The technology may have advanced to HFT Trading, algorithmic trading but the rogue inside the human will always US Flash Crash Traderoverpower the technology.

Let’s try to understand the case of Navinder Singh Sarao , Has he became the scapegoat ?

According to the justice department Mr Sarao and his firm is guilty of Nav Sarao Futures, made £26m ($40m) illegally over five years.

He has been accused of using an “automated trading program” to manipulate markets, and contributing to the flash crash of 6 May 2010. On that day, the Dow Jones index lost 700 points in a matter of minutes – wiping about $800bn off the value of US shares – before recovering just as quickly.

Here are some arguments from the Justice Department:-

  • Regulators blamed high-frequency traders placing multiple sell orders for the crash.
  • High-speed trading is where share dealers use computer algorithms to buy and sell stocks in milliseconds.
  • Justice department said last week that “Sarao’s alleged manipulation earned him significant profits and contributed to a major drop in the US stock market on May 6, 2010”.
  • Its statement continued: “By allegedly placing multiple, simultaneous, large-volume sell orders at different price points – a technique known as ‘layering’ – Sarao created the appearance of substantial supply in the market.”
  • Mr Sarao was then able to buy and sell futures contracts tied to the value of the share indexes, it is alleged.

Some Arguments and Questions against the CFTC/DOJ/FBI

The First question that arises why did it take them five years to bring it?

A guy living with his parents next to London’s Heathrow Airport enters a lot of big, phony orders to sell U.S. stock market futures; the market promptly collapses on May 6, 2010; it takes five years for the army of U.S. financial regulators to work out that there might be some connection between the two events. It makes no sense.

Traders who seek to manipulate the U.S. stock market are meant to encounter resistance from the market itself. During the flash crash, Navinder Sarao apparently used Jon Corzine’s now defunct MF Global to place orders and clear trades. Why didn’t MF Global see what he was up to, or at least call him to ask him about it? There’s now a big business on Wall Street of firms renting out their HFT infrastructure to prop shops. Does that business depend on the brokers paying no attention to what their customers are doing? Do the big Wall Street firms that rent out their technology bear any responsibility for what their customers do with the weapons they’ve been given? For that matter, why don’t U.S. securities exchanges assume any responsibility for what happens on them?

Sarao’s manipulative orders were placed on the Chicago Mercantile Exchange. Why didn’t the CME notice what was going on? Or did they notice, and simply not care, as the behavior was standard practice for their high-frequency trading clients?

Then there is the biggest question of all: How can a guy working from his parents’ house in suburban England whose only actionable orders were to BUY stock market futures cause such a sensational collapse in U.S. stocks? On the day of the flash crash, Sarao never actually sold stocks. He was trying to trick the market into falling so that he could buy in more cheaply. But whom did he fool with his trick? Whose algorithms were so easily gamed that they responded to phony sell orders by creating a crash? Stupidity isn’t a crime. Still, it would be interesting to know who, at this particular poker table, on this particular day, was the fool.

 

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