The UK Flash Crash Spoofer Case Brings More Questions Than Answers

After reading both the Department of Justice and the CFTC cases against the UK Flash Crash spoofer, Navinder Singh Sarao, we are left with more questions than answers. While some in our industry are already debating whether or not Sarao was a high frequency trader, we don’t think this is the important issue in this case. This case is about manipulation and the lack of regulatory oversight which allowed it to continue for five years.

We trust by now that you are familiar with the details of the case but if not the CFTC summarized it here:

“According to the Complaint, for over five years and continuing as recently as at least April 6, 2015, Defendants have engaged in a massive effort to manipulate the price of the E-mini S&P by utilizing a variety of exceptionally large, aggressive, and persistent spoofing tactics. In particular, according to the Complaint, in or about June 2009, Defendants modified a commonly used off-the-shelf trading platform to automatically simultaneously “layer” four to six exceptionally large sell orders into the visible E-mini S&P central limit order book (the Layering Algorithm), with each sell order one price level from the other. As the E-mini S&P futures price moved, the Layering Algorithm allegedly modified the price of the sell orders to ensure that they remained at least three or four price levels from the best asking price; thus, remaining visible to other traders, but staying safely away from the best asking price. Eventually, the vast majority of the Layering Algorithm orders were canceled without resulting in any transactions. According to the Complaint, between April 2010 and April 2015, Defendants utilized the Layering Algorithm on over 400 trading days.”

The headline of the case is that a UK trader helped cause the Flash Crash of May 6, 2010. But the real story is that this particular trader was running the same manipulative scheme for five years before getting caught. The trader, Sarao, was not part of a sophisticated firm that operated microwave networks or paid for colocation services but rather a single individual who tweaked a software program that he used to repeatedly run the same manipulative layering strategies. We have a number of questions/issues about this case:

http://blog.themistrading.com/the-uk-flash-crash-spoofer-case-brings-more-questions-than-answers/



Why Wall Street is scoffing at 'flash crash' bust

In arresting Navinder Sarao this week and charging him with manipulating markets, regulators indicated they'd gotten to the bottom of 2010's "flash crash." Many on Wall Street, though, believe the work is only starting.

That's probably a gentle way of stating the Street's reaction to Sarao's arrest Tuesday. Many pros openly scoffed at the notion that Sarao was the sole culprit of the spectacular plunge on May 6, 2010. On that day, the Dow industrials rapidly lost about 600 points, taking the average down nearly 1,000 points on the session, only to rebound within a matter of minutes.

According to separate indictments, Sarao masterminded a scheme in which he was able to send orders to the market that he had no intention of executing, a practice called "spoofing" that caused a market plunge on which Sarao capitalized. The practice happened within minutes of the crash and was a direct cause of it, according to regulators. Authorities allege he acted mostly alone rather than as part of a large, sophisticated operation.

However, many experts believe the explanation is at least an oversimplification and at most an intent to deflect attention away from more fundamental weaknesses in the financial markets.

http://www.cnbc.com/id/102614595