WASHINGTON, April 21, 2015 – CNBC reports that a UK-based futures trader deliberately and illegally manipulated markets, an action that contributed to the infamous “flash crash” of May 2010 that caused panic on Wall Street and world markets.
In documents that were unsealed Tuesday, CNBC reports
“The [U.S.] Justice Department charged the United Kingdom’s Navinder Singh Sarao with wire fraud, 10 counts of commodities fraud, 10 counts of commodities manipulation, and one count of spoofing (which is when a trader places a bid or offer with the intent to cancel before execution).
“Sarao was arrested Tuesday, the DOJ said. The charges were filed in a federal complaint in Illinois in February, but were unsealed today following the arrest.
“The U.S. Commodity Futures Trading Commission alleged in a conference call that Sarao was believed to have profited by about $40 million for his scheme. U.S. authorities have frozen nearly $7 million worth of his assets and accounts, Aitan Goelman, CFTC director of enforcement, said on the call.”
According to CNBC, the DOJ complaint against Sarao alleges that he
“used an automated trading program to manipulate the market for E-Mini S&P 500 futures contracts (E-Minis) on the Chicago Mercantile Exchange (CME)…”
In so doing, alleges the complaint, Sarao “earned … significant profits and contributed to a major drop in the U.S. stock market on May 6, 2010, that came to be known as the ‘Flash Crash.'”
As those who were in the market at that time will easily remember, the Dow Jones Industrial Average (DJIA) tanked roughly 600 points in just minutes as the S&P 500’s “E-mini” contract took an enormous dive. Individual stocks appeared to lose half their value or more within seconds as near total panic ensued in the markets.
The DOJ complaint alleges that the UK trader employed an elaborate spoofing strategy known as “layering,” meaning that he put on a series of phony orders in a row that he later canceled, having never intended to execute those orders in the first place.
When entered into the trading system via high-speed computers, such orders have the effect of displaying those false prices as legitimate, instigating trades by individuals and institutions working on slower personal computers or terminals that significantly underbid or overbid the actual market price, which has been hidden by the high-speed trader playing this game.
The clever trader then re-enters the market to buy or sell at the more favorable price he’s created, having essentially stolen money from traders who placed their orders after being drawn in by the phony price spread. Even a few pennies of this kind of manipulation, when multiplied by tens of thousands of shares traded at one time, can create millions in profits from each bogus transaction.
When the American CME futures trading group asked Sarao about the questionable transaction, according to the complaint, he stated in an afternoon email that he “…told em to kiss my [a–].”
According to CNBC, the Commodities Futures Trading Commission (CFTC) “alleged that Sarao is believed to have engaged in market manipulation or spoofing on about 400 days between 2010 and 2014, and continued doing so as recently as this year.”
This story is likely to develop much further, as the government and the exchanges seem ready to move ahead with what will likely be a significant and long overdue prosecution of Sarao and perhaps even others not yet mentioned.
As we have noted many times in our CDN columns here, it’s been intuitively obvious that U.S. markets have been clearly and strikingly manipulated for the better part of this new century by computer-savvy traders systematically employing proprietary algorithms, pre-public news releases, insider information and high-speed computer trading techniques to game the markets on a consistent basis, making it difficult for smaller funds and smaller investors to compete.