Delayed flash crash arrest may herald future spoofing detection woes

Thu Apr 23, 2015 2:14pm EDT
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By Douwe Miedema and Ann Saphir

WASHINGTON/SAN FRANCISCO (Reuters) - The five years it took regulators to bring high-profile charges against a UK trader underscore how hard it is to spot wrongdoing in fast-developing markets, and may herald problems in detecting future mishaps.

Navinder Singh Sarao, 36, was arrested in London on Tuesday, charged with market manipulation and wire fraud. Authorities sought to link his activities to the May 6, 2010, so-called flash crash when about $1 trillion was temporarily wiped out from U.S. stock markets in a matter of minutes.

The CME Group, the platform Sarao used for his trades and also a self-regulatory organization, first started talking to him about his trades in 2009, but he continued his alleged manipulation well into this year.

The fact that manipulation wasn't identified as the cause of the flash crash in a September 2010 report, suggests that regulators did not see his activity at that time.

"This will raise concerns about the stability of financial markets," said Robert Engle, finance professor at New York University's Stern School of Business. "That this trader could put the markets in a tailspin with actions that are hard to detect is bad news."

Tim Massad, the head of the Commodity Futures Trading Commission, which oversees the trading of futures and swaps, said on Wednesday that it took so long to charge Sarao because of the size and complexity of U.S. derivatives markets. "These are huge markets," he said. "There's a lot going on."

The agency, which oversees self-regulatory bodies such as the CME, brought civil charges against Sarao alongside criminal charges by the Department of Justice.

The many years it took for the CFTC to come out with its findings, and the fact that manipulation wasn't mentioned in the 2010 report, suggested that the help of a whistleblower was essential in bringing the charges, one lawyer said.   Continued...

The sun sets on the address where Nav Sarao Futures Limited is registered, in Hounslow, London April 21, 2015.  REUTERS/Neil Hall