UK trader arrested for May 2010 U.S. Stock market flash crash

"It goes on to allege that Mr Sarao used a computer-based algorithm to essentially pretend to create sell orders, making it appear that there were multiple traders wanting to take a downward bet on the market, when in fact there were none."

hmmm isnt that what everyone is using today to trade these manipulated rigged propped up markets, computer-based algorithms.....I think so...

this is just a cover up, if this was that easy to do anybody could take down the market using the right algorithms....
 

By James Quinn, Group Business Editor

7:10PM BST 21 Apr 2015


US financial regulators have arrested a British trader for what they allege was his role in triggering the May 2010 "flash crash" which wiped hundreds of billions of pounds from the global stock markets.

The US Department of Justice and the US Commodity Futures Trading Commission (CFTC) have charged Navinder Singh Sarao with manipulating the financial markets, alleging he made more than $40m (£26.7m) from his activities.

Mr Sarao, 37, who ran his own financial trading company, was arrested earlier today, April 21, at his home in Hounslow, west London.





Aitan Goelman, director of enforcement at the CFTC, said Mr Sarao was "extremely active" in the market ahead of and during the flash crash, which occurred on May 6, 2010,

"His conduct was at least significantly responsible for the order imbalance that in turn was one of the conditions that led to the flash crash," Mr Goelman continued.

Mr Goelman continued: "Protecting the integrity and stability of the U.S. futures markets is critical to ensuring a properly functioning financial system. Today’s actions make clear that the CFTC, working with its partners on the criminal side, will find and prosecute manipulators of U.S. futures markets wherever they may be.”

On that day, the Dow Jones Industrial Average fell by 998.5 points within a 45 minute period, before recovering to end the day down 348 points. Ripple effects were felt on markets around the world, including in the UK.

Although a final figure of the impact of the crash was never calculated, it is estimated that hundreds of billions of pounds was wiped from the value of companies listed in the US and around the world.

The alleged actions of Mr Sarao are in part an example of the perils of high-frequency trading, a type of accelerated computer-based trading which has been blamed for increased volatility in the markets since the financial crisis.

Working with the CFTC, the DoJ filed a sealed criminal action charging him and his company - Nav Sarao Futures - with manipulation, attempted manipulation, spoofing and wire fraud in February.

It is alleged that Mr Sarao "engaged in a massive effort to maniplute" the price of the E-mini S&P 500, one of the most popular financial futures markets which is based on the S&P 500 index which includes household names such as Amazon, Boeing and Bank of America.

The regulator alleges that over a course of five years, and as recently as April 6 of this year, Mr Sarao attempted to manipulate the market by a variety of "exceptionally large, aggressive and persistent spoofing tactics."

It goes on to allege that Mr Sarao used a computer-based algorithm to essentially pretend to create - or 'spoof' - sell orders, making it appear that there were multiple traders wanting to take a downward bet on the market, when in fact there were none.

The prosecuters accused Mr Sarao of using an automated trading programme to execute the scheme, which they described as "dynamic layering," involving placing a significant number of large volume sell orders at different price points at the same time to make it appear as if substantial supply existed.

Mr Sarao is then alleged to have modified the orders again and again to ensure they were close to the actual market price, only to then cancel them before they were executed.

He then profited from the turmoil which ensued through a series of well-placed bets on the futures market, it is alleged, selling futures contracts and buying them back at a lower price.

The charges have only came to light now, however, following his arrest by the Metropolitan Police, working in conjunction with the British regulator, the Financial Conduct Authority. (FCA)

Mr Sarao, a futures trader who worked alone from his west London home, remains in custody, awaiting extradition to the US on the charges. A US judge has issued an order freezing the assets of both Mr Sarao, and his trading company. However the DoJ emphasised in its statement that the charges "are merely accusations, and the defendant is presumed innocent unless and until proven guilty."

A report into the crash in September 2010, produced by the CFTC and the US Securities and Exchange Commission, found that almost 8,000 individual shares and exchange traded funds suffered price declines and subsequent rebounds as a result of the erratic trading on the E-mini S&P 500.

Many of those shares fell by as much as 15pc before recovering later in the day.

However the report said that "some equities experienced even more severe price moves, both up and down."

The E-mini S&P 500 futures instrument is traded on the Chicago Mercantile Exchange, and as a result, the court filings have been made in the US District Court for the Northern District of Illionois.

Accounts for Nav Sarao Futures for the year to October 2013 - the most recently available at Companies House - show cash on the balance sheet of £7.5m.

In that year, the firm generated trading revenues of £9.07m, but the company produced a pre-tax loss of £5.7m, in part due to more than £14m of administrative expenses and costs including a £2m outflow on an unnamed capital expenditure item.

In the previous year, the company, of which Mr Sarao is the sole director, generated trading revenues of £10.5m, but posted a pre-tax loss of £28.1m due to £38.6m of expenses and costs, for which little detail is given.
 
They should charge for cancels. It was pretty ballzy for that guy to manipulate the whole futures market. I am 100% sure a lot participants engage in some kind of manipulation. Trading is a game of poker, game of fakeouts. There is strategic advantage in engaging in "market manipulation". You are a significant disadvantage if you don't at least try to throw people off.
 
So some guy with probably not much capital on a relative basis used an off-the-shelf algo program that is probably very similar to the programs that a lot a traders on the board use. Coded it to spoof and then blew up the whole market. Blaming the flash crash on him sounds like bull shit to me.

Didn't the useless SEC do an investigation that took months that blamed the flash crash all on Waddell and Reed?
 
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LOL! The SEC is a joke.

A Step By Step Guide How To Crash The Entire Market

While we already noted that the CFTC and the DOJ have gone full scapegoat retard, by blaming the entire flash crash on one solitary trader (operating out of the UK no less), which means that Waddell & Reed should now sue the SEC for hundreds of millions in lost fees and defamation, it is worth re-emphasizing the hubris and the audacity that these "regulators" have, to assume that sophisticated market participants are truly dumb enough to believe any of this is just shocking.

In any event, going with the bullshit story concocted by the confused brains at the CFTC (whose former head when all this happened, is now being groomed by Hillary Clinton to be America's next Treasury Secretary), and for all those who wish to follow in the "rogue" ES trader's footsteps, here is how Navinder Singh Sarao singlehandedly crashed the entire market, leading to the single biggest loss in market capitalization in history.

From the charging document:

Defendants aggressively used both the Layering Algorithm and the 188/289-Lot Spoofmg strategies on May 6, 2010, the 2010 Flash Crash day.

Defendants first turned on the Layering Algorithm at 9:20a.m. CT, placing four orders, totaling 2,100 contracts. These orders were each one tick apart, starting three ticks from the best ask. The orders were modified 604 times over the following six minutes so the orders were always at the third level of the sell-side of the order book or deeper, and then canceled with no executions, as the Layering Algorithm was turned off. While the first cycle of the Layering Algorithm was active, the E-mini S&P price fell39 basis points.
While the first cycle of the Layering Algorithm was active, Defendants bought 1,606 contracts and sold 1,032 contracts.

Defendants' use of the Layering Algorithm and the 188/289-Lot Spoofing intensified throughout the day. At 11:17 a.m. CT, Defendants turned the Layering Algorithm on for more than two consecutive hours, until 1 :40 p.m. CT. During this cycle, Defendants utilized the Layering Algorithm to place five orders, totaling 3,000 contracts. A sixth order was added at around 1:13 p.m. CT, increasing the total to 3,600 contracts.
These orders represented approximately $170 million to over $200 million worth of persistent downward pressure on the E-mini S&P price and, over the next two hours, represented 20-29% of the entire sell-side of the Order Book. The orders were replaced or modified more than 19,000 times before being canceled at 1 :40 p.m. CT. At that time, the Order Book was severely imbalanced and Defendants' 3,600 Layering Algorithm orders were almost equal to the entire buyside of the Order Book. In total, the Layering Algorithm was on for over four hours and 25 minutes on May 6, 2010.

In addition to the Layering Algorithm, Defendants aggressively utilized the 188/289-Lot Spoofing which intensified the Layering Algorithm's effects. Between 12:33 p.m. CT -1:45 p.m. CT, Defendants placed a total of 135 orders with 188 or 289 lots on the sell-side of the Order Book, totaling 32,046 contracts. Ofthese 135 188/289-lot orders, 132 orders were canceled without resulting in execution.

Between 11:17 a.m. CT and 1:40 p.m. CT, Defendants' actions contributed to an extreme order book imbalance in the E-mini S&P market. This order book imbalance contributed to market conditions that caused theE-mini S&P price to fall361 basis points.

During this two-hour period, Defendants traded 62,077 E-mini S&P contracts with a notional value of$3.5 billion.
On May 6, 2010, Defendants caused an artificially low price to exist in the lead month of the E-mini S&P contract.

So now that you know how to crash the entire stock market singlehandedly, please do. Because this is not a "market."

And finally, this:

In addition to the Layering Algorithm, Defendants frequently manually "flashed" large-lot orders in a variety of lot sizes in the Order Book that were quickly canceled with no intention of these orders resulting in trades. At times during the Relevant Period, the Flash Spoofing was used with and to amplify the impact of the Layering Algorithm. At other times, Defendants' Flash Spoofing was used alone to benefit Defendants' trading strategies

In other words, 5 years after Zero Hedge first explained precisely what happened on May 6, 2010, the CFTC finally admits that the flash crash was not due to Waddell & Reed, but due to HFTs and quote stuffing.
 
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