U.S. ‘06 Market ‘Flash Crash’ Charges Filed as a Result of Whistleblower
22nd April 2015
Navinder Sarao, a trader who worked out of his West London home was arrested by British authorities on U.S. charges that he helped cause the Dow Jones Industrial Average to plummet 1,000 points on May 6, 2010, also known as the “flash crash.” Prosecutors and regulators charged the trader with using a hyped-up version of commercially available software to manipulate a stock-market index futures contract, laying the groundwork for the index’s decline, in which hundreds of stocks momentarily lost almost all their value. Authorities said the trader earned $40 million in profits from 2010 to 2014 through alleged manipulations, including $879,000 on the day of the flash crash. His alleged conduct highlights the fragility of financial markets and the undermining role computerized trading can play. The Justice Department said the trader manipulated a futures-contract index that imitated movements in the S&P 500 stock index. He supposedly placed orders and canceled them just before they were executed in order to artificially move prices, also known as spoofing or layering.
A whistleblower found evidence of a single trader having a big impact on the markets on the day of the flash crash. The Government followed the trail the whistleblower uncovered and validated those findings
The flash crash shocked investors, traders, and regulators with its extensiveness and speed. As a result, shares in some companies traded for one cent while others skyrocketed. Nearly a trillion dollars of value was temporarily erased before being restored by a swing in the opposite direction. The event led to a range of market changes, including “circuit breakers” at exchanges that automatically pause trading in stocks that change price rapidly.
Previously, a report by regulators said the crash was set off by the activities of a large trader, which sold about $4.1 billion of E-mini futures contracts at a time when the market was already unstable because of unease over European debt issues. Those sell orders were executed by an algorithm designed to ramp up trading at times when there was greater volume, causing a “liquidity crisis.”
The case is part of a clampdown by criminal and regulatory authorities on tactics used by high-speed traders, including spoofing, which was outlawed in the 2010 Dodd-Frank financial overhaul. That law was enacted after the flash crash; the CFTC is claiming that the trader violated the Commodity Exchange Act, which also prohibits manipulative trading, as well as the anti-spoofing law for trading he engaged in beginning in 2011.
Another trader was criminally charged with spoofing last year, when the U.S. attorney’s office charged a New Jersey high-frequency trader, Michael Coscia, with six counts of commodities fraud and six counts of spoofing in 2011. Mr. Coscia has denied the charges in the case.