A British financial trader has been arrested on charges of triggering the 2010 “flash crash” – a sharp, short-lived fall in the US markets that took place on 6 May 2010. Navinder Singh Sarao is accused of sending “spoof” orders to sell E-mini futures contracts (derivatives based on the value of the S&P 500 index).
Spoofing involves placing a large volume of orders at prices that are not intended to be executed with intention of creating the impression of a large volume of selling (or buying) pressure in the market. This can encourage other traders to sell (or buy), thereby potentially driving the market down (or up).
Heathrow-based Sarao was arrested at the request of the US Federal Bureau of Investigation. He has been charged with multiple counts of wire fraud, commodities fraud and market manipulation, with potential prison terms of ten to 25 years per charge.
What the commentators said
“It’s pure financial Keystone Cop-ery,” said Paul Murphy on ftalphaville.com. “The simple idea that a chap in west London, playing around at home with an off-the-shelf algo program on his PC while his parents are off at the gurdwara, can up-end the entire US equity market is comical.”
Quite, said Bloomberg View’s Matt Levine. “The markets were nervous and his spoof orders probably made them more nervous.” But it seems unlikely that he “caused the whole crash”.
The authorities have previously tried to blame the event on a small asset manager in Kansas. Now they seem to be abandoning that in favour of a “new one-guy-in-London theory”. You’d be wise to remain sceptical of this claim as well.