January 15, 2016 at 13:40How the mysterious trader and his algorithm caused the largest stock market crash
- Transfer
In May 2010, one of the largest stock market crashes occurred - in a matter of minutes the market lost a trillion dollars. This event was called Flash Crash, and one of its main culprits, the authorities of the United States and Velocrittenia called a modest trader from London. We present to your attention an adapted translation of the story of the Bloomberg publication about the protagonist of this story.
The story of one of the most dramatic moments in the history of Wall Street began in a modest house on the western outskirts of London, where the noise of planes descending for landing at Heathrow is constantly heard. It was here that the trader Navinder Singh Sarao lived (Navinder Singh Sarao), and until that day he did not stand out from the thousands of people like him.
But, according to US and British authorities, that day more than five years ago, Sarah “helped” the Dow Jones index make an incredible instant drop of 1000 points - now this collapse is known as “instant collapse” or flash crash. According to regulatory authorities, the trader is guilty of submitting one of five bids for sale, which caused subsequent madness.
The fall of the Dow Jones index during Flash Crash
In April 2015, Sarah was arrested by the British authorities at the request of the United States - now the issue of his extradition is being decided . However, there is no clarity with this matter yet - a decision will be made only in 2016.
The arrest of the trader caused a large number of public questions - there is no evidence of his work for large financial companies in the United States and Britain. At the time of flash crash, he worked with a small private prop-trading firms and clearing of transactions carried out by MF Global Holdings Ltd - the now-working company, headed by the famous American financier Jon Corzine (Jon Corzine). Neighbors Sarao say what the neighbors usually say in such cases: he was quiet, kept apart, no problems arose with him.
$ 40 million
Nevertheless, the authorities are sure that, in fact, everything was not quite right, and for several years of manipulating the market with the help of algorithms, Sarao illegally earned $ 40 million.
He caused that famous failure not alone, regulators believe, it was not without the participation of others players - for example, the Waddel & Reed Financial Inc mutual fund from the city of Overland Park in Kansas.
For all that, flash crash was just a technical glitch — a glitch that raised fundamental questions about how vulnerable today's financial markets are to the high-speed computerized trading that now dominates them.
Navinder Singh Sarao
Who "surrendered" Sarao
Little is still known about Navinder Singh Sarao and his transactions, other than the information voiced in a London court and contained in a request from the US Department of Justice. A related civil lawsuit filed by the US Commodity Futures Trading Commission sheds additional light on this case. It began to spin thanks to the efforts of an informant who conducted a “serious original analysis” and presented its findings to the Commission, said Shayne Stevenson, a Seattle lawyer representing the same informant.
According to the US authorities, for the past six years, Sarah has been driving regulators by the nose using his software to manipulate financial markets. He is also accused of spoofing - the illegal issuance of fraudulent orders to buy or sell shares, which are then canceled before they are executed, but create false impression on other market participants about the demand for a particular stock.
According to the Commodity Futures Commission, in May 2010, the trader’s actions created an imbalance in the derivatives market, which then spread to the stock market, which ultimately led to a general collapse.
Introvert Trader
“We believe and intend to prove that his actions had at least a very serious impact on the situation then and led to a failure,” says Aytan Golman, Director of Law Enforcement of the Commission.
According to a man who knew Sarao, during trading on the stock exchange, he was focused and closed in himself, fencing off the outside world with headphones. S&P 500 index futures data almost always blinked on his computer screen, and all his communications with people came down to communication at work - for example, installing new programs on his computer.
When he allegedly began to manipulate the market in 2009, he used the software of the company, which he then asked to modify in such a way that he would not only be able to automatically issue orders, but also immediately cancel them. At one point, he even asked the developer for the code of the trading application, explaining that he would like to “play” with him on his own, making a new version - this is the version of the authorities.
Cancel orders
In the year preceding the May Dow Jones crash, Sarah was already on the radars of regulatory authorities. Exchanges in the US and Europe have noted that he constantly puts out and then quickly cancels a large number of orders - this information is contained in the leaked press collected by the FBI.
The CME exchange, which trades derivatives related to the S&P 500 index, contacted Sarao about his deals after realizing that many of his orders influenced the opening prices of the trading day.
According to the FBI, in an email sent in March 2010, Sarah explained his actions with a simple desire to "show a friend what is happening with the offer on the market for 24 hours a day under the influence of high-frequency geeks." Then he wondered if CME’s actions would “end the mass market manipulation by HFT traders.”
Flooding the market
On May 6, 2010, the day the flash crash happened, CME sent another message to Sarah. It said that all orders sent to the CME electronic platform should be formed “in good faith and with the real intention of concluding a fair transaction,” the FBI testimony reads.
On the same day, Sarao and his company Nav Sarao Futures Limited Plc used layering and spoofing algorithms to trade S&P 500 E-mini futures. The cash volume of orders amounted to about $ 200 million, put to a quick market decline - which amounted to 20% to 29% of all sales orders at that time. Following the issuance, orders were re-issued or modified 19,000 times until final cancellation.
Such activity created an imbalance that “affected market conditions”, which resulted in a drop in the value of the futures contract, according to the Commodity Futures Commission.
The collapse shocked investors, got into all the world news, leaving perplexed regulators to deal with the causes of what happened.
About three weeks later, Sarao told his broker that he had just called CME and said “they should kiss my ass,” the FBI said.
But no one stopped him even after that - among about two dozen accusations there are also those related to transactions of March 2014. However, now, if he is extradited to the United States, the trader faces a maximum term of 20 years for electronic fraud, 25 years for manipulating the exchange, and for spoofing he can get another 10 years and a fine of $ 1 million.
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