then the 0:15:17.000 --> 0:15:22.320 crmes stop mechanism kicks in because the pride, the volty, 0:15:22.440 --> 0:15:24.840 the velocity of the movie is so great that it 0:15:25.040 --> 0:15:28.920 pauses the market for five seconds and at that point, 0:15:29.000 --> 0:15:30.800 you know, it's the longest five seconds in the world 0:15:30.800 --> 0:15:33.600 while everyone's kind of waiting to see what happens. And 0:15:33.600 --> 0:15:39.080 then miraculously and again kind of confusingly because nobody knew 0:15:39.080 --> 0:15:41.240 really why at the time, but the market as soon 0:15:41.280 --> 0:15:43.760 as as soon as the market reopens, prices starts to 0:15:43.880 --> 0:15:47.560 rally again um and within half an hour they're back 0:15:47.560 --> 0:15:50.680 at the level they were before the drop. But meanwhile, 0:15:50.720 --> 0:15:54.520 in the US stock market, there are, as Michael mentioned, 0:15:54.520 --> 0:15:56.080 you know, some stocks that are trading at like no 0:15:56.080 --> 0:15:59.480 all point zero zero one cent others that are suddenly 0:15:59.480 --> 0:16:05.920 trading at hundred thousand dollars um because there's no liquidity 0:16:05.920 --> 0:16:07.560 in the market, so they've gone to these things called 0:16:07.600 --> 0:16:12.600 stop stub quotes, and and so in the aftermath of 0:16:12.640 --> 0:16:16.680 all this, there's a big period of introspection. There's an 0:16:16.680 --> 0:16:20.680 investigation by the CFTC and the SECUM and they come 0:16:20.720 --> 0:16:24.760 to the conclusion that a combination of the kind of 0:16:24.840 --> 0:16:28.680 changing marketplace and the increasing preponderance of electronic trading and 0:16:28.720 --> 0:16:33.480 high frequency trading, the extreme macro economic conditions, and this 0:16:33.720 --> 0:16:38.800 pension fund had all combined to create the conditions for 0:16:38.840 --> 0:16:42.920 this exceptional market event. Naver Sara is nowhere to be 0:16:42.960 --> 0:16:47.480 seen at this point. It's only two years later when 0:16:47.720 --> 0:16:51.080 another day trader happens to be kind of back testing 0:16:51.200 --> 0:16:54.600 his trading system on May six, two and ten, just 0:16:54.680 --> 0:16:59.160 randomly picks that day, and he notices that throughout that 0:16:59.240 --> 0:17:03.240 day in the order book there are hundreds of millions 0:17:03.280 --> 0:17:06.399 of dollars of sell orders that are just sitting there, 0:17:06.880 --> 0:17:09.080 never get hit. As soon as the price moves, they 0:17:09.080 --> 0:17:13.719 get canceled and reposted um. And to him it's just 0:17:13.800 --> 0:17:16.800 like a complete shock and an eye opener like, what 0:17:16.880 --> 0:17:19.399 the hell Like, you know, surely this had had a 0:17:19.400 --> 0:17:23.720 contributing factor as well. So he blew the whistle essentially 0:17:24.320 --> 0:17:27.439 to the CFTC. They've got a program now where if 0:17:27.480 --> 0:17:30.160 you lead to a successful conviction, you know, you get 0:17:30.200 --> 0:17:32.760 paid for it. So this guy who I interview in 0:17:32.760 --> 0:17:35.480 the book and I call him Mr X, blows the whistle. 0:17:35.520 --> 0:17:37.760 And that is the first time that Nav appears on 0:17:37.800 --> 0:17:41.240 the radar of the authorities. He probably wouldn't have done 0:17:41.280 --> 0:17:44.320 if he wasn't for this guy. And then fast forward 0:17:44.400 --> 0:17:47.719 to two thousand and fifteen and and Nav, you know, 0:17:48.000 --> 0:17:51.359 is asleep in his parents house, in his bedroom in 0:17:51.440 --> 0:17:53.120 hound Slow, and he gets a knock on the door 0:17:53.840 --> 0:17:56.760 and it's you know, a dozen FBI agents and police 0:17:56.800 --> 0:18:00.439 officers and they arrest him for manipulation in the market 0:18:00.760 --> 0:18:03.640 and for spoofing and over a period of a long 0:18:03.680 --> 0:18:07.600 period of time, but specifically as well um on the 0:18:07.680 --> 0:18:12.920 day of the flash crash um. So you know, one 0:18:12.920 --> 0:18:14.800 of the questions I attempt to grapple with is the 0:18:14.800 --> 0:18:18.800 extent to which Surround really had a significant impact on 0:18:18.920 --> 0:18:22.480 what happened that day, whether he was just a contributory factor, 0:18:22.480 --> 0:18:25.840 whether he had no impact at all, And there's people 0:18:25.840 --> 0:18:28.840 with views across that whole spectrum eving to this day. 0:18:29.040 --> 0:18:30.760 I know, and I think you and I had gotten 0:18:30.800 --> 0:18:33.560 a little bit of a Twitter conversation about that with 0:18:33.640 --> 0:18:38.400 some others. Um. And so it clearly, as you point out, 0:18:38.400 --> 0:18:41.439 there were structural issues with the market. There was you 0:18:41.440 --> 0:18:45.080 know what Ellen read a fund manager putting in a 0:18:45.160 --> 0:18:48.480 very aggressive, you know, ill advised sal ord or into 0:18:48.520 --> 0:18:52.840 the market. UM. I do think people sort of rallied 0:18:52.880 --> 0:18:56.240 behind the character of Nav because he's very much a 0:18:56.280 --> 0:19:00.040 sympathetic character, as you say, a blue collar kid. I 0:19:00.400 --> 0:19:03.560 believe he has Asperger's right. Um. Uh, you know Matt 0:19:03.600 --> 0:19:07.399 Wiz who sort of makes this small fortune on his own. Um. 0:19:07.640 --> 0:19:10.600 And he's kind of, you know, treating the market like 0:19:10.600 --> 0:19:13.960 a video game, playing at the way he best sees fit. 0:19:14.080 --> 0:19:17.240 And I don't wonder though, Liam, Now, if if there 0:19:17.240 --> 0:19:20.720 were some giant hedge funds, some multibillion dollar hedge fund 0:19:20.960 --> 0:19:27.200 or some uh you know, emerging high frequency trading firm 0:19:27.560 --> 0:19:29.879 that was doing what he was doing. I mean, he 0:19:29.960 --> 0:19:33.080 was he was responsible for what was it like thirty 0:19:33.119 --> 0:19:36.960 or forty of the seal orders on the spres that 0:19:37.040 --> 0:19:41.000 day something like. One statistic is staggering is that he 0:19:41.080 --> 0:19:44.840 was amongst the top five largest traders on the E Mini, 0:19:44.920 --> 0:19:47.119 which is one of the biggest futures markets in the world, 0:19:47.240 --> 0:19:50.720 for a period of five years. So crazy to consider 0:19:50.840 --> 0:19:54.240 one person day trading at home. Yes, I just wonder, 0:19:54.320 --> 0:19:57.440 what do you think, you know, Uh, would the sympathy 0:19:57.560 --> 0:20:00.240 be there for what he was doing if if did 0:20:00.280 --> 0:20:02.960 say it's been a ten billion dollar hedge fund, I 0:20:03.000 --> 0:20:07.800 won't name any names, or you know, a prominent firm. 0:20:07.840 --> 0:20:09.919 I think you're absolutely right. The thing about nav is 0:20:09.960 --> 0:20:13.320 that he was an outsider. He was like David taking 0:20:13.320 --> 0:20:15.840 on Golias. You had Michael Lewis's book that had just 0:20:15.840 --> 0:20:18.879 come out about high frequency traders and now throughout his 0:20:18.920 --> 0:20:21.000 whole career, and he put you know, there's all these 0:20:21.040 --> 0:20:23.080 emails that came out afterwards. He used to call the 0:20:23.240 --> 0:20:27.280 HRT firms nerds and geeks, and he used to complain 0:20:27.320 --> 0:20:30.000 about them. So he became like almost like a folk hero. 0:20:30.240 --> 0:20:33.439 So particularly so a lot of day traders. I do 0:20:33.600 --> 0:20:37.640 think that you are right, you know, And and there 0:20:37.640 --> 0:20:42.000 have been a bunch of both banks and hedge funds 0:20:42.160 --> 0:20:44.200 and large h of T shops that have now been 0:20:44.200 --> 0:20:46.399 done for spoofing, and that certainly doesn't seem to be 0:20:46.440 --> 0:20:51.080 the same level of of sympathy around it. Um. My 0:20:51.200 --> 0:20:53.199 view on the flash crash itself is it's, you know, 0:20:53.320 --> 0:20:58.040 it's it's almost impossible to reverse engineer what happened in 0:20:58.119 --> 0:21:00.960 such a complex and busy market. It's just sort of 0:21:01.000 --> 0:21:03.800 suffice to say that he was a major player. He 0:21:03.880 --> 0:21:07.600 was a major kind of seller, um, and other market 0:21:07.640 --> 0:21:10.440 participants were reacted to his orders. So I don't think 0:21:10.680 --> 0:21:13.000 you can really say that he had nothing to do 0:21:13.040 --> 0:21:16.800 with it. Um. But again, would it have happened if 0:21:16.800 --> 0:21:20.080 he wasn't there? Maybe maybe it would. So yeah, it's 0:21:20.080 --> 0:21:23.600 hard to prove the you know, the hypothetical what would 0:21:23.640 --> 0:21:25.840 have happened if he wasn't around? Hey, Liam, Like I said, 0:21:25.880 --> 0:21:28.040 I wish we could talk about this for hours, um, 0:21:28.160 --> 0:21:30.399 but I think that's all the time we have for today. 0:21:31.080 --> 0:21:33.480 I encourage everyone check out this book. I and I 0:21:33.480 --> 0:21:35.359 believe it's going to be made into a movie. Or 0:21:35.480 --> 0:21:39.199 is that correct? It is? Yeah, the Dev Patel, the 0:21:39.640 --> 0:21:42.600 you know, amazing Hollywood actor, has signed onto play nav 0:21:42.600 --> 0:21:46.880 if you could believe that, So congratulations and yeah, everyone 0:21:47.040 --> 0:21:49.480 everyone has to either download the book or purchase the 0:21:49.480 --> 0:21:52.480 book somehow, because it's the perfect quarantine rate. And if 0:21:52.480 --> 0:21:55.840 you need someone to play a frazzled stocks market editor 0:21:55.880 --> 0:21:57.280 trying to keep up with all of it, you know, 0:21:57.320 --> 0:22:04.200 I'm I'm I'm Availbule. I'm just saying, and the frazzle journalist, Liam, 0:22:04.240 --> 0:22:05.920 thanks so much for coming on the show. We appreciate 0:22:05.960 --> 0:22:25.600 it for having me, guys, it was a pleasure. All right. 0:22:25.600 --> 0:22:28.440 Now we're going to switch gears a little bit from 0:22:28.480 --> 0:22:31.840 the flash crash of two thousand and ten to an 0:22:31.840 --> 0:22:35.680 area of the market that itself has been pretty volatile 0:22:35.840 --> 0:22:40.520 amidst the coronavirus crash, right, Mike, Yeah, absolutely, Sarah, And 0:22:41.000 --> 0:22:44.439 I'm fascinated to talk to our next guest because, as 0:22:44.520 --> 0:22:46.560 we all know, the U S stock market is basically 0:22:46.600 --> 0:22:52.640 become dominated by the big five stocks. You know, Microsoft, Alphabet, Amazon, Apple, 0:22:53.359 --> 0:22:58.560 and Facebook makeup of the stock market right now. Um, 0:22:58.600 --> 0:23:01.480 But there's this whole other world of companies out there 0:23:01.520 --> 0:23:04.280 around the world, global small cap companies. And I think 0:23:04.280 --> 0:23:07.520 a lot of investors maybe get scared at the notion 0:23:07.560 --> 0:23:11.200 of global small caps just because it's unfamiliar. So our 0:23:11.240 --> 0:23:14.439 guest is gonna walk us through how he goes about 0:23:15.040 --> 0:23:18.080 UH screening through the universe of global small caps to 0:23:18.160 --> 0:23:21.960 find value and to find growth potential in You know, again, 0:23:22.040 --> 0:23:25.600 what I think is an area that most American investors 0:23:25.600 --> 0:23:28.439 aren't very comfortable with. So so hopefully we'll make them 0:23:28.440 --> 0:23:31.840 a little bit more comfortable, UH with some insights from 0:23:32.080 --> 0:23:36.159 Joffer riz Vey. He's a portfolio manager of the Harding 0:23:36.280 --> 0:23:41.800 Lovener Global Small Companies and International Small Companies Funds UH. Joffer, 0:23:41.880 --> 0:23:48.639 welcome to the show. Let's let's start with that basic idea. 0:23:48.680 --> 0:23:51.879 I mean, I think of the universe of small cap 0:23:51.960 --> 0:23:54.040 stocks around the world, and I don't know what it 0:23:54.119 --> 0:23:56.959