Fox Business Was one trader responsible for the flash crash?
WASHINGTON (MarketWatch) — The 2010 “flash crash” — in which the Dow industrials sank by around 1,000 points before quickly recovering — has been debated for years. But on Tuesday the U.S. for the first time filed a criminal charge relating to it.
The Justice Department on Tuesday unsealed charges, and sought extradition, of a Brit who conducted day trading in futures contracts from his London home. The Commodity Futures Trading Commission also filed civil charges against Navinder Singh Sarao and his company.
A law firm says a whistleblower unearthed the allegations.
Our anon. client brought powerful,original analysis to CFTC after 100s of hours investigating #FlashCrash for years http://t.co/3Df94kF3bw — Whistleblower Law (@WhistleblowerHB) April 21, 2015
Sarao was arrested in the U.K. over the charges relating to manipulation. While the government has alleged manipulation on at least 10 different occasions, it is the activity of May 6, 2010, that will draw the most attention.
The U.S. government says Sarao was engaged in what’s called layering, which involves making multiple, bogus orders that are quickly canceled to trick other market participants. Sarao used the E-mini S&P 500 contract to conduct spoofing, the court document says.
On the day of the flash crash, Sarao modified more than 20 million lots — compared with the fewer than 19 million lots the rest of the market modified, the U.S. alleges.
Sarao allegedly used “dynamic layering” between 11:17 a.m. and 1:40 p.m. Central time, and created persistent downward pressure on the price of the E-minis. His offers composed 20% to 29% of the CME’s entire E-mini sell-side order book, the U.S. alleges. Sarao made $879,018 in profits that day, and nearly $9 million on the trading days where the U.S. alleged illegal activity, and around $40 million over four years.
On social media, he was mocked both for soliciting outside help to create software and for the relatively small size of his profits relative to the disturbance he allegedly caused.
@ThemisSal @JaffrayW Even more sad...he only made $867k when the mkt declined over $1T in value...rookie — Kimberly Scott (@hikergal23) April 21, 2015
His colorful language also was noted — according to an email, he told the Chicago Mercantile Exchange CME, +1.40% “to kiss my ass” after being questioned over his entering and then canceling orders. At another point, Sarao characterized his own trading as just demonstrating to a friend “what occurs on the bid side of the market almost 24 hours a day, by the high frequency geeks,” according to the Justice Department description of his email.
As for the flash crash, the CFTC and the Securities and Exchange Commission stated in their joint report that E-mini trading spilled over into the equity market and helped trigger the extreme movements. But the E-mini trades that the agencies said triggered the big moves were from a large trader, subsequently identified as Waddell & Reed. Waddell & Reed has always maintained that their trades were not out of the ordinary.
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