Flash crash hunt homes in on Hounslow

Baddies who bring down global capitalism should have an HQ in a volcano, or at least a white cat. A chap trading futures from his parents' house in a part of London best known for its motorway services is not Bond villain material.

Yet Navinder Singh Sarao stands accused of contributing to the 2010 flash crash, when US shares plunged 6 per cent in three minutes, suggesting that markets were broken.

US regulators claim he was "spoofing" trades - entering and then cancelling thousands of orders to push futures prices down. According to their complaint, spoofed trades amounted to 20-29 per cent of all S&P 500 E-mini futures listed for sale in the Chicago Mercantile Exchange order book in the two hours before the May 2010 flash crash.

This trading strategy was supposed to make money when the spoofing algorithm was turned off and the market rebounded. However, it ended minutes before the true flash crash so, if anything, should have helped prices rise. Equally, Mr Sarao is supposed to have run the same programme many times, without any flash crash resulting.

The problem is that markets are complex systems, with multiple "causes" for any event. No one can ever say for sure whether spoofing contributed to the flash crash - let alone how it is meant to fit with the US regulators' own explanation of the crash, as having been triggered by a big trade from a Kansas mutual fund.

Whether or not it helped cause the flash crash, such spoofing - and other illegal tactics - is believed by many to be widespread, and clearly hurts confidence in the fair functioning of the markets. Dave Lauer at KOR, a trading analytics group, says algorithmic market abuse costs traders through mispricing, but also because market makers leave, making it more expensive to trade.

Still, the actual profits supposedly extracted by Mr Sarao suggest long-term investors have little to fear. He is alleged to have made $530,000 a day on the days selected by the regulators. That is big money for someone living under the Heathrow flight path, but only 0.007 per cent of the $7.8bn of futures contracts traded. US market structure needs fixing. But true investors should worry more about whether US stocks are overvalued than whether trading tricks are costing them a couple of ticks extra.

[email protected]

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation