The Strategist

'Flash Crash' culprit pleaded guilty in the US

11/10/2016 - 13:42

Yesterday, the US court found guilty British trader Navinder Sarao, whose actions contributed to collapse of the United States stock exchange, known as the Flash Crash, in 2010. While in Britain, the trader manipulated market quotes with techniques previously common in the hacker environment. This, coupled with actions of stock trading software, resulted in a 600 points-avalanche of Dow Jones. Regulators is demanding that Sarao pays a fine $ 38 million. In addition, the trader can be sentenced to imprisonment for a term of six to eight years.

Norbert Nagel, Mörfelden-Walldorf, Germany
Norbert Nagel, Mörfelden-Walldorf, Germany
Guilt 37-year-old British trader Navinder Sarao, worked in a private company Nav Sarao Futures Limited PLC, pleaded guilty in the federal court in the Northern District of Illinois. The trader was extradited in the US at the request of American government after relevant decision of Westminster Magistrates' Court in the UK. Sarao tried to appeal his extradition to the United States, but failed. During the trial in the US court, the trader confessed that he made the fateful bids while staying at his parents' home in the suburbs of London.

Recall, May 6, 2010, Dow Jones Industrial Average at the NYSE fell by more than 9% in just a few minutes, thus reducing market capitalization of half a trillion dollars in total. After 20 minutes, the index returned back to its previous level. This event, later called the Flash Crash, was considered in the US Congress, causes of the incident were also investigated by the Securities and Exchange Commission and the Commodity Futures Trading Commission. In course of the investigation in April 2015, Navinder Sarao was arrested by the British authorities, and a few months later released on bail of £ 50 thousand before the British court’s decision on extradition.

Charges against the trader were brought by the US Justice Department and the Commodity Futures Trading Commission. It is reported that Sarao used improved software for automated trading on the stock exchanges. To manipulate the market, the trader used an expedient called spoofing, which is, essentially, sending a large number of automated queries from other people's IP-addresses in order to hide fraud actions. For the first time the term appeared in the early 2000s among hackers, who used this technique to masquerade traffic to access a particular resource, or flood traffic to get a website blocked.

Navinder Sarao used spoofing towards the electronic trading platform. He sent a huge number of purchase requests for futures and instant cancellations of these requests. Actions of Sarao provoked requests sale of futures from other high-frequency trader software, which regarded the event as massive reduction in demand for the futures. This, in turn, caused a decline in prices and collapse of the index. Having the prices knocked, Navinder Sarao concluded some contracts and sold them at a profit after the index recovered. According to US authorities, the trader earned about $ 40 million in the course of his operations.

The trader pleaded guilty to one complaint. He admitted his fault in using electronic means of communication and spoofing during market trading. Sarao has been released on bail of $ 750 thousand until the next court hearing, scheduled for February. The bail was secured by a mortgage on British property of his parents and brother.

US authorities state that the trader must return illegally obtained profits. Besides, he could face a prison term of six and a half to eight years.