Financial experts cast doubt on case against alleged 'flash crash' trader

Question Mark

Financial experts have raised questions about how a 36-year-old Londoner could have almost single-handedly caused the 2010 “flash crash” that that wiped billions off the value of US stocks in seconds.

Navinder Singh Sarao, 36, from Hounslow, west London, appeared in court in the UK on Wednesday charged with crimes the Department of Justice believes helped cause the Dow Jones industrial average to plunged 600 points in five minutes, wreaking havoc on Wall Street.

The DoJ and Commodity Futures Trading Commission (CFTC) have accused Sarao of multiple charges of wire fraud, commodities fraud and market manipulation, and are seeking his extradition to the US.

US authorities have offered several explanations for the flash crash, which rattled stock markets worldwide. Sarao’s arrest comes five years after the SEC and CFTC’s official report said the crash was caused in part by an automated sale algorithm at a mutual fund, widely identified as Waddell Reed. There was no mention in the report of Sarao, or an unidentified individual trader that could have been Sarao.

Eric Hunsader, chief executive of financial data company Nanex which monitors all market trades, said it was very unlikely that a single trader could have caused the crash – and questioned why it had taken so long for the authorities to discover Sarao’s suspect trades.

“I think he’s a small fish, it’s really disappointing to see the Justice Department laying the blame on a small guy, [it is as if] they are afraid of the big players,” he told the Guardian. “I don’t think they thought this through. If one guy can do this what [could] a well capitalised country or a terrorists do? The only thing preventing him from causing total destruction was fear of getting caught. A terrorist wouldn’t have that fear.”

Hunsader said trade data also showed that Sarao’s trading alogrithm was switched off two minutes before the crash which started at 14:42:44 on 6 May 2010.

“The CTFC had audit trail data [at the time of the report], there’s no way they didn’t know about this,” Hunsader said. “You cannot miss it, it really is that easy.”

The chairman of the CFTC, Tim Massad, on Wednesday defended the agency’s slow action in identifying Sarao’s trades, which were highlighted by a whistleblower.

“Sometimes it takes a long time to put cases together,” Massad said following a speech in Chicago on Wednesday, according to Reuters. “These are huge markets. There’s a lot going on.”

On Tuesday, Aitan Goelman, the CFTC’s director of enforcement, said the agency believed and intended to prove that Sarao’s conduct was “at least significantly responsible for the order imbalance that in turn was one of the conditions that led to the flash crash”.

“It’s ridiculous. It’s the government at its best – inept,” Rick Fier, director of equity trading at Conifer Securities, told Bloomberg. “It really is just another one of many things to deal with, it’s extremely frustrating. We’ve seen flash crashes and we’ll see them again and it’s definitely disconcerting.”

Powered by Guardian.co.ukThis article was written by Rupert Neate in New York, for theguardian.com on Thursday 23rd April 2015 12.30 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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