An event that nearly brought the entire US stock market to its knees is alleged to be the doing of one man: Navinder Singh Sarao, a UK based trader who used automated trading programs to manipulate the market.
An event that rocked the market
The so-called ‘flash crash’ happened on May 6, 2010. Traders saw the dow trending low throughout the day when suddenly it went down more than 300 points at exactly 2:42 pm and steadily went down to almost 1,000 points within a 5-minute time frame.
Although the market would regain 600 points later in the afternoon, the sudden crash had overreaching repercussions. Eight of the major companies within the S&P 500 saw their stocks fall to one percent. Of particular note was the whopping 37% drop of value of Procter & Gamble’s stocks, which CNBC Jim Carter humorously provided commentary about the outlandish situation. Stock market prices eventually rebounded after a few days and in the weeks that followed, many companies reported that they have all but erased their losses during sudden market meltdown. However, this only reinforced suspicions that the ‘flash crash’ was done intentionally.
Making a profit
There were many theories of how such a sudden meltdown could occur including technical glitches, a change in market structure, and the impact of high frequency traders placing too many sell orders. Eventually, United States prosecutors announced that the flash crash could be due to the actions of a singular entity. It took authorities nearly five years to track Navinder Singh Sarao who used a practice called spoofing and layering to manipulate the market and eventually caused the flash crash.
U.S. prosecutors assert that Mr. Sarao did this using a trading program which left the market vulnerable to risky moves. He is accused of placing thousands of order worth millions of dollars and then withdrawing it in order to push down the price of stocks. He would then buy these deflated stocks and sell them for a higher price when the market recovers. He is alleged to have been doing this for more than five years, boldly stating to have made over 27 million pounds or over $40 million dollars.
Spoofing is a form of stock market manipulation wherein a trader places a large number of buy order for shares through an ECN and then cancels it almost immediately. Due to the large number of anonymous buy orders, the price of the stock immediately spikes which gives the impression of high demand. This tricks other traders into purchasing that specific stock and allowing a trader to benefit from selling them at an increased price.
The U.S. Department of Justice hopes to extradite the 36 year old and charge with wire and commodity fraud, and market manipulation.