Home' Trinidad and Tobago Guardian : April 26th 2015 Contents SBG10 STOCKS
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt APRIL 26 • 2015
That America's stock mar-
kets dropped by 10 per
cent in a few minutes on
May 6, 2010, was wor-
rying enough, even if they
did bounce back quickly.
Worse still was the real-
isation that nobody
understood why or how it had happened.
After pointing the finger in various direc-
tions, American authorities have settled on
an unlikely culprit: Navinder Singh Sarao, a
36-year-old British day-trader whom they
now want to extradite to face an assortment
of criminal and civil charges.
Market watchdogs would not have expected
the source of the "flash crash," as it came to
be known, to be a lone trader based in a non-
descript, semidetached house in Hounslow,
an unfashionable suburb nestled between cen-
tral London and Heathrow Airport. They would
be less surprised, however, by the methods
he is accused of using, most notably "spoofing,"
a common form of market manipulation.
According to the charge sheet, Sarao would
routinely place a series of orders to sell futures
contracts that would be profitable only if the
S&P 500 share index fell.
The authorities claim that a computer pro-
gramme he devised constantly tweaked the
price of his orders to ensure that he wasn't
taken up on them. The effect, nonetheless,
was to inject pessimism into the futures market,
by making it look as if lots of investors were
expecting prices to drop.
Part of this bearishness spilled over into the
stock market, causing shares to fall in price.
Sarao, it is claimed, used this as an opportunity
to buy cheaply. Merely canceling the sell orders
would then have caused prices to perk up
Regulators long have tried to stamp out
spoofing, but it is hard to prove that an offer
that is subsequently withdrawn was made in
bad faith. High-frequency traders, some of
them billion-dollar outfits, spew out and retract
many buy and sell orders every millisecond.
Sarao himself, in previous dealings with the
Chicago Mercantile Exchange, where he placed
his trades, denounced "mass manipulation
(by) high-frequency nerds" - before telling
his broker he had called the exchange "and
told 'em to kiss my ass" on a compliance mat-
ter.Sarao appeared in court in London on April
22, but only to fight extradition. The American
authorities claim that he made a profit of only
US$879,018 from the trades linked to the flash
crash, a pittance compared to the upheaval
caused, though perhaps US$40 million from
Awkwardly, he funneled his profits from
trading to a firm called "Nav Sarao Milking
Markets Limited," based in Nevis, a Caribbean
tax haven, although he has no obvious ties to
the dairy industry.
Why Sarao's continued use of similar trading
strategies did not cause markets to convulse
again is not clear. Nor is it established that he
was the sole cause of the S&P's swoon, as the
American complaint in effect concedes. It
claims that he was "at least significantly
responsible for the order imbalance that in
turn was one of the conditions that led to the
flash crash." That leaves plenty of blame to
Regulators previously had thought that a
mega-investor such as a mutual fund must
have had a hand in the mysterious event. Some
favoured the theory of the "fat finger trade,"
a mammoth but unintended sell order. Plenty
think that the widespread use of automated,
lightning-quick trading algorithms made mat-
ters worse, at the very least.
Many computers befuddled by whiplashing
markets stopped trading, leading to a liquidity
crunch, itself a source of volatility.
That Sarao might be even partly to blame
will only add to the alarm the flash crash
engendered. Many will ask how a single day-
trader could possibly have been allowed to
generate US$200 million of selling orders,
more than a fifth of the daily volume in the
contract he favoured, during a period of known
market convulsion without having been
blocked by one party or another.
The financial watchdogs also will have ques-
tions to answer. The most pressing of them
will be, if a trader from Hounslow can cause
the S&P 500 to crash, who or what else could
do the same or worse?
@2015 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
The curious case of the
The May 6, 2010, 20-minute "flash crash" will reverberate for quite some time.
if a trader from
Hounslow can cause
the S&P 500 to crash,
who or what else
could do the
same or worse?
NAVINDER SINGH SARAO
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