Traders we spoke with think the arrest of a 36-year-old UK-based trader for his alleged involvement in the 2010 "Flash Crash" is a total joke.
On Tuesday, futures trader Navinder Singh Sarao was arrested in London in connection with charges in the US.
He's been charged on one count of wire fraud, 10 counts of commodities fraud, 10 counts of commodities manipulation, and one count of "spoofing" — buying or selling large orders with the intent to cancel.
Sarao was granted bail and the US is seeking extradition.
According to the complaint, Sarao allegedly used an algorithm to manipulate the market for E-Mini S&P 500 futures contracts, or "E-Minis," on the Chicago Mercantile Exchange (CME).
"Sarao’s alleged manipulation earned him 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,'" the Department of Justice said in a statement. "On that date, the Dow Jones Industrial Average fell by approximately 600 points in a five-minute span, following a drop in the price of E-Minis."
Here's how futures traders reacted (emphasis added):
- "Well what he did is a problem for CME, which they are cleaning up. They have been cracking down over past 6 months hard. He was not the cause of the flash crash. That is a joke," one New York-based trader said. (The problem the trader is referring to is "spoofing.")
- "[Spoofing] is a separate issue, but spoofing doesn't happen risk free," another trader said. "If someone is in the market spoofing it they are taking the chance that a real buyer can lift their contracts and all of the sudden they are seriously short or long a position they never wanted to be in ... which is why the market is normally a better liberator of these things than regulators. If I'm a big fund and see someone doing this, I may try and wait for the right time and then buy 5,000 contracts when I see them doing this if I know I need to buy a lot more and squeeze him as a short. That's far more painful to him than a one time fine."
- A New York-based quant trader said that regulators absolutely should be tracking spoofing. However, the trader thinks regulators needed someone to blame this time. "My gut says he is basically being made a target because they need someone to blame for the 'Flash Crash.' The trader thinks that this "case smells of political PR" and that "someone somewhere is really working hard on their career."
- The quant also pointed out that the complaint said Sarao had been using the trading algo before the "Flash Crash" and in the years after. If he was the cause of the crash, why did we only have one crash in that period?
- One Midwest-based trader said it was "impossible to have been caused by one trader or even exaggerated." He added, "It's insanely entertaining to think an individual or an entity caused that day."
- The trader explained that there were "far too many other markets losing liquidity just as fast and in fact FASTER that it's LUDICROUS to think one individual in just the EMINI caused it. Insanely [reckless] in fact."
- "To blame them, to blame them for the 'Flash Crash' is absolutely ridiculous. It's beyond ridiculous," one trader said. "If anything, OK someone is trying to game the market here. It's f------ stupid."
This is the first case brought forth related to the Flash Crash. Traders aren't the only ones showing skepticism.
Securities lawyers told Reuters that this case is going to be difficult to prosecute because they have to show that Sarao intentionally canceled orders.
"How do you prove an order is false?" one trader we spoke with asked.
The trader explained this is a "very fast market." He speculated that it would be difficult to just look at the order book and see if someone is intentionally cancelling orders. It's normal for traders to cancel. "You'd have to look at it and see a continuous behavior," the trader said.
"Why is it that he had not been caught? ... They noticed but no action was taken for years?"
Sarao was the sole employee of UK-based Nav Sarao Futures Limited. It appears that he traded his personal account from his home in a London suburb.
If you're a futures trader, we'd love to hear your thoughts. Feel free to reach out to jlaroche@businessinsider.com.
