Flash Crash Caused by Trader Running Trading Programs
On Tuesday April 21 2015 a high frequency trader by the name of Navinder Singh Sarao, 36, was arrested by the CFTC U.S Commodity Futures Trading Commission. The chargers were on the account of “Unlawfully manipulation and attempting to manipulate the E-mini futures”. Navinder Singh Sarao market manipulation is said by the CFTC to be responsible for the May 6, 2010 market Flash Crash. The allocations are that Sarao was running a program that manipulated the markets and resulted in the Dow Jones Industrial Average dropping 1000 point within minutes. The crash resulted in the immediate loss of over $1trillion in market value. The market quickly regained those losses.
The activity that Sarao has been associated with is “spoofing” the market in which large orders are placed as flash bid or offer, only to be canceled within a moment later. These orders are placed without the intention of ever execution them. They are used to create and illusion that there supply or demand in a in a particle market, while in fact there is not. If the bid and ask spread get close to the orders traders will cancel the open order and replace them further away from the spread. Sarao’s program had in excess of 10,000 open orders providing false levels of support and resistance. CME Group Inc, where Sarao conducted his trades, said on Wednesday in a statement that “the Flash Crash was not caused by the futures market.” Spoofing was made illegal in 2010.
Sarao’s degree of spoofing was complex. He created layers of large orders stacked above each other. This provided the market with an artificial sense of support. Sarao was able to place thousands of orders because he had a tremendous amount of leverage on margin. This leverage is money borrowed from the institution where he was trading. In his scheme he was risking the stability of the entire firm, not to mention to the global exchanges.
The CFTC has alledged that Sarao profited roughly $40 million during the flash crash.
Navinder Singh Sarao appeared in front of the Westminster Magistrates count, London, Britain on Wednesday April 22, 2015.
There are 22 charges against him from wire fraud to market manipulation. The charges if convicted could send away Navinder Singh Sarao to prison for decades (380 years). Sarao’s bail was set at just under $8 million USD on Wednesday. He is facing extradition to the United States to face these charges.