The US Justice Department said it arrested a trader in Britain today (April 21) over allegations he illegally manipulated trades that led to the infamously quick stock market meltdown known as the “Flash Crash.”
The arrest comes nearly five years after the May 2010 scare (paywall), in which the Dow Jones industrial average plunged 600 points in five minutes. The tumble temporarily extended the blue-chip US index’s loss for the session to more than 1,000 points.
The Dow quickly rebounded, but the episode resurrected memories of the October 1987 stock market crash known as Black Monday (which was more severe on a percentage basis) and left traders, investors, and regulators worrying about how fragile the stock market had become amidst a rise of high-frequency traders executing automated, algorithmic-based trades.
An initial report from regulators six months after the crash led to a round of finger-pointing targeting mutual fund Waddell & Reed (paywall), a conclusion that Waddell & Reed objected to at the time, and one that appears to be completely unfounded based on today’s charges from the Justice Department.
In documents unsealed today, US officials said that Navinder Singh Sarao, 37, operating from his home in the UK, allegedly used an automated trading program to manipulate futures contracts on the Chicago Mercantile Exchange (CME) that were tied to the S&P 500 index.
He was charged with fraud, manipulation, and “spoofing,” in which he allegedly placed large bids and offers he never intended to execute, which created the appearance of a substantial supply of orders and drove down prices—conduct the US Commodity Futures Trading Commission said continued until as recently as April 6, 2015.
Regulators said they believe Sarao not only helped cause the flash crash, but took in about $40 million in profit from 2010 to 2014 from the alleged trading scheme.
The Justice Department’s complaint shows that on numerous occasions, exchanges in both the US and Europe believed that Sarao was engaged in suspicious activity and sought more information from him.
In several instances, Sarao rebuffed allegations of wrongdoing. The complaint quotes an email he sent to a commodity broker on May 25, 2010, in which he said the CME had accused him of intentionally entering orders and canceling them, which had influenced prices—and that he had called the CME in response “and told em to kiss my ass.”