An Unlikely ‘flash Crash’ Suspect
The notion that the U.S. stock market could suddenly collapse is frightening enough, said The Economist. But the truly terrifying thing about the so-called flash crash of May 6, 2010—when the Dow plummeted 1,000 points in a matter of minutes, temporarily wiping out hundreds of billions of dollars in assets—“was the realization that nobody understood why or how it had happened.” Nearly five years later, regulators at the Commodity Futures Trading Commission have “settled on an unlikely culprit”: Navinder Singh Sarao, a 36-year-old day trader who works out of his parents’ house in a London suburb. But while Sarao’s identity is a surprise, “the methods he is accused of using” are not. According to the charges filed in London last week, Sarao would “routinely place a series of orders to sell futures contracts,” only to pull those orders milliseconds later. The tactic, known as “spoofing,” is fairly common, and high-speed traders use it to “inject pessimism” into the market, driving down prices so they can buy stocks on the cheap.
This supposed break in the case “isn’t boosting investors’ confidence,” said Kaja Whitehouse in USA Today. “It’s spooking them.” How could one small-time trader cause such a massive disruption? And why did it take regulators “so long to catch on?” The Chicago Mercantile Exchange, which posted Sarao’s orders, reportedly questioned him numerous times in 2010, “only to be brushed off.” Even if the Justice Department’s theory is true, said John Cassidy in NewYorker.com, “what does it say about the fragility of the U.S. financial system?” Unlike “previous rogue traders,” who’ve caused billions in losses, “Sarao didn’t have the balance sheet of a big financial institution behind him.” If a “bit player” like him can wreak that kind of havoc, anyone can.
This case “makes no sense,” said Michael Lewis in Bloomberg View.com. By 2010, high-frequency trading firms were routinely using spoofing to try to gain an edge, so when Sarao placed his manipulative orders, why didn’t the exchange “notice what was going on?” Worse yet, on the day of the crash, “Sarao never actually sold stocks”—he was just trying to trick the market. So “whose algorithms were so easily gamed that they responded to phony sell orders by creating a crash?” All Sarao’s arrest proves is that the real crime isn’t “the alleged actions of a single trader,” said David Weidner in MarketWatch.com. It’s that “the meek, overmatched, and sluggish” regulatory system can’t respond when things go off the rails. “Bad actors” like Sarao are everywhere. “It’s the lack of good guys that is the problem.”
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