'Flash crash' traderNavinder Singh Sarao has been bailed on charges of allegedly bringing down the US markets from his parents' Hounslow bedroom. Does this show how vulnerable markets are?
What's happening?
US authorities claimed the Hounslow-based trader was responsible for the US stock market suddenly plunging by 9% for a brief period on 6 May, 2010. This reduced the value of the market by an estimated $500bn, and caused the value of the US dollar to fall by 4%. While it quickly rallied, the S&P 500 would still end the day down 3%, much larger than normal.
His cumulative activity over four years is claimed to have brought him around $40m in profits. For his part, Sarao has denied his involvement in any wrongdoing and has pledged to fight attempts to extradite him to the United States.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
So, how is Sarao alleged to have done this?
However, the authorities claim that they were close enough to be visible to other traders, giving the misleading impression that there was a large seller in the market. This pushed the price down. They further allege that Sarao then profited by buying them cheaply (using a different program) and then selling them when the market recovered.
Could someone on his scale really bring down the markets?
As Jane Croft and Phillip Stafford of the FT report, there is a large amount of scepticism as to whether he was the most important cause of the crash. Indeed, experts have found it "hard to understand the US authorities' actions", with the head of one trading software company suggesting that the authorities "needed someone to blame" for the "embarrassing crash".
Bloomberg View's Matt Levine is also sceptical. He asks that "if his behaviour on May 6, 2010, caused the flash crash, and if he continued it for much of the subsequent five years, whydidn't he cause, you know, a dozen flash crashes?"
What were the regulators doing while this happened?
Sarao is also alleged to have boasted in an email to the software company that he had responded to further enquiries from them in May by telling them "to kiss my ass". In May 2014, he admitted to the FCA that he had deliberately placed orders away from the market price, though without any assistance from software.
Michael Maiello of The Daily Beast thinks that such blas behaviour, "is no surprise". After all, "exchanges don't make money by kicking people out of the game".
Were there any other causes?
The report argued that the main cause of the flash crash was a decision by a mutual fund to sell a large number of e-mini contracts using a computer program. For some reason, the program decided to sell the contract over a 20-minute period rather than the five hours such a large transaction would normally take.
While it argued that computer-driven High Frequency Traders did play a role in making things worse, it focused on those traders who frantically bought shares only to resell them a few moments later (unlike Sarao, who only pretended to make offers). This meant that,"the same positions were rapidly passed back and forth".
Finally, the volatility caused many firms to temporarily pull out of the market altogether, drastically reducing the number of buyers.
-
Christmas at Chatsworth: review of The Cavendish Hotel at BaslowMoneyWeek Travel Matthew Partridge gets into the festive spirit at The Cavendish Hotel at Baslow and the Christmas market at Chatsworth
-
Tycoon Truong My Lan on death row over world’s biggest bank fraudProperty tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
