Almost five years after the 20-minute Flash Crash when the Dow Jones Industrial Average plunged nearly 600 points and then quickly rebounded, the U.S. Department of Justice has arrested trader Navinder Singh Sarao. He is accused of allegedly playing a major part in the brief turmoil because of his involvement in a number of market manipulating trades.
The crash, on May 6, 2010, caused certain stocks to trade at a penny before thousands of trades were cancelled and placed substantial downward pressure on shares of big companies. The Flash Crash generated a lot of worries about just how stable the U.S. stock markets were and triggered scrutiny into high frequency trading firms and electronic trading venues.
Now, following a joint probe with the Commodity Futures Trading Commission, the DOJ is putting a lot of blame for the crash on Sarao. He is accused of multiple counts of commodities manipulation, one count of wire fraud, and one count of spoofing. Sarao’s alleged manipulation took place over a number of years up, including up through this month.
The government said that Sarao tweaked an algorithmic trading program to layer together big sell orders on several futures contracts on the S & P 500. The orders came at different price levels and were continually modified to stay outside market price where trades might happen. Sarao allegedly cycled the algorithm on and off several times, creating an imbalance on the sell orders. He is accused of making profits by selling the futures contracts before market declines and repurchasing them prior to market recovery.
The government claims that on May 6, Sarao used the layering algorithm for two hours before the crash. He applied nearly $200 million of downward pressure on the E-mini S& P price. The trades happened right before the market crash yet the contributed to an “extra” imbalance of the E-mini S & P order book. This purportedly created the market conditions that resulted in the Flash Crash.
Sarao allegedly made around $897,018 during the flash crash The U.S. government said that over the years he engaged in manipulative trading, Sarao made around $40 million.
This is the first time authorities in this country have indicated that illegal activities may have played a part in the flash crash. In October 2010, market regulators had pinned the causes on different reasons, including a computer-driven trade by a mutual fund.
Shepherd Smith Edwards and Kantas, LTD LLP helps investors recover their lost investments. Contact our securities law firm today to request your free case assessment. We represent clients in arbitration and throughout the litigation process. Over the years, we have helped thousands to get their money back that they lost due to fraud.
Accused British ‘flash crash’ trader fights extradition to U.S., Reuters, April 22, 2015
More Blog Posts:
“Flash Crash” – Why is This So Hard to Understand?, Stockbroker Fraud Blog, November 9, 2010
Securities Class Action Says ARCP Made Over $900M From Acquisition Binge, Institutional Investor Securities Blog, April 20, 2015
Texas-Based Broker-Dealer Faces SEC Charges Over Supervisory and Customer Protection Violations, Stockbroker Fraud Blog, March 6, 2015