Flash crash charges garner increasing skepticism in high-speed world

Fri Apr 24, 2015 6:54pm EDT
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By Douwe Miedema

WASHINGTON (Reuters) - The notion that one man trading from his parents' house in a working class London suburb had a material role in the 2010 Wall Street flash crash has aroused increasing skepticism from investors and traders since charges were brought on Tuesday.

The U.S. has asked UK authorities to hand over Navinder Singh Sarao, 36, after his arrest this week on charges that he manipulated markets over several years in a fraudulent scheme that helped cause the stock market rout.

The U.S. Department of Justice alleges that Sarao used souped-up, off-the-shelf software to trick other market participants into thinking massive sell orders were about to hit, causing the so-called E-mini S&P futures prices to drop so he could buy at cheaper levels. In doing so, he made $40 million in profits, U.S. authorities allege.

But traders doubt that Sarao could have had the upper hand in a market dominated by Wall Street firms with powerful computer trading programs and huge technology budgets.

The charges against Sarao, operating far from the center of U.S. markets and engaging in activity some believe occurs every day among larger firms, show that regulators may not shy away from publicity, even if their case may be legally solid.

Linking Sarao to the flash crash "smacks of sensationalism," said Manoj Narang, founder of Tradeworx, a firm that supplies data for regulators. "Maybe they felt that would get the story in the papers. Mission accomplished, I guess."

In Britain, a petition has been started opposing Sarao's extradition to the United States. So far, at least 194 people have signed up to an online message saying "One man with a single broadband connection cannot bring down an entire market." 

Sarao, who court documents show pushed around millions of dollars between banks in the Caribbean, Switzerland and the Middle East, has been granted bail in London on conditions including a 5 million-pound ($7.5 million) bond.   Continued...

A man walks past the address where Nav Sarao Futures Limited is registered, in London April 24, 2015.   REUTERS/Cathal McNaughton